Category Archives: Netflix

Why Netflix walked away from personalization

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In 2006 Netflix offered a $1 million prize for anyone who could improve its movie preference recommendations by 10%. Netflix, at the time, made most of its money sending DVDs in the mail to users’ homes (Internet streaming had yet to take off), and personalization offered two major advantages as customers built their “movie queue” on the Netflix website. First, if the recommendations seemed to make sense, Netflix consumers would be happy as they searched for films online. And second, once the DVDs came in the mail, users might actually enjoy the movie — since a truly personalized prediction would be more likely to meet your taste than your guess based on a movie’s cover image and brief description. Happy ordering and happy watching built Netflix customer loyalty.

To spur improvement, Netflix did more than offer big bucks in the competition. It made public a dataset of 100 million-plus ratings on 17,000 movies, which included the customer rankings from 1 to 5 stars and the sequence in which customers watched films, and allowed competitors to play with the data. The cleverest part was a subset of the data was hidden blind, and Netflix would run the proposed new algorithms against that to see if the prediction models matched how customers really behaved in film rankings.

Mathematicians went wild. The competition was lauded by business pundits as an example of crowdsourcing genius. Because this was damned hard math, the project took years. And then in 2009, a team of mathematicians called “BellKor’s Pragmatic Chaos” actually cracked the code, achieved a 10% lift, and Netflix gave them the $1 million.

And then … Netflix never implemented the winning algorithm. Because personalization at that point no longer mattered.

What happened? Netflix at the time said the technical work of implementing the new personalization would be too costly for the anticipated return. These seems like a rather lame excuse, since bundling a new math model into a computer system surely doesn’t cost more than a bit of coding. Other observers noticed that, by 2010, Netflix’s business model had changed, moving away from DVDs-by-mail to instant streaming. When you can order any movie instantly online, personalization isn’t as valuable — since if the movie is a dog, you simply click over to another movie. Today, in 2014, Netflix’s online interface has a series of rows of film titles, and most of them aren’t personalized recommendations at all.

You learned my needs. But I don’t really care.

The deeper issue is that personalization is not as exciting as many once believed. In the 1990s, Don Peppers built a consulting business on the concept of “1to1 marketing,” where new computer systems would learn individual preferences and businesses would respond with customized offers. Don’s concept was that personalization would create an unbreakable competitive advantage — because once a consumer trained a company to anticipate her needs, she would be reluctant to go through the same process with a competitor. Don was observant enough to note that such customization wouldn’t be a fit for every business model — but companies that had customers with a wide range of needs (such as Netflix movie watchers) or a wide range in value (say, financial advisors courting investors) would benefit by deploying 1to1 personalization.

Despite the noble dream of giving customers more utility and companies more brand loyalty, personalization never took off. Amazon was really the best case study … but it struggles still to offer truly relevant personal recommendations on its website (the core challenges being it cannot easily recognize multiple users on the same Amazon account, or differentiate between your modality as you shop for your spouse one day and yourself the next). Twitter has a personalization engine behind its “Discovery” tab to push news or links to you based on your observed Twitter profile. That site section has so little utility, most Twitter users don’t use it. And Facebook, which arguably has the greatest trove of data on human personal interests, is really at the mercy of the advertisers who wish to target you; this is why you, guys, get ads for men’s underwear whether you really want them or not.

Why is personalization so difficult? Why is it so hard to anticipate what people want, and use that for business advantage? The challenge is personalization is at odds with a core driver of consumer purchase behavior — novelty. Consumers are constantly hungry for something new, something improved, something that will stimulate their endorphins in a manner unseen before. The iPhone 5S had marginal improvements over the prior models, but people lined up in droves for the new OSX, excited by — wait for it — a thinner Helvetica font. Most cable on-demand movie rentals are “new releases,” when logically the utility you derive from a film should have little to do with whether it was released in 2013 or 2003. Retail stores make a business of rotating in new fashions that don’t keep your body any warmer, but spring your desire to shop.

