1Michael

Hey Noah,

Most products or services that you buy in advance probably fall into this category. How about gym memberships? They save a little money if you don't show up ever, but then you won't renew next year. It's the same with baseball season tickets and the text messaging plan on your phone.

August 10, 2009

2Saurabh Garg

Yep,

It makes sense to align your interests to customers, but I don't think they can overdo it. If suddenly all customers started ordering a disk a day, or say, 15 disk a months, what happens to the costs for netflix?

Compare it with credit card companies (at least in India). The companies want their customers to default on the payment for a month but want them to pay the entire amount next time. This is how they maximize their returns.

I am sure a graph like that exists at Netflix and they know the "optimal" number of disks that a customer needs to rent out so that netflix makes the most from the subscription plan.

Some will rent more, some will rent less.
Challenge thus is to get most customers in that "optimal" range.

Regards,
SG

August 11, 2009

3David Lifson

I used to be the Product Manager for Amazon's recommendations team, and the following comment came out of a discussion I had with a guy from Netflix's engineering team....

There is an important distinction between the motivations behind Netflix's recommendations and Amazon's recommendations. Amazon's goal is to show you the next product you are going to buy, regardless of what it is. In fact, the old joke is that one day we could replace the list of 100s of recommended items with a giant picture of the one item you WILL buy next. Usually this is some related bestseller (e.g. how about that new Coldplay album?), but it didn't matter, as long as we thought you'd buy it.

Netflix has very different motivations. Yes, they want to make great recommendations, but their recommendations ALWAYS will skew to back catalog and away from current blockbusters. How many times have you said "Oh yeah, I've always meant to watch that movie!". The reason behind this is economical. It's very expensive for Netflix to purchase hundreds of thousands of copies of The Dark Knight, just to be stuck with them a year later after everyone has seen them all. So Netflix tries to dampen demand for blockbuster movies by encouraging you to rent older movies, where they can get away with only owning a small number of copies.

So while Amazon just wants to move items off the shelves, Netflix wants to shift demand from the head to the tail to reduce the cost of supplying that demand.

August 11, 2009

4Drew Weilage

Related to your post on the data supporting that preventative health care measures don't necessarily save money, on the individual level this is exactly the approach one should make when utilizing health care resources. But the "healthy" rewards go to the customer and the financial rewards go to the insurance company (which usually isn't the customer per se). The provider of the prevention services gets little and (again on the individual level) misses out on the big ticket item that would arise had the patient not utilized prevention services.

Anyway, all of that confusion and mass simplification to say that your Netflix example is not how health care works. But that's how it should work: provider and patient interests aligned perfectly.

Also interesting that Netflix seems to be the most topical business at the moment, what with the culture presentation and a few articles. Never knew they were so secretive, but I guess that was the point.

August 11, 2009

5Noah Brier

@Michael: Good point, except with gym memberships they actually oversell the space. If everyone showed up they wouldn't fit.

August 11, 2009

6Matt

It is funny Michael brings up gym memberships. I used to sell them. And by far the most money was made selling them to gym newbies. They'd buy a six-month membership, which was more costly per day than a three-year membership. They'd need to hire a personal trainer. They'd need to buy supplements and wouldn't know where to go to get them cheaper. And then they'd stop coming altogether, meaning the gym was less crowded and therefore could sell even more memberships.

By contrast, it was impossible to make money off fitness junkies. If they liked the gym, they paid on the spot for a long-term membership and never bought any of the premium services.

I have met several people who start gyms with the belief they can create a "community" around the gym. And within a couple of years, they are always out of business.

August 11, 2009

7Robin

@David: Love that subtle insight. The economic imperative to drive viewers deeper into the long tail. Giddyup!

@Noah: I think your theme here -- aligning interests -- is sorta the key to everything. And by everything I mean: the environment, better health care, satisfying work, an actual functioning economy that creates value (in the Umair Haque-ish sense), etc.

And in particular I'm interested in the idea of aligning interests in media & advertising. I think, as a business, it's one of the worst offenders: interests of consumers & producers are not quite diametrically opposed, but they're definitely off-kilter.

Now, by contrast, I think of (this is self-serving but I wouldn't cite it if I didn't actually think it was a good example) Current's viewer-created ads. I say this all the time to people at Current, but this program is really weird because everybody likes it. The kids who make the ads like it because they get paid. The advertisers like it for obvious reasons. Viewers like it (!) b/c the ads are more interesting than traditional TV spots and they're wrapped w/ this interesting creation story. And we at Current like it b/c it pays the bills, and b/c it's totally on-brand, unique, etc. etc.

That doesn't scale up to replace, er, all of advertising, though. So, what I'm wondering now is: What are some other ways that consumers and producers of advertising* (and, by extension, producers of ad-supported media) can get their interests better-aligned?

*Which could be entirely redefined

I think this is a huge, almost existential question at this point -- especially if you're talking about ad-supported journalism.

(Didn't mean to type that much, but as you can tell, I think this is a big idea.)

August 12, 2009

8Wesley Verhoeve

Not sure if you ever caught onto this new story though, seems like the theory as described in your post does have its limits:

"'Throttling' Angers Netflix Heavy Renters"
http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2006/02/10/financial/f112412S32.DTL

It's actually something I've experienced myself when I first became a member.

August 12, 2009

9Matt Ward

This is a very interesting concept and not one I've thought too much about. I tend to expect that David's comment with respect to the recommendation engine being likely skewed to incent the behavior Netflix desires, based on their marginal costs of providing the product, is likely correct. But if this is the case, it's hard to imagine that this arbitrage scenario based on a misalignment of buyer/seller goals can persist for very long. That is the type of opportunity the next disruptive innovator is looking for.

August 13, 2009