Justice Dept. to Probe RIAA!

I told you the tide was turning in DC. The Justice Dept. is launching an investigation similar to Eliot Spitzer's in NY to address the rampant price-fixing in this industry, this time they're specifically looking at online sales.

The labels are not gonna have that cush ride they expected when they were in there screaming about Napster. It's sort of like the US after 9-11. At first, people did feel sorry for us, but we squandered our goodwill and of course that rube Bush didn't care, or notice. Same with the labels, there was some sympathy at first, I mean, they did take it up the ass, and they got a sympathetic reaction from the courts and Congress. But, they don't know where to stop, they just got more and more aggressive and greedy, and they didn't even care how it looked.

But, you know, people are like that. They get imbued with a false sense of entitlement or power. I've started to notice how often it is the case that people don't realize what they've lost till it's long gone. I've seen marriages that are dead as a doornail go for years with no one willing to point it out, Skillings and Lays who rape and pillage California down to its last dime, people who don't realize how far they've gone, how much respect or sympathy they've lost until it's way too late. So, here's another example of desperate companies doing increasingly desperate things instead of doing what good businesses do and respond to the needs of their customers. And, the message is, there is a price.

The studios will survive for many more years distributing exquisite action films with lots of violence and voluptuous women to a worldwide audience but, the labels are dinosaurs. The once $16B domestic industry is now under $12B and it will go nowhere but down. Music can be democratized so much more easily than film and it's gone too far to stop it. They've lost the youth. Their last hope was to hold on to catalog, but, they can't, the files are too small. They're out there, the genie is out of the bottle. It's like Tina Turner's patter before Proud Mary, she says, "Some people like it easy, and some people like it rough" . Well, these label guys are the toughest of the sharks and they like it rough. And, rough it's gonna be, for them and the folks who want their music.

Netflix '06

Netflix grew more than any company in the film industry last year. So, I was intrigued by this article on their current thinking and direction. Personally, I think it's clear their current business model has a limited lifespan. It's only a matter of time before DVDs go the way of vinyl and VHS. But for now, the digital distribution models are not taking hold because there are broadband issues that still need to be resolved and, at this point, most everyone still watches most of their entertainment through cable on TVs because the computer screens are still used primarily for what I'll call "traditional purposes" small screen delivery of applications, web browsing and music... not to mention sex.

In a few years these distinctions will break down and any successful content distributor will need to do so digitally. For now, it's all about Netflix. It's the best alternative out there right now. I left last year, when they started throttling me and went to Blockbuster. Blockbuster is too slow, even without the throttling factor, so, I returned to Netflix. I'm able to watch a full DVD, often with features like commentary tracks and other stuff that makes the mystery behind movie-making so accessible, almost every day for under $20./month.

This fits my lifestyle, and apparently that of many others, since the company's stock tripled last year. Consumers want control. We all want control. We want to watch films on our own timetable. Why should I run my life around theater schedules, traffic, or even VOD rules, which usually force you to watch the whole movie at once, or in one day. With Netflix, I keep the film as long as it takes me to view it, I can stop it, rewind, watch one scene twenty times, skip another entirely. I view the film the way I want to view it, when I want to view it.

You may have noticed I never review the theatrical run of a film, only the DVD, because in addition to the reasons I just mentioned, I want to be able to do a full review of a film, including the deleted scenes and comments of the director, actors, writers, cinematographers and everybody else whose views I've heard expressed on these invaluable tracks.

Seems Reed Hastings and the Netflix guys are typical Valley ideologues who want a revolution. They want a seat at the table, they want to democratize film. They are doing it. Their business model is intimately tied to the trend toward indie films, to public desire for independent art, particularly in music and film. They are responding to to the disconnect Hollywood had with the American public for twenty years preceding Napster. Napster and its progeny brought the public an awareness of the corporate structure shaping the product that was supposed to pass for American art and culture. Our music and film had become pablum, so when artists started responding with something real, and avenues started to develop to distribute it, Madison Avenue and Hollywood were eventually forced to respond.

But meanwhile, Silicon Valley has increasingly realized its own power on this field. I've lived in Silicon Valley a long time and it's a very cyclical place. The last few years of the past two decades saw wild growth, followed by depression and then a deceptive calm before things go crazy again. In another few years (especially if it's Hillary in '08), we're gonna be drunk with power again around here when all these geeks move from the dry, quantitative stuff into content. Welcome to the new Hollywood baby, don't forget where your new king, Steve Jobs, lives. For now, The VCs are still scared shit of content because their poster boy is still Hollywood's whipping post. If Hank Barry and John Hummer are cleared, and they should be, things could change and the vultures could get a taste of the big cash that awaits them.

It's gonna be wild and Netflix will be a big player, if they can fend off a challenge from Amazon, who seems most interested in taking the second big direct attack (Blockbuster being the first). They also need to watch Google, who is clearly going for the young, indie filmmakers. Any big internet company not looking at indie filmmakers today, will be sorry tomorrow, and they are starting to know it.

Being a smart, forward looking company (hey, at least they tried some VOD), Netflix is now going into development and trying to do more with their user data. Just don't make the mistake of producing by numbers and committee or you'll end up where Hollywood is now, films that show no real heart and vision. When the director's vision is undermined too much, the film always suffers. The audience intuitively picks up on the disconnect.

Netflix rents only 30% new releases and the rest is catalog (unlike brick and mortar stores which typically rent 70% new releases), showing that Netflix users are getting enough product to start reaching out. I like to watch the big budget pictures too, and once I have, I have more time to check out smaller films. People will watch the heavily promoted films, they're often very good. Here's the concept that those in control of these huge media conglomerates never seem to get. There is relatively little penetration. The powers that be look at this as a zero sum game, even though it's not, and that's what causes so much of the problem.

While consumers may not spend much more on entertainment than they have in the past, they do have the ability to consume far more and better content. They want to do so, and they will pay for it. There is so much more room in the marketplace for good quality content than is recognized by the big players because they are so intent on keeping the bucks they had before and from the same sources. They refuse to accede to the desire of consumers to spend their entertainment dollars in ways that respect their autonomy.

Take the issue of video windows. Netflix is on the right side of this, demanding these onerous windows, which force people to see a film on the big screen or wait six months to see it at all, to close up. Even though the grosses for home video/DVD are now over three times the size of box office receipts ($10B), all the studios can see is the threat to box office receipts. They are far more attuned to their margins than gross sales. Stop looking at your price points and start looking to overall revenue and alternate revenue streams. Instead of putting all your upfront investment, our equivalent of R&D, into production, use it for development of new business models.