Psychologists have termed our love for newness “the novelty effect,” and it has both positive and negative implications. Humans have the highest stress response when first faced with a threat, likely a survival mechanism that spurs our fight-or-flight reflexes when a mountain lion appears over the hill (and which also explains our grumpiness on Monday mornings at work), so new things can make us angry or upset. But people also have the highest interest when a new person enters their life, a new service is launched, or a new technology is offered. Teachers have noticed, for instance, that when educational information is presented in a new medium — say, tablets — students’ test scores initially rise; the information could be the same as that presented in a history book, but the novelty of the new approach lifts interest and recall.

There is also an evolutionary bias toward novelty in human relationships, both emotional and sexual. A 2012 study by The Journal of Marital and Family Therapy found that at least one spouse in 41% of marriages admitted to marital infidelity. The reason, psychologists believe, is that physical and emotional excitement often diminish in long-term relationships. This could be tied to an ancient instinct for humans to be sexually promiscuous to spread their genes as randomly as possible, ensuring the survival of our species. Even with love, people will trade proven history for risky novelty.

And that is the trouble with personalization. Finding something new is likely at odds with our old interests — because newness by definition is a break from the past. It’s an interesting lesson for marketers now playing with big data. Yes, you can learn and model the past needs of your customers. But just as Netflix didn’t implement a 10% improvement in personalized recommendations because its analysts didn’t predict much value from it, you may find that launching a new product with different sheet metal or miracle fiber gets customers more excited tomorrow than a personalized version of what they wanted yesterday.

No one ever asked for a phone with a camera on it. But today, we can’t live without it.

 

 

Netflix kills Qwikster — yet still buries DVDs


Netflix announced today it will go back to business as usual, give up renaming its DVD-by-mail service Qwikster, and allow consumers to order movies for both streaming and mail from one web site. With the stock price down 61%, Reed Hastings beat a hasty retreat from his vision of making Netflix purely a streaming firm. NYT reports Hastings joked on Facebook that his investors might poison him.

Which is sad, because Hastings was absolutely right. Netflix pissed off consumers with its price hike this summer, pushing fees for combined mail rentals and streaming from $10 to $16 per month, causing screams. But that was a bargain compared to the $75 per month average U.S. cable bill. Before that price hike, streaming cost $8 a month and DVDs were a $2 surcharge — yet it costs Netflix a full $1 to ship every DVD to home by mail. The economics make no sense, and the consumer outrage is a perfect example of the illogical way people respond to prices based not on value, but on a perceived reference point. The same animal instinct that makes us feel good when we buy a leather jacket for $300 “marked down 50% from $600,” a fake reference price that never really existed, triggers fury when we suddenly have to pay $6 more for a fantastic service previously priced at an insanely low $10.

What The New York Times and other media miss today is Netflix, while superficially apologetic, remains completely focused on streaming and killing DVDs — as they should. The Netflix home page mentions DVDs by mail nowhere; click on the main offer, and the second “unlimited TV episodes & movies” landing page focuses almost entirely on the streaming service, with only one tiny text link at the bottom left posing “Can I get DVDs by mail from Netflix?” If I did not want anyone to sign up for the mail service, but had to offer it, this is exactly how I’d bury it.

Netflix tried to fire its DVD customers, but couldn’t. So now, it’s simply going to migrate quietly away from them.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Originally posted on G+.

Why 1to1 personalization hasn’t arrived (hint: media loses money)


The concept of 1to1 customer relationships, in which a marketer learns your needs and later gives you an offer tailored exactly to your whim, is tantalizing. Don Peppers espoused it back in the 1993 book “The One to One Future,” and brands as wide-ranging as Levi Strauss, Amazon.com, Zappos, PaineWebber, IBM and General Mills toyed with it. The idea was a clever counterpoint to the “Positioning” mass-communication strategies of the 1970s, and agencies and software companies, always ready to drink the Kool-Aid of customer focus, embraced 1to1 in the 1990s as much as they love social media hyperbole today.

Trouble is, the personalization idea never took off. No brand prepares your grocery list, picks out your clothing, or foresees what you’ll want for dinner at the restaurant Saturday night. The major impediment was not technology — true personalization requires vast inventories, efficient mass-customization of production assets, and brilliant algorithms, difficult but possible as Netflix has demonstrated with DVDs — but market incentives. Waste against the masses is usually a source of profit, and this is especially true in the media landscape.

