Last week Kevin made the case that the new world of parallel programming would lead to a market where the biggest player – most likely Netflix – was going to end up dominating the market for television delivery.
That hadn’t been the way I had anticipated things unfolding. I was expecting the number of distribution platforms to proliferate and that we would all be spoiled with an abundance of high quality viewing options. As one reader pointed out, unlike social platforms like Facebook, the switching costs are almost zero. And if I switch from Netflix to HBO’s new streaming service, or subscribe to both, it’s not going to impact anyone else on either platform. There are no network effects.
But there are more ways to market dominance than network effects.
Kevin’s post got me thinking about a book I read last year called The Second Machine Age by Andrew McAfee and Erik Brynjolfsson. The authors talk about the demolition of physical constraints on distribution, and how this has caused a proliferation in winner-takes-all markets:
“In many markets, buyers with a choice among products or services will prefer the one with the best quality. When there are capacity constraints or significant transportation costs, then the best seller will only be able to satisfy a small fraction of the global market (for instance, in the 1800s, the best singers and actors might perform for at most a few thousand people per year). Other inferior sellers will also have a market for their products.
But what if a technology arises that lets each seller cheaply replicate his or her services and deliver them globally at little or no cost? Suddenly the top-quality provider can capture the whole market. The next-best provider might be almost as good, but it will not matter. Each time a market becomes more digital, these winner-takes-all economics become a little more compelling.”
Google’s search engine is perhaps the best example of this sort of market dynamic. How difficult is it for you to type in the url of another search engine? The switching costs are zero. There are, again, no network effects. Why, then, does it have such a dominant market position?
Because it has the best product. And the best product means the most revenue with which to ensure its product remains the best (in the middle of a recent discussion about how many times rich people get married, I googled “John Singleton wives” and was delivered a chronological list, with photos, without clicking on a link).
I’m not for a second arguing that this sort of competitive advantage is as robust as one in which network effects are prevalent. But the more I think about it the more I question whether I will actually be signing up to more than one streaming service. If Netflix has five times as much to spend as the rest of the industry combined, why won’t it be able to provide me with everything I could ever want to watch?
I’ve no doubt there will be a long tail of alternate viewing. My wife and I are addicted to Scandinavian crime dramas The Bridge and The Killing, and it’s hard to imagine Netflix creating content with Danish subtitles (although they probably could purchase the distribution rights).
And there’s no guarantee, yet, that Netflix will be the winner. But I won’t be the slightest bit surprised if the media world is dominated by one provider in a decade’s time. The rest of the market will be fighting for scraps.
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