This post answers questions on Netflix’s international strategy – specifically from an Asia Pacific lens. Do India and China offer a lucrative market for online movie streaming? And if they do, can Netflix dominate these markets? It probably won’t, in my opinion. Let us analyze this sequentially.

Netflix, the on demand internet movie and TV streaming media, added Internet video streaming in 2007. Perhaps Reed Hastings had realized that the future lay in internet streaming. By 2011, Netflix owned 61% of the US digital movie streaming market.  The natural course of action was to look towards global expansion. On 22nd Sep 2010, Netflix entered Canada and began its Latin America services a year later. In 2012 it began operations in UK and Ireland and earlier last month arrived in Sweden, Denmark, Norway and Finland. While we wait for most of these operations to stabilize, questions are being asked about the next international entry for Netflix. India and China seem like a big bet not just for Netflix but for other similar online movie streaming platforms. But can Netflix succeed in these markets?

There are three questions we need to answer.

  1. Does the Asia Pacific (especially India and China) online movie streaming market have potential?
  2. Can Netflix succeed in the region?
  3. If not, could they enter with a pivoted operating model? What all should they change?

A new report (“Online Movies:  A Global Strategic Business Report) predicts the total value of the global online movie streaming market to reach $4.4B in 2017. There are several drivers behind this growth. Most markets are growing internally, customers are increasingly aware of global trends and more comfortable with online payment systems, internet penetration is on the rise and movies remain popular in general.   In the US, broadband connectivity, which was a low 20% a few years back, has grown at a rapid clip over the years to reach a rate of over 78% in 2011. On the other hand, Asia-Pacific, driven by growing dominance of markets like China, India and Australia in terms of Internet connectivity, broadband penetration, and huge population base, is expected to grow at a fast clip of about 36% through 2017. Additionally, the “reach of online users” in Asia Pacific, as a share of total internet users is healthy. Asia Pacific scores an average of around 81% which is only slightly lower than the worldwide average of 81%. India and China hover around the 70% mark. Broadband penetration is growing and around 63% of the population shop online at least occasionally. However, in India, broadband penetration relative to total population is only 2% – which is small but also indicates huge potential. In China, this number is 12% – also indicating untapped potential. An untapped, growing market with enormous potential makes sense to enter.

However, I don’t think Netflix can succeed easily in these markets.

·         For starters, its expansion in Europe (a more comparable market to the US) is draining its cash reserves substantially. Netflix reported an 88% drop in its third quarter earnings this year and net income reduced as compared to last year. What this implies is that Netflix will wait for a significant time period before expanding into the lucrative markets of Asia Pacific. And while they wait, these markets would most likely be taken by home players. Even if Netflix wants to go to non-India/China markets like Korea, it will have to wait till its European earnings stabilize.

·         Domestic content providers have a much better shot at dominating these markets. They own the content and would likely host it on their websites. In India, a bunch of production houses (Eros, Reliance) have already started to do so. Netflix’s traditional licensing agreement will not be easy to pull off with such content providers. Even in China, the government-helmed China Movie Channel’s site M1905 joined forces with Jiaflix to launch a movie streaming service in China. It will be hard to displace such incumbents if you are late to enter the market. Content is king and owning it will not be easy.

·         Similar to the last point, Netflix will find it tough to negotiate with the domestic production houses in India and China on the same terms as the in the US. Will Netflix be flexible enough to take a much smaller share of the pie when it does get an in?

·         Within the Asia Pacific market, rampant piracy will hurt operations. Most of the population downloads illegally and for free. Most of Netflix’s movie and TV offerings are not the most recent releases – the latter being in the top favorite list of the population. Success of Netflix will involve changing customer behavior, which is always a long and painful process. If domestic content owners control their movies/shows then Netflix will be left offering its international collection – something most people can download in no time, for free!

·         YouTube can actually emerge as one of Netflix’s main threats in the region. Even if domestic production houses can’t host their own content (paid or free) and are unwilling to invest in a hosting website, they can always start a paid channel on YouTube which will attract the target market. How does Netflix compete with that?

So we know that the market has potential but Netflix will likely face a hard time if and when they get to it. That said, they must go into the region at some point – the potential is too huge to ignore. How then can Netflix succeed in these markets? Perhaps it can by changing its operating model.

