Wednesday, April 8, 2015

An Example of Stubbornly Staying the Course

After reading the article Seven Ways to Fail Big, the bad strategic move that stuck out most to me was “stubbornly staying the course.” Companies choose to do this because “the economics of the new model don’t measure up to the economics of the old,” and the companies don’t understand the new possibilities the new model could one day bring. It is a poor business decision that occurs time and time again, and it has the ability to destroy leading companies.

This bad strategic decision is occurring again in the movie and television industries. Movie studios make most of their money from theatrical releases of a film. Then, the film is released on the second most profitable medium, DVD. After that, the film goes to pay per view and subscription channels, and finally it arrives on regular cable and broadcast networks, where money is made from ad revenue. This model was followed so that profit would be maximized. Those that were impatient and had high willingnesses to pay had high amounts of money extracted from them in the theatrical window and those that were patient and had low willingnesses to pay watched it on television. As for television networks, they usually release one episode from a series a week so that they can show their full portfolio of shows and have time for each show to generate buzz for the episode the following week.

Companies like Netflix are changing those old models and many film and television companies are not following suit. In the past, this made sense because established studios and networks would have had to make a huge capital investment to create a service to house the data, and the download speed of consumers was far too slow to stream whole movies and television shows over the internet. In addition, as high definition formats became more popular, the idea of streaming these even larger file formats seemed unrealistic. The established companies believed there was no market for such a service, and they did not want it to interfere with their distribution windows.

However, as technology has advanced, the capital required to house large amounts of data has decreased and download speeds have increased. These two factors made services such as Netflix possible. Now, Netflix is changing the old tried and true models. They are creating their own films and making them available to stream on day one, skipping all the different distribution windows from the past. They are also creating original television shows and releasing the entire season at once, instead of an episode a week.

As time has gone on, it seems that this distribution method can be very profitable and many customers actually prefer it. Now, some of these movie and television companies are trying to play catch-up, but Netflix already has a huge lead. Netflix uses data that its rivals have not been working to generate, in order to create content it knows match its subscriber’s preferences. Therefore, while these companies were “stubbornly staying the course” for fear of adopting strategies that would produce lower profits, new companies disrupted the industries and now have the first mover advantage.

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