Elmo's arrival points to HBO's future

Sesame Street announced a new five season deal with HBO. The seasons will be available exclusively on HBO for nine months before dropping at PBS.

This is HBO pursuing the Netflix, Amazon Video, and Hulu strategy instead of the reverse, the latter three all offer or plan to offer original children's programming. HBO has never had kids programming, and this move is a clear acknowledgment that they view themselves as a mini-bundle in and of themselves, more so than a channel carried by the traditional cable bundle.

HBO was once content to be a brand that stood for movie titles from the Warner Bros. catalog and boxing. Then it offered some comedy, and then original series, most of it targeted towards an adult demographic. HBO has had some great original series over the years, but it's fair to characterize their house style as having a fair bit of sex and nudity along with a fair dose of profanity and violence. They told us β€œIt's not TV. It's HBO.” but if you watched any of their series you weren't likely to confuse the two.

What they didn't offer was family or children's programming. The money was coming in by the truckload, especially during the heyday of DVD, so it wasn't as if HBO felt a great sense of urgency to diversify its subscriber base.

Then came Netflix, which doesn't have a house style. Rather, they have more of a technology companies approach to content and growth: why put artificial limits on your own growth? The limit on entertainment subscription service growth is a function of the diversity and quality of their content portfolio. To acquire a subscriber, you need enough content to entice that person to become a subscriber. Then you need enough interesting content each month to keep them from canceling (that's the main reason subscription services like HBO don't release all their series at the same time of the year).

Once you have enough content to acquire and keep one type of subscriber, the marginal return on your next dollar of content is higher if you produce content that appeals to another type of subscriber. That's the Netflix strategy. If you look at all their original series, they are all over the map in genre, style, tone. They want to offer something for everyone so their subscriber base can include anyone.

[Amazon Prime is an even more bizarre subscription because it includes not just video but free expedited shipping, Amazon music, unlimited photo storage, e-book lending libraries, Amazon-branded everyday essentials, cheaper shipping on groceries, and a personal drone for dropping your kids off at school. I made one of those up, but it might be part of Prime next year.]

And now HBO is following suit. The next step for HBO is to let its original series spill out from Sunday night. If you read the Hollywood Reporter or another industry rag, you'll no doubt have heard of HBO passing on quite a few original series recently. Some of that could be creative differences, but if any of it is HBO limiting themselves to what they can fit in their Sunday night time slots, they're imposing yet another artificial limit on themselves that makes no sense in this streaming, time-shifted age. If HBO Now is the future, at some point it shouldn't even matter if some content on HBO Now never airs on their cable channel, especially if it's something like Sesame Street which would seem out of place on a cable channel chock full of mature content. The MSO's wouldn't love that, and perhaps HBO would just tack on another channel like HBO Family, but they should be willing to consider any concessions to their linear channel to be a strategy tax.

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Since Twitter has largely replaced late-night talk-show monologues as the joke factory on the day's news, I enjoyed this roundup of humorous tweets riffing off of the HBO and Sesame Street deal.

Chelsea Peretti: One of the Greats

Jonah Peretti is doing some great things at Buzzed, but his sister Chelsea ended 2014 strong too with this brilliant standup special for Netflix. I saw her perform as an opener for Sarah Silverman a few times at the Largo in Los Angeles when I lived there. She was good then, but this act showcases her after some level ups.

I think all the talk of House of Cards being based on proprietary Netflix viewing habit data is vastly overblown, but I do wonder if all the standup Netflix has funded is based on empirical proof of the repeat viewability of standup comedy (not to mention its relative low cost versus a TV series.