In my opinion, Netflix would need to do away with its exclusive hosting model and share hosting platforms with domestic content providers. It brings a lot of value to the partnership – top notch technical expertise coupled with experience in providing a seamless customer experience are invaluable assets – especially for content creators that have traditionally not grappled with an online market. This takes away the fear of losing content control from the minds of the domestic production houses and also allows Netflix to have a share of the pie (albeit small). While Netflix will be able to showcase their own name of the partnered website, their revenue share will likely be much smaller as the platform will be mostly of the domestic content owner.

Additionally, there may be some content owners that are unwilling to go through the hassle of hosting their own streaming websites and Netflix could host their movies/shows on its normal website.

YouTube will still pose a huge threat to Netflix as it is also a hosting platform serving the same purpose. But YouTube will probably not be as adept in tracking customer preferences and experiences – something Netflix can and has done. It could pitch this value proposition to the domestic content owners as having a grip on preferences and streamlining experiences can help gain significant early traction. As a customer I would prefer a dedicated movie channel rather than finding and watching a channel on YouTube.

To summarize, the Indian and Chinese online movie streaming markets have a lot of potential and Netflix has the expertise to win in them – however domestic market conditions and friction with content owners will most likely hurt Netflix in actual operations. Changing its operating model for these markets is a solution but even then the road will be full of bumps. It will be interesting to see which path Netflix takes and how much success it can generate.


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Payment platforms for online and mobile businesses – current and future landscape

While most of the press around mobile payments has focused around B2C solutions such as Square and LevelUp, online payment platforms such as Zuora, Stripe and Braintree are also seeing robust growth, riding the tremendous growth in e-commerce and P2P mobile payments. Example client include Uber, LivingSocial and AirBnB (Braintree), box.net and zendesk (Zuora) and shopify and edmodo (Stripe).  Such platforms have a few key elements that all competitors in this space try to replicate:

  • A robust, reliable and scalable solution
  • Simple developer-friendly APIs
  • Excellent customer service
  • Quick (and in some cases “instant”) set up, including setting up a new merchant account for the client

A robust, reliable and scalable solution

Accepting payments for a new high-growth startup can be a very painful process if attempted on your own, but companies such as Braintree, Stripe and Zuora attempt to simplify the process as much as possible. The goal is to provide a solution that scales as your startup scales – from facilitating 100 transactions a week to a 1000 transactions a minute, all the while providing a reliable, secure and affordable service. Key to this space is supporting both desktop and mobile transactions, as a growing number of e-transactions occur on mobile devices. A number of startups also make international expansion a very early priority, as they attempt to be the first-mover in several markets. Payment providers try to stay one step ahead of the curve by expanding internationally and having a deep understanding of foreign legal and financial frameworks.

Simple developer-friendly APIs

Stripe is perhaps the best poster-child for having developer-friendly payment APIs. Stripe boasts having APIs “that get of your way” and also pioneered the “instant” setup features that were replicated by Braintree – which allow you to get started with a payment solution in under a day. The key here is to have API wrappers for various languages such as Ruby, PHP, Python and many more to make it incredibly easy to get started and integrate with your service.

Excellent customer service

Braintree seems to be leading here, and promises to always have a real person answer a customer service call. Customer service is key in this business, which is based on having reliable, trustworthy service with quick turnarounds if something goes wrong. Parts of the payments process remain tedious and high-touch. For example, setting up a new merchant can often involve multiple long-threads between the payment-solution provider and the client, where the payment-solution provider acts as the middleman (and underwriter) between the client and the bank. The client wants to have the account set up as soon as possible, while the bank wants to make sure that a proper risk assessment as done – companies like Braintree try to simplify the process by having excellent customer service and quick turnaround times.

Instant set-up

Now that Stripe and Braintree have instant setup (by eliminating the waiting period for a new merchant account or underwriting approval), startups can have a quick headstart in facilitating e-commerce transactions.  Through this process, companies such as Braintree also get more insight about the client’s business model and growth plans, and try to ensure that clients’ accounts are never frozen or shut down because of unanticipated activity.

