NetFlix wants to take over your TV

I want to complete the series of posts on the future of the internet really soon. I hope to do it this weekend. In the meantime, I'm going to take a different approach and talk a little bit about current events.

I generally try to eschew this practice as the mainstream press + blogs will generally beat it to death. Yet, in the spirit of one of my favorite blogs, I Cringley, when there is a larger trend behind the events, I'm glad to dig into it.

Netflix announced today the release of their much anticipated set-top box. Essentially, as long as you are a Netflix subscriber and are willing to pay $100 for the box, it gives you the ability to watch Netflix's library of streamable videos on your television. As the mainstream press has pointed out, the product is not perfect.

• It is limited to their catalog of approximately 10,000 streamable videos. This is a much smaller selection than their 100,000 movies, and from experience, these 10,000 movies for the most part suck.
• The device does not contain a hard-drive but rather streams just as you would on your computer. If your internet connection is slow or interrupted, it will significantly affect your playback.

The reasons for this move are obvious. It is based on an apothegm that I've been preaching for a long time. "When it comes to digital content, if you're in distribution, you're dead." The marginal cost of distributing digital content is essentially zero.

This is largely affecting two very different industries. The first are those providing the bandwidth, essentially ISP's and Telecom's. As the bandwidth becomes a commoditized dumb pipe, their entrenched annuity revenue model is breaking down. Look no further than AOL's troubles as well as the failure of the walled garden strategy of the major mobile providers. This business will only be further eroded by Google's and Clearwire's efforts in the WiMax space.

The second are those in the business of distributing digital content. When Napster launched, the clock started running on these businesses. The troubles of the music industry, especially the retailers, have received much attention. The movie rental business, with a once promising Blockbuster Inc. as the example, is succumbing to a similar fate. Book retailers, notably Barnes & Nobles with its many recent store closings, have been decimated by Amazon's success. I think the implications will be much deeper and wider than we've seen so far, and will effect industries that are not pure distribution plays. We may discuss these industries in a further post.

I think bringing up Amazon at this juncture is important as it's vertical position is largely analogous to Netflix; they are both intermediaries between the past and the future of content distribution, and are both (presciently) acutely aware of it. Amazon's main business has been distributing digitizable content (i.e. books and recently music/movies) among many other ancillary products. They simply took the next step and leveraged the power of retailing on the internet thus reducing the traditional overhead costs while simultaneously . Furthermore, they innovated and integrated technologically to improve the traditionally stagnant distribution model, allowing them to pass on some savings to consumers without severely compromising their financial position. These lower prices were an important weapon in persuading consumers to trust the online model.

But Bezos is no fool, hence the Kindle. He is well aware that to date Amazon has been nothing but an intermediary (an extremely innovative one at that), and is trying to position the company to be part of the future as well. After delivering a rousing talk at an NYU alumni event recently, I asked Bezos about the inevitably of the "Napster effect" spreading into books and whether he was furthering his own demise with the Kindle. Bezos, being the guy that he is, brilliantly responded with an apothegm of his own, "We'd rather eat our own lunch than have someone else eat it." If only the music executives had been so wise. Bezos realizes that as most if not all digital content becomes free, the $ will not be in delivering or owning the content, as much as in owning the "real estate" where it is displayed (and the data generated thereto). This is what the Kindle is all about. I would be interested to see whether Bezos will tackle the music section by building it into the Kindle, releasing a separate device, or leaving it be. What he will do with video is also interesting, especially considering Netflix's latest efforts.

Netflix too was an intermediary between the future (embodied by their set-top box effort), and the past of Blockbuster. They also transferred a brick and mortar industry to the internet, and innovated in distribution. I still get a tremendous kick out of their envelopes everytime I use them. And they also realize that DVD's are a dying product as all digital content will be distributed via the internet in real-time. They want to be the ones controlling the display.

I would view their current effort as a hardware beta. I have no doubt that overtime they plan to release the whole library and potentially add hard-drive capabilities. Furthermore, they will possibly build in the ability to stream internet video, and potentially layer on some applications related to traditional television viewing. In general, I predict that we are on the verge of tremendous innovation in the TV hardware space and in the development of a platform for application development in this space. Television, although not traditionally seen as such, is simply another digitally distributed product. It is a matter of time before the effects of the internet are felt here as well. Google, as always, is making headway in this space as well.

The funny thing is that both Netflix's box and the Kindle are not the ultimate future, but simply another intermediary point on the trajectory. What is the future? Massive device convergence. We will no longer think of individually in terms of a book reader, a music player, a laptop, a desktop, a set-top box, a television, a monitor, even a key and credit card. Think only of a multi-purpose hardware platform with various functionality. What does this all mean? It's all part of the future of the internet, and is something I will tackle in the next post. Until then.