Will Lifesize and Polycom be the Next Blockbuster Video?

 

netflix-blockbuster

In 2004 Blockbuster Video had 60,000 employees, 9,000 video stores and did 6 Billion, (yes, with a “B”), dollars in revenue.  By 2010 they were bankrupt.  What happened?

Netflix.

The strangest part of the whole thing though is that Netflix never wanted or intended to be in the DVD business long term.  You don’t have to look far past their name to know what Netflix’s long term goal was.  To be the leading online, cloud-based, streaming video service.  That is exactly what they are today, to the tune of over 50 million worldwide online subscribers.  But how did they get there and how did they kill Blockbuster in the process?

Netflix knew that building the online infrastructure they needed and paying for the licensing for the movie library they wanted to build was going to be extremely expensive.  They also knew that they would have to create a paradigm shift in the minds of the movie consumer, who was used to going to a video store every week for their entertainment.

The Catch 22 was only a large online library would attract the number of users needed to make the money needed to build a large online library.  It was a circular problem.

They also knew that the Blockbuster customer was their target.  This was the revenue stream they needed to start to capture in order to start building up their coffers for the work ahead.  With Blockbuster having both the mind and market share, how would Netflix take these customers?  They decided to exploit the weaknesses in the Blockbuster business model.

There were a couple major problems with the Blockbuster model.  One was that it was extremely cost heavy.  DVDs were cheap, but 9000 stores and 60,000 employees were not.  Blockbuster was also heavily dependent on one habit of their customers to stay afloat.  That was the habit of procrastination.  Late fees were a huge source of revenue for Blockbuster.  The inability of their customers to return movies on time was money in the bank and really accounted for a large amount of their profits.

Netflix built an inventory of DVDs and offered a subscription based service to deliver movies to people’s homes through the mail.  Their inventory and library were not as big, and they didn’t even guarantee you’d get your first choice of movies, but rather just something from your pre-selected queue.  So why would people switch?  Why would they sacrifice choosing the exact movie they wanted that night and wait several days to get it?

The answer is that customers knew that they were getting killed on late fees.  With Netflix, they could get as many movies as they wanted, 2 at a time, and could keep them as long as they wanted and wouldn’t incur any late fees.  So Netflix banked on customers being self aware of their bad habits.  Netflix also banked on those bad habits continuing.  The same procrastination played well to Netflix’s advantage as if people didn’t return movies very consistently, they didn’t have to keep as much inventory.  No one was really maxing out the “all you can watch” promise.

With the Netflix model of no brick and mortar stores and mailing DVDs, the profit margins on DVD subscriptions was 47%  It was highly profitable, and Netflix started putting those profits into their online library and infrastructure.  Their ordering model had gotten people used to the idea of going online to select movies, so when they added the ability to watch a movie now on your computer, people started to try it.  Now Netflix was starting to change their customers’ expectation of how they could watch movies.  They continued to offer both services under one subscription as broadband proliferated and they continued using the DVD profits to finance their online project.  Not many people wanted to watch movies on their PC, so Netflix started to partner with companies like Roku and also created apps for web enabled TVs, AVRs, and Blu-Ray Players as well as the major gaming platforms and mobile devices.  This extended the reach of the online content from the PC back to the TV and even to portable devices.  Now people were starting to get hooked.

This is where Netflix made a very interesting decision.  They decided to break the DVD service and the streaming service into separate subscriptions.  They made their users make a choice.  Did they like the wider selection and consistent quality of the DVD service despite the time delay or did they prefer to get movies now, even if the titles they wanted took longer to become available and they may be delivered at varying quality based on the ISPs speed?   It caused quite a backlash at first, but Netflix really didn’t lose many subscribers.  The majority of subscribers chose the online service, which had much lower margins than the DVD counterpart.  So why would Netflix purposefully start to kill the most profitable part of their business while they still led the market?

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They knew that the DVD rental curve was about to decline, and that online based content was the next evolution.  Hardware was about to be dead and services were about to be the new profit center.  They jumped the curve and beat the competition to the next market.

The gamble worked.  DVD subscribers continued to pay for the improvements in the online system.  Profits from online finally eclipsed the DVD profits as of a couple years ago, and today they continue to grow comparatively.  In fact, there are only 6 million DVD subscribers left, compared to the 50 million online Netflix users.

Blockbuster tried to offer DVDs by mail as a reaction to Netflix’s rise and also changed their late fee policies, (the new policy was marketed as no late fees, but they charged customers for the whole movie after a few days, which didn’t go over well either), and even started an online service as well.  But it was an ancillary strategy that came too late.  In the end, they couldn’t catch up to take their market back, nor could they compete in the new one online.