Tech tidbits

  1. Researchers have developed a type of chemical iris that could enable photographers to select apertures on really tiny cameras (think camera phones) in the future. Maybe someday we'll get to shoot wider open on camera phones, enabling us to get the type of shallow depth of field which is the one piece of a photographer's toolbox that's most noticeably absent on the most popular camera now, the smartphone.
  2. Netflix signs Chelsea Handler for a new talk show. They're going to keep re-investing their profits in original programming. Imagine if HBO didn't have one particular house style for original programming but instead tried to target programs even more segments of viewers. What number of subscribers could they sign up? That's what Netflix is setting out to do.
  3. Viacom and about 60 small cable operators representing about 900,000 households went to war over carriage fees. In what is a notable first, the two sides decided to part ways rather than settle. Supposedly most households didn't care and the cable operators lost less than 2% of subscribers, much lower than the 10% churn they were bracing for. Not entirely surprising consider Viacom's target viewership is less represented in the flyover states, and most of the generation that watches Viacom programming can likely find that stuff online. This next generation of kids have never paid for cable and probably never will. There remains just one channel that every cable operator in the country would have to suck it up and pay for just about any price, and that's ESPN, which not surprisingly demands the highest carriage fee (by a wide wide margin) in your cable channel lineup.
  4. The Oxford Mail is experimenting with letting WhatsApp users follow them to get occasional news alerts tailored to their interests. This is a small test but an important one as it may signal WhatsApp is finally moving to become a platform like its Asian peers LINE, WeChat, and KakaoTalk. Those chat services have corporate or celebrity accounts you can follow to receive broadcast text messages, much like following a celebrity or corporate account on Twitter.

Big data and price discrimination

Adam Ozimek speculates that Big Data might bring about more price discrimination.  First degree price discrimination has always been a sort of business holy grail, but it was too difficult to get enough information on the shape of the price-demand curve to make it so.

For some time now, though, this has no longer been the case for many companies, and in fact one company did try to capitalize on this: Amazon.com. I know because I was there, and the reason that was a short-lived experiment is a real world case study of how the internet both enables and then kneecaps this type of price discrimination.

Amazon, until then, had one price for all customers on books, CDs, DVDs (this was the age before those products had been digitized for retail sale). A test was undertaken to vary the discount on hot DVDs for each customer visiting the website. By varying the discount from 10% up to, say, 40%, then tracking purchase volume, you could theoretically draw the price-demand curve with beautiful empirical accuracy. 

Just one catch: some customers noticed. At that time, DVDs were immensely popular, selling like hotcakes, and the most dedicated of DVD shoppers perused all the online retail sites religiously for the best deals, posting links to hot deals on forums. One customer posted a great deal on a hot DVD on such a forum, and immediately some other respondents replied saying they weren't seeing the discount.

The internet giveth, the internet taketh away. The resulting PR firestorm resulted in the experiment being cancelled right away. Theoretically, the additional margin you could make over such price discrimination is attractive. But the idea that different customers would be charged different prices would cause such distrust in Amazon's low price promise that any such margin gains would more than offset by the volume of customers hesitating to hit the buy button.

Ozimek notes this: "The headwind leaning against this trend is fairness norms." What's key to this is that the internet is the world's most efficient transmitter of information, and while it enables a greater degree of measurement that might enable first degree price discrimination, it also enables consumers to more easily share prices with each other. This greater transparency rewards the single low price strategy.

It's not a coincidence, in my mind, that Apple fought for a standard $0.99 per track pricing scheme with the music labels while Amazon fought the publishers for a standard $9.99 pricing for Kindle ebooks. Neither Amazon or Apple was trying to profit on the actual ebooks or digital music retail sales (in fact many were likely sold at break-even or a loss), they were building businesses off of the sale of complementary goods. In the case of Amazon, which is always thinking of the very long game, there are plenty of products it does make a healthy profit off of when customers come to its site, and getting users to invest heavily into building a Kindle library acted as a mild form of system lock-in. In the case of Apple, it was profiting off of iPod sales.

In the meantime, second and third order price discrimination continues to exist and thrive even with the advent of the internet so it's not as if the pricing playbook has dried up.

A skeptic might counter: didn't Ron Johnson get fired from J. C. Penney for switching them over to an everyday low price model? Didn't their customers revolt against the switch from sales and coupons and deals you had to hunt down? 

Yes, but everyday low pricing isn't a one-size-fits-all pricing panacea (as I wrote about in reference to the Johnson pricing debate at J.C. Penney). For one thing, there is path dependence. Once you go with a regular discount/deal scheme, customers create a mental price anchor that centers on that discount percentage and absolute price. It's hard to lift an anchor.

