Vertical integration in mass media shouldn’t take us by surprise. The DVD-by-mail giant Netflix is showing us how they don’t settle by accounting with more than a fifth of the Internet traffic in the United States by also entering the production arena. Why are they doing this?
The American provider of Video On Demand (VOD), who started as a traditional distributor, and then became leader in Digital Marketing and Digital distribution, is looking to promote their business and ensure financial growth by an upstream integration to production, which in my opinion was triggered by the market specific influences. The digital era lowers barriers for competitors to enter the market and become a threat to the established participants like Netflix, moreover, the Long Tail makes it easier for Netflix as distributors to reach the market and promote their content. But lets analyze more in depth what might be the reasons for this decision.
1.- Leverage in relationships with TV and movie studios.
This is the first possibility we could think of, if they produce a certain show to build stronger relationships with studios, maybe by selling the show to them and converting Internet pennies into traditional dollars. At the same time, these relationships are critical for Netflix show offering.
2.- Original Shows.
The other reason they might be doing this is to increase their barriers by owning an original show that can only be seen through Netflix platform, in that way, differentiating from the rest, and leveraging on their resources -Long Tail, to make the show a success.
From an economical point of view, we would have to study and balance the relationship between the Marginal Economic Benefit vs. the Marginal Bureaucratic Cost incurred by this move, model offered by Jones & Hill, and see up until what point it is good for Netflix to integrate.
It is true that they are saving a lot of costs due to the sharing of resources used to implement this new activity, but we would need to see how the benefits will outweigh the costs. Maybe in a few days we will find out what is the strategy behind this decision, and if they will follow through this big step.
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Other references:
http://www.fool.com/investing/general/2011/04/25/netflix-byte-my-dust.aspx
http://www.hollywoodtoday.net/2011/05/09/digital-hollywood-2011-net-flicks-talks-about-going-into-tv-production/
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