Personalization kills media profits
Case in point: Cable television. With boxes in every home, you’d think advertising could be customized easily to every household based on your demographics, personal viewing history, even past shopping habits. It doesn’t seem hard to tie your cable box into an Experian data set to give dads with kids hitting mid-life 30-second spots for red convertibles (ahem), yet we’re not there yet. Experimenters such as Eyeview are beginning to combine audience data, advertiser assets and marketer products to personalize online video ads — in real time, showing snow or rain in the car spot based on your local weather. But that’s just a start. Personalization has become the Great Pumpkin of the ad universe, always almost here, and when it someday arrives it will be really, really big.

Personalization is a huge threat to old media empires. Truly targeting ads means you need fewer messages to get to your audience, and that efficiency is counter to what gives publishers and media giants money. Consider cable: The typical U.S. consumer watches 5 hours and 9 minutes of TV each day, enough to receive 166 30-second TV spots … and most of those are wildly off base. If advertising were truly targeted, you could receive only 10 ads a day for products you really want, and you might respond to 2 of them — enormous marketing success. But all the ad revenue from the 156 off-base spots would disappear. Online publishers, where personalization is much easier thanks to cookies that tag user computers, face similar threats as DSPs and ad exchanges begin allowing media buys that circumvent their high prices and audience control.

Most media is never seen. But advertisers still pay.
Put another way, the typical American subscribes to 130 television channels and yet “tunes” to only 18 of them (consumers no longer “surf” through channels and instead typically punch in 33 for CNN on their remote, “tuning” in to the channels they prefer). That 18 of 130 options means 86% of all programming, and its associated advertising, is never seen by each individual. The bloated waste of advertising is good for the media producers and transmitters, but not so good for advertisers who pay their bills.

Of course, consumers and advertisers want targeting. Media planners, direct marketers, and CMOs spend their careers trying to make their brands relevant; consumers rush to the malls each Black Friday looking for just the deal they crave. From the market efficiency view, personalization really is the Holy Grail — to spend production resources only against those consumers likely to respond. But it is worth noting that goal is diametrically opposed to what drives profits for the media intermediaries. Good luck, Eyeview, with those clever customized video ads; but don’t expect the marketplace forces to get behind your efficiency anytime soon.

(Bonus points: Don’t miss the 2000 press release for General Mills’ customized cereal.)

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.


Warner Brothers spins someone else’s web


Way back in the old days, say, 2008, people worried about losing their personal identities and companies fretted about competitors gaining their customer lists. The new valuable asset in play is your personal social network.

Case in point: Warner Brothers, eyeing the $59 billion in annual U.S. TV advertising up for grabs as consumers shift from cable, is about to launch a “Digital Everywhere” network that allows you to aggregate your entire video library in the cloud. Digital Everywhere combines flavors of iTunes (you buy or rent movies and TV shows), Amazon Cloud Drive (you store your stuff online), Netflix (the service personalizes recommendations), and Facebook (it pushes recommendations to your friends). If that sounds confusing, think of Digital Everywhere as a new hub that links to all your other entertainment hubs — a Dyson vacuum to suck up all your cluttered video content so you can find it in one place. Warner Brothers has a vast library to stir interest: everything from Peanuts, Sesame Street, Looney Tunes and Charlie Brown to The Lord of the Rings trilogy, Austin Powers, the Harry Potter film series, The Ellen DeGeneres Show, Mad Magazine and Ocean’s Eleven.

Groovy, except this brings up an interesting competitive point. This app works with the rest of the entertainment industry, but also lifts data from those players. CNBC reports that if you plug in your password to Netflix, Digital Everywhere can scrape your history there to personalize recommendations. Digital Everywhere also plugs into iTunes and Facebook, where it can parse all the purchases you made through Apple and then share what you’re doing with friends.

