Monday, March 7, 2011

Apple's Strategy Tax parallels with Netflix

Apple is both a platform (hardware and software) for selling applications, content and services, and a vendor of content (music, movies, books) for the platform. This puts them in competition, as a vendor, with some of their customers (as a platform), and sometimes that leads to conflict.

This is a topic that John Siracusa's been talking about with Apple's Strategy Tax, both on Ars Technica and on Hypercritical (with Dan Benjamin).

There's some interesting parallels with the inflection point reached by Netflix (as covered by Wired Magazine):

It had taken the better part of a decade, but Reed Hastings was finally ready to unveil the device he thought would upend the entertainment industry. The gadget looked as unassuming as the original iPod—a sleek black box, about the size of a paperback novel, with a few jacks in back—and Hastings, CEO of Netflix, believed its impact would be just as massive. Called the Netflix Player, it would allow most of his company's regular DVD-by-mail subscribers to stream unlimited movies and TV shows from Netflix's library directly to their television—at no extra charge.

The potential was enormous: Although Netflix initially could offer only about 10,000 titles, Hastings planned to one day deliver the entire recorded output of Hollywood, instantly and in high definition, to any screen, anywhere. Like many tech romantics, he had harbored visions of using the Internet to rout around cable companies and network programmers for years. Even back when he formed Netflix in 1997, Hastings predicted a day when he would deliver video over the Net rather than through the mail. (There was a reason he called the company Netflix and not, say, DVDs by Mail.) Now, in mid-December 2007, the launch of the player was just weeks away. Promotional ads were being shot, and internal beta testers were thrilled.

But Hastings wasn't celebrating. Instead, he felt queasy. For weeks, he had tried to ignore the nagging doubts he had about the Netflix Player. Consumers' living rooms were already full of gadgets—from DVD players to set-top boxes. Was a dedicated Netflix device really the best way to bring about his video-on-demand revolution? So on a Friday morning, he asked the six members of his senior management team to meet him in the amphitheater in Netflix's Los Gatos offices, near San Jose. He leaned up against the stage and asked the unthinkable: Should he kill the player?

By choosing to focus on selling movies, not making hardware, Netflix has integrated successfully with platforms far and wide, rather than encouraging themselves to focus on a single platform. As a result, you can watch netflix on iPhone, iPad, Apple TV, Roku, computers, internet TVs, and other platforms of which I'm not even aware. This seems to have worked well for them.

This is a tricky situation for Apple to be in, and a line they have to walk very carefully if they want to remain effective in both businesses. It's not hard to imagine that being in both businesses makes it harder to be in each business. Netflix and Amazon/Kindle would probably be happier partners if Apple weren't also selling eBooks through iBooks and movies through iTunes. At the same time, Apple's ability to provide a very streamlined end-to-end simple solution for reading books, listening to music and watching movies has been key to their success in the past and probably the present, so leaving one business or divorcing the two businesses through some kind of a corporate split might well damage both irreparably. Having come this far, I think they have to stay the course.

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