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Rental Market Penetration

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By Har1en
June 6, 2006

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I have a hunch that Netflix provides us with some very valuable information that to date we have ignored: the Top 100 Movie list.

Here's a sample of the Top 10 movies and their Dates of Release as of today (June 5, 2006):

1 Crash 2005 *
2 Mr. & Mrs. Smith 2005
3 Aviator 2004 *
4 Million Dollar Baby 2004 *
5 Hotel Rwanda 2005 *
6 The Notebook 2004 *
7 Ray 2004 *
8 Mystic River 2003 *
9 Finding Neverland 2004 *
10 Hitch 2005

Average Release year = 2004.3
Today's date (in decimal) = 2006.4
Years Back from today = 2.1

This is pretty usual for Netflix this time of year. But it does seem odd, doesn't it? Why should Crash be the most rented movie of all time? What does this seeming oddity tell us? (You are free to draw your own conclusions, or skip to the bottom of this long-winded exposition and I'll give you my opinion for free!)

Netflix deals heavily in critically successful movies -- particularly in the wake of the Oscars. We knew this already, that Netflix makes its money off the long tail. But why should the list be dominated by the likes of Crash (which I hated) and the Aviator (which bored me slightly less, and should have had the same name). These are not even the best of the Oscar contender class of the last 10 years, and certainly when you compare them to the mass-market successes of film franchises like Harry Potter, X-men, Shrek, Spider-Man, Batman, and the like, I have to ask myself, why do these loser (from a mass-appeal standpoint) movies score in the top 10?

THE LONG ANSWER

I believe that there are three stages of Netflix usage. The first stage is unprofitable, mass-market, pop-culture consumption. I'll call this the Good-for-everyone stage. Good-for-everyone users are likely to be new users or young people who have missed a few films and feel the need to see every major release that they missed out on over the years. I was in this stage for the first one or two years of my NetFlix usage. I always had a new movie in my set of 3, and I was trying to fill in my movie knowledge of things that I had missed growing up. Most people can skip this stage quickly, as they see many of these films in theaters, and there aren't that many of these blockbusters anyhow.

The second stage of usage is the Good-for-you stage. These people are watching movies that other people say are good for them to watch. Note that the Good-for-YOU stage is focused on Oscar contenders, winners, and other critically successful movies that hardly anyone actually wants to spend 8 bucks to see in theaters. This is the "I'm watching it because other people are telling me it's a great movie" stage. Apocalypse Now, Citizen Kane, Full Metal Jacket, Schindler's List; movies that made a mark, that you probably would like, and mostly wouldn't want to watch twice.

The third stage is the Good-for-me stage. This is when you finally have used Netflix long enough to realize how the recommendation process works and that it actually can predict whether you would like another movie, and tell you why. Now Netflix is really making money off of you, and you're receiving outstanding value as you watch things that you otherwise wouldn't have because you missed it, or never heard of it, or one of your friends told you it was bad, or you hate the channel it was on, or any number of other reasons that have more to do with prejudice than your actual preference.

There is another stage -- not really a stage of usage, but a stage of dis-usage -- and I feel I must mention it: the Good-for-nothing stage. Unfortunately, this stage does exist, much as we would like it to go away, when users decide that Netflix has nothing good to watch. I believe these people are those who skipped stage 3, and maybe stage 2 as well. As many other posters have mentioned, these are not Netflix's target customer base, and good riddance.

Armed with this set of assumptions, I'm going to make one more based on them: newer customers are more likely to rent newer movies. This hypothesis explains why Batman Begins released in 2005 ($205MM Domestic BO Gross) ranked 20th this week on Netflix's all-time charts, far ahead of 58th-ranked Spider-Man 2 of 2004 (which was almost twice as successful in theaters with $373MM Domestic BO Gross.) http://www.boxofficemojo.com/alltime/domestic.htm

Look up and down that top 100 chart and you'll see the dates of the "most rented" movies decline as they approach 100. Indeed, the movie with the highest domestic gross of all time isn't even on the list: Titanic. (Frankly I wish it would disappear entirely, but alas...) Titanic was released in 1997, nearly 10 years ago.

But surely, you say, since then it must have garnished many millions of rentals, enough to get it to the top of the rental hall of fame?! No sir-ee. Instead, Crash sits in the undeserved #1 spot like a canker. Apparently "Starsky & Hutch" at 100 also beat out Titanic. Perhaps there's no accounting for taste?

No, I say. The reason is that new Netflix subscribers dominate the rentals, and most new subscribers are people who recently fled Blockbuster. Blockbuster only had stage one, Good-for-everyone releases, so these new users are just starting to move from stage one to Good-for-you Stage 2 releases.

What do they start with? Critical hits, movies that they couldn't get their hands on at BBI, movies that they didn't want to go to the theater to see. Current, critical successes.

Why is this important? Because I believe that by looking at the average age of the films in the top 100 list, probably just the top 10, we can see the growth pattern of Netflix subscriber additions, in real time, updated every two weeks.

I'm going to keep an eye on this hypothesis, and see if it bears fruit in the coming months.

MY SHORT ANSWER

Basically I'm saying this: If the average age of releases in the top 10 get closer to the current date, subscriber additions must be coming on faster. As the average age gets farther away (older), the existing subscribers are coming to dominate, which would signal a slowing of the exponential subscriber growth we have seen to date.

This could be a potential early warning signal to get out before management says a word about subscriber additions dropping off, or a light in the dark when all hope seems lost.

BTW, I see today's current top 10 being a great sign that our current user base is expanding quickly -- as quickly as it ever has.

For what it's worth,
Har1en

Long NFLX


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