Which brings me to Lifesize and Polycom and the hard codec.  Have they held onto the hardware business model too long?  Of course margins are high in proprietary codecs but are these companies, as Peter Drucker would describe it,  slaughtering tomorrow’s opportunity on the altar of yesterday?

At one point in time the hard codec had some unique advantages in quality and security.  However, with products like Vaddio’s Easy USB and HuddleStation, it is fairly easy today to add a high end look and feel to VTC while still leveraging the cost of the soft codecs like Lync, Skype, Google Hangouts, etc.

IT managers are now already securing and managing their networks to allow for provisioning of new BYOD and consumer mobile devices, so adding protocols for machines running soft codecs is not as costly as it may have been in the past.

The quality and security gaps are being closed at a fraction of the cost, so the niche for hard codecs is shrinking.  Lifesize and Polycom are making the customer choose between a perceived marginal quality increase of their hardware based systems at a premium cost and a low cost cloud based solution.  Sound familiar?

The difference is that Netflix was the leader for either solution, and kept the customers regardless of the choice they made.

Now, you may say that Polycom and Lifesize offer some cloud based options as well.  Remember that Blockbuster added movies by mail and online streaming as well before they went extinct.  Can they catch up to companies like Blue Jeans, Zoom, and Acano whose strategy seems to be cloud first?  Are Polycom and Lifesize offering cloud based services as a me too strategy to appease those who want it, or is it their business transition strategy?  From the outside it seems like the former.  However, I don’t sit in the big room where those discussions are had, so I can’t be sure.

This is where I ask you to start again at the beginning.

Netflix always knew they were going to be a streaming company.  Their whole business model was based upon exploiting hardware (DVD subscriptions) to build their online streaming business.  They knew that the business model of the past had inherent weaknesses and that they could exploit those weaknesses to steal customers and dominate the very market that they intended to kill while creating one that never existed before.  They never wanted to be in the DVD rental business, but they wanted the DVD rental revenues to bankroll their future.  It worked.

I think if you read this post critically, you may find several lessons that could be taken to heart in regards to our businesses’ models.  All of those lessons entail a popular axiom of today which is

“What got you here today will never be sufficient to get you there tomorrow.”

Food for thought.

Is your integration business buying a Blockbuster franchise in 2004 or are you investing in Netflix before their IPO?

 

 

 

 

About Mark Coxon

Mark Coxon is an AV industry native and blogger for the rAVe BlogSquad. You can reach him directly at mark@marketexplosion.me.

  • Simon Dudley

    Mark, Firstly may I say I enjoyed your review of the Blockbuster/ Netflix scenario. The history of business, and of business models is something than continually fascinates me, and I find it amazing (and shocking) how few people seem able to learn the lessons of history.

    Even though I generally agree with you on the Blockbuster / Netflix battle, our positions then diverge on the Polycom / Lifesize situation.

    Lifesize has always believed three things above all else:

    1) The quality of the experience in a video communication needs to be so good that the affect is like looking through a window. If it doesn’t, then it breaks the spell (And Arthur C Clarke’s 3rd law. “A sufficiently advanced technology is indistinguishable from Magic.”)

    2) If you don’t reinvent yourself every three years, someone else will come and do it for you. We’ve constantly reinvented ourselves in the industry. Examples include: the Worlds 1st HD Video Conferencing solution; The 1st Vmware and Hyper based infrastructure solutions and the 1st company to produce a SaaS based solution tightly integrating SaaS infrastructure with high quality HD based Video endpoints.

    3) The network effect of more users fuels the fire of the technology. (Metcalfe’s law)

    The Internet of things shows that users are very comfortable with high quality, dedicated devices, linked to a great service. Think Xbox or Nest thermostats. Although it is possible to produce decent results by putting together a PC with a bunch of peripherals, this isn’t a solution that the vast majority of users want. In fact the world is generally moving away from such solutions across the gamut of IT solutions. In reality, the cost of dedicated endpoint technology coupled with a good quality service doesn’t cost any more than the piecemeal approach anyway.

    What is changing the game very significantly in the Video Communications world is the emergence of Cloud-based SasS solutions for the Video Conferencing infrastructure. Traditionally the Video Conferencing infrastructure was extremely expensive, with the consequence that the barrier to entry, and the hurdle of Metcalfe’s law meant the technology had limited appeal.

    A few years ago Lifesize virtualized the Video Conferencing infrastructure, enabling it to be deployed on x86 servers on HyperV or VMware. The logical extension of this, launched earlier this year, was to put this into the Cloud ourselves, and enable clients to gain the power of Video Communications without the huge upfront costs. It also enabled clients to stop being their own service providers and now opens the opportunity for Video Communications to proliferate throughout the clients supply chain.