J. C. Penney was trying to go from a heavy sale-driven pricing scheme to an everyday low pricing model, and that's an uphill, unmarked path. Only the reverse path is paved. It's not clear whether the switch would have worked in the long run. Johnson ran out of runway from his Board soon after he made the switch and revenues declined. 

Everyday low pricing tends to work best when you're selling commodities since those items are ones your customers can purchase many places online. At Amazon we were far more interested in dominating one crucial bit of mental math: what website do I load up first if I want to buy something? We were obsessed with being the site of first resort in a consumer's mind, it was the core reason we were obsessed with being the world's most customer-centric company. Anything that might stand in the way of someone making a purchase, whether it be prices, return policy, shipping fees, speed of delivery, was an obstacle we assaulted with a relentless focus. On each of those dimensions, I don't think you'll find a company that is as customer-friendly as Amazon.com.

Ultimately, customers have a hard time figuring out intrinsic value of products, they're constantly using cues to establish a sense of what fair value is. Companies can choose to play the pricing game any number of ways, but I highly doubt Netflix and Amazon will choose to make their stand on the first order price discrimination game. There are many other ways they can win that are more suited to their brand and temperament.

Still, the peanut gallery loves to speculate that Amazon's long term plan is to take out all of its competitors and then to start jacking up prices. A flurry of speculation that the price hikes had begun spun up in July this year after an article in the NYTimes: As Competition Wanes, Amazon Cuts Back Discounts. After the NYTimes article hit, many jumped on the bandwagon with articles with titles like  Monopoly Achieved: An invincible Amazon begins raising prices.

If you read the NYTimes article, however, the author admits "It is difficult to comprehensively track the movement of prices on Amazon, so the evidence is anecdotal and fragmentary." But the article proceeds onward anyhow using exactly such anecdotal and fragmentary evidence to support its much more certain headline. 

Even back when I was at Amazon years ago we had some longer tail items discounted less heavily than bestsellers. However, pricing the long tail of books efficiently is not as easy as it sounds, there are millions of book titles, and most of the bandwidth the team had for managing prices was spent on frontlist titles where there was the most competitive pressure. All the titles listed in the NYTimes article sound to me like examples of long tail titles that were discounted too aggressively for a long period due to limited pricing management bandwidth and are finally being priced based on the real market price of such books. Where in the real world can you find scholarly titles at much of a discount?

The irony is that the authors cited in the article complain their titles aren't discounted enough, while publishers ended up in court with Amazon over Amazon discounting Kindle titles too much. This is to say nothing of the bizarre nature of book pricing in general, in which books seem to be assigned retail prices all over the map, with the most tenuous ties to any intuitive intrinsic value. The publishers set the retail price, then Amazon sets a price off of the retail price. If the publishers wants the discount on their books to be greater they could just increase the retail price and voila! The discount would be larger.

To take another category of products, DVDs, soon after we first launched the DVD store, long tail title like Criterion Collection DVDs were reduced from a 30% discount to a 10% to 15% discount. But just now, I checked Amazon, and most of its Criterion DVDs are discounted 25% or more. If I'd taken just that sample set I could easily write an article saying Amazon had generously decided to discount more heavily as part of its continued drive to return value from its supply chain to customers.

Could the net prices on Amazon be increasing across the board? I suppose it's possible, but I highly doubt that Amazon would pursue such a strategy, and any article that wanted to convince me that Amazon was seeking to boost its gross margins through systematic price hikes would need to cite more than just a few anecdotes from authors of really long tail books. 

It will remain a tempting narrative, however, because most observers think it's the only way for Amazon to turn a profit in the long run.

However, that's not to say big data hasn't benefitted them both in extraordinary ways. Companies like Amazon and Netflix know far more about each of its customers than any traditional retailer, especially offline ones, because their customers transact with them on an authenticated basis, with credit cards. Based on their customers' purchase and viewing habits, both companies recommend, better than their competitors, products their customers will want.

Offline retailers now all want the same type of data on their customers, so everyone from your local drugstore or grocery store to clothing retailers and furniture stores try to get you to sign up for an account of some sort, often by offering discounts if you carry a free membership card of some sort.