Disruption and future landscape

While there are certainly scale benefits to serving many clients, I do not see any network effects associated with providing online payments. However, this could change as some of these providers attempt to get into the mobile P2P payments space, such as Braintree’s acquisition of Venmo.

On the other hand, the companies in this space are addressing an unmet need. For many high-growth startups, solutions such as PayPal, authorize.net are too expensive, slow, outdated and too hard to integrate with. I see solutions by Braintree and Stripe taking away a lot of business from PayPal. Switching costs are also high – it is usually hard to migrate customer payment information from one platform to another.

Although payment providers are seeing tremendous growth just because of the amount of growth in e-commerce and online/mobile transactions, all these solutions (except for Braintree’s Venmo business) are still reliant on the infrastructure provided by the credit-card networks. All the startups in this space seem to be playing the puppy-dog strategy – posing as small players who are friendly with the credit-card networks and are doing little to disintermediate them.

Competition is tough in the payment space, and more and more players (both large and small) are getting into this space everyday. Braintree, Stripe and Zuora seem to have carved out a niche, but need to remain innovative and competitive to stay relevant going forward. I’m looking forward to seeing many more innovate solutions come out of these companies to make payments for young, high-growth startups even easier.

 


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A glance at any news source will reveal an article or blog post on the tension between e-commerce and brick-and-mortar retail. Yes, it’s true that e-commerce is quickly encroaching on the historically offline retailers.  E-commerce sales in the U.S. are expected to reach $224 billion by the end of 2012, up 15% since 2011. [1] Yes, brick-and-mortar retailers still have an advantage, especially in high fashion and apparel more broadly. Customers that want to feel the material and touch the product, enter and browse stores for inspiration, or need an item immediately will still opt for the offline experience. And yes, retailers that master both online and offline will presumably fare the best.

 However, I believe that there are a set of issues that both online ecommerce and offline brick-and-mortar retailers alike are facing – and depending on how you cope with each will ultimately determine how and whether you come out on the other end.

 Increased retail commoditization puts pressure on online and offline retailers

 Retailers and brands have seen their products commoditized over the years. This first happened offline, but worsened as online retailers came into the mix, elevating the importance of price. For example, Intermix has always competed with similarly priced fashion chains, like Scoop, and department stores, like Saks and Bloomingdales, but as brands have opened their own boutiques, increased competition has come from the very designers that Intermix sells. [2] Of course, this commoditization is only exacerbated by the emergence of sites such as Net-a-Porter and Shopbop. While some retailers have tried to combat this issue by partnering with brands to develop exclusive lines, at the end of the day, brands often don’t want to be limited by a single retailer or take the risk of a failed partnership.

 Different shopping habits of millennials forces retailers to innovate

 There are currently 11.8 million millennials age 18-30 living in U.S. households with annual incomes exceeding $100,000. Not only is this group larger than many expect, but it will take over as the largest generational segment in the luxury consumer market around 2018-2020. [3] Furthermore, this group is looking for a unique in-store experience and online social validation. Retailers have spent enormous amounts of energy and money to better understand and cater to this emerging demographic. Nordstrom’s investment in HauteLook and Bonobos, partnership with TopShop, and significant IT capex ($100 million in 2011) on rolling out in-store touchscreens and mobile devices for store associates highlight its intent to be relevant to the millennial shopper and break the mold of being “your mother’s department store.” [4] Online retailers spend marketing dollars to align with influencers within the segment.

 Personalization & curation is difficult

 It’s a common misconception that ecommerce retailers have personalization and curation figured out. In fact, many are still at the initial stages of trying to integrate social sentiment tools, analytics and big data insights in order to better recommend products to customers in a scientific way. [5] Many online retailers tend to have algorithms with cookie-cutter product recommendations based on aggregate site visitor behavior rather than individual customer tastes and preferences.

 At the physical store-level, retailers rely on sales associates to deliver a personalized experience to customers; however, this commonly misses the mark for a variety of reasons. First, sales associates are under-utilized in stores – typically spending much of their time on low-value tasks. Second, given the traditionally high turnover at the shop floor level, retailers are hesitant to spend too much on training and therefore sales associates often miss on easy opportunities to up-sell and cross-sell. Finally, sales associates are not given the necessary data or information about a customer’s purchasing history, tastes, and brand preferences to improve customer service and efficiency.