    Ultimately clients are interested in outcomes not delivery mechanisms. Lifesize started with High cost, high quality end points and moved into some Hardware infrastructure because it was the only way to deliver the quality of experience that clients demanded. As what success looks like changes so does the way we deliver the solution.

    There’s no question that the free technologies such as Google Hangouts, Skype and FaceTime are showing the world the enormous possibilities of Video Communications, but the seamless experience, the look through a window experience, security, and manageability means that clients are going to be much more interested in a SaaS model coupled with a seamlessly integrated endpoint, and not a cobbled together endpoint with a “free service”. After all, everything you say also applies to Email and Voice and although suitable for a small constituency, the vast majority of businesses are looking for much more.

    Products such as Bluejeans and the other “Video bridge in the sky” type offerings are interesting and we think of them as good companies with a good product. However we believe that most clients are looking for more than that, and are looking for a seamlessly integrated solution coupling the best in end point, mobile devices and infrastructure services into a single total solution.

    Way back when we started Lifesize back in 2003 we wanted to build a SaaS business. At that time, the reality was that the technology – such as SIP, VMware, and the capabilities in networks and data centers – just wasn’t there. That’s now all changed and we are experiencing explosive growth with our Cloud offering.

    On the grounds of full disclosure, as well as for legitimacy reasons, I wanted to state I have been with Lifesize since its inception in early 2003, and have had a range of roles, including design, product management, sales and marketing, and now I’m the Video Evangelist for Lifesize. Most of my work is about promoting the use of Video Communications generally, and is not focused on specific products.

    • Mark Coxon

      Mr. Dudley,

      What a great response here. I think you may have answered the very question I was asking. Are Lifesize and Polycom thinking forward?

      Your statement below sums up the answer to that question.

      “A few years ago Lifesize virtualized the Video Conferencing infrastructure, enabling it to be deployed on x86 servers on HyperV or VMware. The logical extension of this, launched earlier this year, was to put this into the Cloud ourselves, and enable clients to gain the power of Video Communications without the huge upfront costs.”

      As an extension of that investment, how much migration have you seen from your traditional codec selling partners into promoting this virtualized environment? Has the industry met this strategy with resistance or are they embracing this new model?

      I am genuinely curious and I really enjoyed your full response here.

      My goal in writing is always to challenge people to think. Being a religious guy, I read a lot about my faith not because I question it, but more to make sure I understand all the reasons it makes so much sense to me personally.

      In the same way, your comment here is a great transfer of knowledge, and something that moves the conversation forward.

      Take care sir.

      Mark C

      • Simon Dudley

        Mark,

        We’re finding that clients are embracing the model very quickly and for a number of reasons.

        The barrier to entry is so much lower than pervious incarnations of the technology allowed. Remember we care about ends not means. As the best delivery method changes so does our offering.

        Let me give you just two examples of how a SaaS infrastructure model changes the game:

        The way we enable the concept of a guest account. A premise under which users of the service can invite a limitless number of guests at no charge (each registered user can even have a video conference call with 24 of their guest friends simultaneously) has changed the video communications.

        Another hugely powerful change that SaaS enables is to free up IT departments from having to be their own micro service providers. Now they can concentrate of the delivery of services, not learning a new and complex technology. Not only is that good news for the users, but because the Cloud offering does not run on a clients network it is free to enable customers to get to the real power of visual communication, namely enabling their supply chain.

        Until now there has, in the professional grade video conferencing industry, a sense of last mover advantage. Whomever invested last in the technology got the most benefit from it. Now with the concept of guests, and enabling organisations to invite people into the environment, coupled with organisations no longer needing to be their own tiny, walled garden service provider, it upends that business model and enables the high quality experience of professional grade video communications to have the viral growth of the free stuff.

        I’m a professional, so you shouldn’t necessarily trust me. I believe strongly that Lifesize Cloud is the answer to the question you initially posed, but Lifesize pays me to say nice things about us. So I would encourage anyone who’s interested to go to http://www.lifesize.com, check the free trail button and try it for themselves for a few weeks.

        • Corey Moss

          First Mark, great blog and very insightful. Simon, I have to say that Lifesize has done something highly strategic moving to the cloud with an excellent application and I believe makes the company stronger as it adds to the hardware and infrastructure solutions.

          I have seen the cloud solution and have interacted with people at Lifesize as well. I’ll go on record to say that Lifesize has made an excellent move that will build them strong into the future. I highly encourage anyone to try Lifesize Cloud, and I’m not paid to say it…

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