Technology Is Changing the Media Landscape Again

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Netflix (NASDAQ: NFLX) has been a force for change in the media space since the day it mailed its first DVD. Now, it is taking on a new challenge that could rearrange the media world as it sits today. With the release of its much anticipated original series, House of Cards, the company is starting to look more and more like the leading “television station” on the Internet. The rest of the industry should watch their backs.

Netflix isn't Humble

Netlix CEO Reed Hastings recently told Bloomberg, “We’re on the cusp of something that will change television forever. Our view is that over the next couple of years as Internet TV really grows, people will look back and say that this was the turning point.” No one has ever accused Hastings of being humble. The thing is, he may be correct.

House of Cards was created after the company's research indicated that viewers liked similar content. Choosing Kevin Spacey was also dictated by research, which showed that viewers were fond of the actor. This wasn't soft science, either, the company has numbers based on its massive subscriber base.

That, of course, doesn't mean that viewers will like House of Cards, but it seems like it will tilt the chances in Netflix's favor. And, the viewing habits of consumers are far better data points than self reporting questionnaires. In fact, Arrested Development, another “new” series from Netflix, is making a comeback based on how popular episodes of the Fox canceled show were. Actions usually do speak louder than words and the Internet is allowing Netflix to use its tracking technology to, hopefully, please its customers.

Data, Data, Everywhere

Data and its analysis is increasingly vital to success. Although it may seem like generations ago today, one of the defining features of Wal-Mart's (NYSE: WMT) growth was its use of technology to track everything. While not as sophisticated as what Netflix is capable of, Wal-Mart not only made sure it knew what products were going to what stores, but it also carefully monitored what products were selling best.

This allowed the company to fine tune its merchandise mix and, in the process, go back to the makers of high-demand products and increase order sizes. Increased order size, of course, leads to lower prices for Wal-Mart and its customers. It's also why so many companies have a love/hate relationship with the massive discounter. It is the largest retailer in the world, so you want your products on its shelves. However, if you are on its shelves, you know for a fact that Wal-Mart is going to squeeze you.

On the Internet, data is easier and more direct. Every action a user makes is a data point. Buying a product, reading a story, clicking a link... everything is stored somewhere. The best companies track it and analyze it.

Amazon

This is part of what sets Google apart in search and advertising and Amazon.com (NASDAQ: AMZN) in retail. Amazon, for its part, not only presents alternative purchase options based on other users's purchases on screen as you look at items, but it will also push emails highlighting recently viewed items to customers. Seeing a sale on an item you were looking at materially increases the chances that you will open that email and make a purchase.

Amazon, however, also brings things back to the media world, since it is also trying to reshape the media landscape. In the web retailer's world, that means its Prime service, which is an odd combination of “free” shipping and video service for a yearly fee. While it sounds odd to mix the two, it seems to be working out for the company. And, Amazon is also working on original content.

All at Once

While Internet companies bringing out original content is clearly a game changing event, it may not be the biggest threat to the typical media model. Another phenomena that Netflix and Amazon Prime have made possible is so-called binge viewing. Typical television and cable stations dole out a series one episode a week. However, Internet content providers have seen a trend toward people watching an entire series in one sitting.

So, if you love Arrested Development, you might sit down and watch all of season one on a lazy Saturday afternoon. Then repeat that the next Saturday with season two. So, Netlix is releasing all of the episodes of House of Cards on day one. That's a huge change and very different than what is typical of traditional media outlets and Internet competitor Hulu, not surprisingly owned by the traditional media outlets and creators.

It's one thing to present all of a series that has already been aired, but a whole different ball game to push out all of the new episodes of a series at one time. The risk is that interested subscribers only subscribe for a short period of time, usually on a free trial, and then drop off after they've seen the shows.

However, there are two things arguing against that. First, the vast amount of content Netfix offers is likely to prove too enticing to just give up on because someone watched all of one show. Second, Netflix can stagger its original content so that it releases entire seasons of new shows every month or so. This way there is always a reason to stick around. Of course the less than $10 a month price tag is hard to beat, too.

This is all at once method could be the real Earth shattering event.

Costs are Rising

While Netflix is working to change the world as we know it, it is also taking on some big risks in the effort. Assuring access to content is becoming increasingly costly and making your own content isn't cheap, either. Since it is taking on these costs at the same time as it is expanding overseas, the video site isn't making much money right now. Debt is also being layered on. So, this effort could wind up costing the company, and its shareholders, if it doesn't pan out.

Still, Netflix is taking a measured approach. The first original program to air was Lillyhammer, which the company used as a testing ground to figure out how to actually create and air an original series and, equally important, how to track the success or failure of the effort. It then started work on a big splash with Spacey and House of Cards. Resurrecting Arrested Development is simply bringing back an old favorite, so it should have a solid, if not spectacular, showing. The bigger question will be Orange Is the New Black, Hemlock Grove, and Derek, which are all new and won't likely have the media cache that House of Cards is garnering.

Watch and Learn

Investors might find that Amazon, which has so many other things cooking that creating new content can't possibly be getting the same level of attention, quickly follows the lead of Netflix on every front. How the traditional media outlets react will be far more complicated because their distribution model is vastly different. Of course, if Netflix supports too many flops, the new way of doing things may not last, either.

Yours,
Reuben Gregg Brewer


Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google, and Netflix. The Motley Fool owns shares of Amazon.com, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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