 Human element is key to differentiation

 At the end of the day, the retailer that brings the best overall experience wins. Part of this is getting mobile POS incorporated into the stores, which most brick-and-mortar stores are already in the process of figuring out. More importantly, though, is how sales associates – online or offline – play into the sales process. I am in complete agreement with Hil Davis’ assertion that personalization and curation will still require a human element that is the sales associate or stylist (with the help of technology and data). [6] A well-trained sales associate with the right data-informed tools will be able to provide the differentiated experience relevant to millennials and the broader tech-savvy audience. This will lead to increased customer loyalty and consequently increased sales. Neiman Marcus has found that customers who shop with the same associate three times spend almost 10 times more than those who go to a random sales clerk. [7] It’s an art and a science – a delicate balance of using data and relying on the personal relationships that develop between sales associates and customers.

 

[1] http://www.emarketer.com/newsroom/index.php/apparel-drives-retail-ecommerce-sales-growth/ 

 [2] http://www.crainsnewyork.com/article/20101017/SUB/310179968

 [3] http://www.forbes.com/sites/larissafaw/2012/10/02/meet-the-millennial-1-young-rich-and-redefining-luxury/

 [4] http://blog.shop.org/2012/09/12/customer-service-is-changing-and-so-is-nordstrom/

 [5] http://allthingsd.com/20120604/e-commerce-accelerating-due-to-personalization-pinterest-and-ipad/

 [6] http://www.forbes.com/sites/ciocentral/2012/10/25/the-future-of-e-commerce-bridging-the-onlineoffline-gap/

 [7] http://www.retailwire.com/discussion/15855/app-lets-neiman-marcus-know-when-best-customers-arrive


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In 2009, there were 27.5 million businesses in the United States (according to the Office of Advocacy estimates) and small firms with fewer than 500 employees represent 99.9% of this total.  Many of these small businesses have low revenues, many fail, and many aren’t in industries that typically use web-technology but I’d argue that many of these same companies still offer an attractive opportunity to many tech startups.

 The types of small-businesses I’m classifying as non-technology are ones like local moving businesses, beauty services, personal training, any-type of lessons (like piano lessons), landscaping, etc.  At first glance these wouldn’t seem like attractive opportunities for someone interested in a web-technology business, but there are many opportunities for web-technology to make these businesses more successful.

 An obvious opportunity is enabling these businesses to connect with customers.  Just looking at all the small businesses advertising their services in the “services” section on craigslist, it’s easy to see that these businesses are looking for inexpensive ways to connect with customers.  An entrepreneurial opportunity that has already been exploited successfully in numerous industries (including some of the above) is a marketplace that matches these businesses with customers.  One such example is Care.com which matches people offering care (childcare, senior care, pet care, homecare) with customers.  In this case Care.com serves both the small business and consumers in a two-sided network that exhibits strong indirect network effects (meaning the more consumers on the site, the more valuable the site is to caretakers and vice versa).  There are numerous industries in which this type of web-application would be valuable to both small-businesses and consumers.

 Aside from the above marketplace business model, there are a whole slew of opportunities to help make these same types of small businesses become more efficient.  Although QuickBooks by Intuit was not originally a web-based application, it is now an example of web-based software that supports small business owners and enables them to spend less time on tedious finance work.  I know of a few small businesses using Mint.com to help make their finances run more smoothly and take up less of their time.  Another general area where web-systems are being used to make some small businesses run more efficient is in business scheduling. For example, moving companies have multiple movers and moves that need to be scheduled daily and the owner often relies on just a notebook or excel sheet to track this when a centralized web application with automated email reminders and numerous other tools can provide much more value to both movers and customers.  We recently read a case on Zillow that discussed Zillow’s new zPro product aimed at real estate professionals that featured tools to help these professional run their businesses more efficiently.  Another entrepreneurial opportunity recently appearing was the development of a way to enable businesses focusing on teaching lessons (on anything from piano lessons to sports lessons) to better connect with their clients through online tools and video platforms.  All of the above involve instances where web-based technology is brought to small-businesses that aren’t traditionally thought of as needing this web-technology, but can benefit greatly from it.

 Some of these niches in this type of small-business space have some big and small players that have found the market opportunity, but I would argue that many of the products are in their infancy with lots of room for improvement and a huge potential market share that hasn’t been pursued.  An entrepreneur focusing on these areas needs to understand the potential downsides to approaching these types of small-businesses and turn them into upsides for their business by crafting their product and business model in a specific way.

 A key characteristic of these small-business owners and potential customers is that they lack capital and do not have the opportunity to spend significant amounts on a product unless it is guaranteed to reduce costs or increase revenues.  The “Freemium” model works great here in obtaining these types of clients by allowing the small business owner to try a web-application out that could help their business for free and then once they see the value of the product they can purchase a premium version.  This also means that the Software as a Service (SAAS) model typical of web-applications works great here because the small business owner does not want to make a big investment up front but is willing to continue paying a continuous and predictable service fee if the software increases their net income.  Approaching small-businesses with the SAAS model also is attractive when considering the potential of a small-business growing – the more helpful a particular software product is for a small business, the more they will be willing to pay more for it as they continue to grow. This lack of capital characteristic also often delays the pursuit of these niches by big-businesses which can be helpful from a competitive standpoint for the web-based startup.

 Another potential downside of small-businesses is their limited revenue, but this also means that the web-based entrepreneur can identify a way of increasing that limited revenue even just slightly and provide tremendous value to the small-business.  For example if a web entrepreneur develops a video/lesson platform for a piano teacher that helps them reach one or two more clients and use their time slightly more effectively, that incremental benefit can be an important fact for the piano teacher that they will value highly.

The above factors provide an attractive opportunity for many web-based startups who can tailor their products to meet the needs of these non-technology-based small businesses.  Who better to meet the needs of a small-business than a start-up that is currently facing similar challenges as a small business themselves?  They will often have a higher level of understanding of what issues other small businesses face than a large company could have.  At the same time web startups can respond more nimbly to these customers and hone in on specific niches to take advantage of a market that is often difficult to identify and penetrate by large companies.


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Managing an online identity has become an increasingly important part of life.  With so many options to connect to the world via cyberspace, we are forced to pick and choose which social platforms to engage with and what exactly to share.  Being part of a particular social network establishes a permanent record of your interactions with that network.  No hiding your past.  That means you better be careful of what you post. 

By now, many of us have heard the urban legend where an employee tweets about his boss and is subsequently fired or where a candidate is not offered a job because of a controversial Facebook photo.  While these stories may or may not be true, employers are definitely Googling candidates and making inferences about that candidate’s personality from the results that appear.  Thus, we are forced to segment our online identities and tailor our profiles accordingly. 

Being aware of the importance of your online identity highlights the complexity of managing it.  Google yourself and see what returns.  You may be surprised to find that short article you wrote back in college turns up in the top five search results.  You may also be surprised that a photo on a friend’s Flickr account is publicly available.   Most of us would like to maintain a sort of professional persona to employers and colleagues while simultaneously sharing personal pictures from travels with friends and family.  How can this “split” identity be maintained? 

Privacy and security issues are a hot topic these days, giving rise to added privacy features on social networks that allow you to control exactly who you share with.  This added flexibility is beneficial but requires a certain amount of thought each time you make a post or upload a photo as you decide what segment of your friend list you entrust with the material.  It can quickly become overwhelming to remember what you posted, where, and to whom. 

However, having an online identity is not all evil.  The internet is often a source of first impressions and thus can be used to shape how we want others to perceive us.  Considering the ease at which web pages can be developed, you can create your own website that broadcasts your interests or highlight only certain work experiences on your LinkedIn profile.  Take, for example, a graduate student with a healthcare background who is now interested in pursuing a full-time position in technology.  By showcasing her thoughts about the latest tech trends in a few blog posts and a personal AboutMe page while “following” tech-related bloggers on Twitter, she is proving her industry commitment to potential employers.

So, just as you pay your bills on time to build a good permanent credit history, use websites and social networks carefully to build an online identity that you are comfortable sharing with the world, permanently.

                


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