In essence, Digital Everywhere is building off the entertainment and social networking equity competitors have accrued elsewhere. Often, this “network scraping” technique helps new services scale — Instagram, a clever social media photo application, grew to more than 2 million users in just 6 months by linking seamlessly to Twitter, for instance. Riding the web of others is a fast path to growth. The hard lesson for companies like Apple and Facebook rushing to build the future’s new entertainment platform is if they build wide enough, competitors may not stand on that stage — they may draw a circle around it and push a new platform under it.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: Zxgirl

YouTube’s attention deficit disorder


About $59 billion is spent on television advertising in the U.S. each year, so it’s stunning to realize it’s all going into play. TV is changing in two fundamental ways — tablet-type devices now put enjoyable video streaming in your lap, and the next generation of TV sets is being built, finally, with connections that hook you into the Internet. This means that online video sites have a rare opportunity to smack cable companies and snag billions in ad dollars — if they can use the new gadgets or TV screen access to change consumers’ video behavior. About 2% of U.S. cable subscribers “cut the cord” in the past three years, and that may just be the beginning.

Alas, YouTube may have missed the lead in this new advertising landscape. Today YouTube.com is the top video web site in the U.S., with between 111 million or 130 million monthly uniques (comScore and Quantcast differ slightly in their reports). Yet the time spent on YouTube per user is a fraction of competitors’. ComScore reports the typical YouTube viewer spends 2 hours and 14 minutes a month watching its videos — about 15 minutes per day — while Hulu captures each user for 5 hours and Netflix for more than 9 hours and 15 minutes. People like YouTube, but only for video snacks, not for full-course entertainment meals.

Yes, YouTube is still growing — its audience is up 25% in the past 12 months — but it needs more time from its shallow users if it’s going to attract bigger advertising dollars. To help, Google, which owns YouTube, recently announced it will spend $100 million to build richer, longer, professional video content. YouTube also recently launched YouTube Live, a service meant to lure you in longer, although the initial content we found at youtube.com/live seems lackluster (tobacco education and cricket games, anyone?).

It won’t be easy. “We are not good at creating content,” Tom Pickett, director of content at YouTube, told Ad Age in March. The only way to get viewers to stay is to build content with a reason.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: César Augusto Serna Sz

‘Free’ movies: Amazon’s brilliant move to the future


Evolving a business is difficult because it seemingly requires you to take your eye off what drove profits in the past to find what will bring strong margins tomorrow. But look ahead you must; after all, the business world is littered with cautionary tales of those who did not: IBM’s hardware obsession in the 1970s led it to miss the PC operating system opportunity; Kodak pushing film as digital cameras killed the photo developing industry; Microsoft wasting away first-mover advantage in tablets for nearly a decade to be beat by Apple’s iPad core.

So kudos to Amazon for making a brilliant evolutionary chess move. On Tuesday, Amazon launched a service giving away movie streaming to members who subscribe to its $79-a-year “Prime” premium shipping service. Amazon Prime was already one of the smartest moves in ecommerce, building loyalty among shoppers while charging them more for “free” 2-day shipping. (It’s “free” shipping, you see, if you spend $79 a year for access to it. And once you spend $79 a year, well you better buy a lot of books, spending more of your money to get more of that great “free” shipping.) Amazon Prime is a sticky pricing gambit that makes consumers feel good while sending dollars straight to Amazon’s bottom line.

Now, Amazon has made the shipping deal seem even sweeter by adding “free” access to 5,700 films and TV shows, giving Netflix a competitive whack at the same time. It’s an arrow shot straight at the future of digital content, while tying consumers to Amazon’s current core product, hard goods shipped by mail. All we can say is Amazon, your strategy is Prime.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.


Wired data stalking and the demise of 1to1 personalization


Wired magazine’s UK edition pulled off a nice stunt by collecting publicly available data on its subscribers and printing customized covers that greet individuals with freakishly accurate tidbits about themselves: Their birthday, whom they live with, even colorful comments about a recent online spat with a friend. Yikes.

Yes, a clever troller (or buyer of an Experian list) can learn a lot about you. The more interesting question isn’t whether privacy is gone (it is, check your direct mail), but why similar ultra-personalization has never taken off as a marketing tactic. Don Peppers and Martha Rogers founded a consulting group in the 1990s devoted to advocating personalization based on 1to1 relationships — corporations learning to connect with individuals via data that recognized their personal interests. It was a visionary concept, where every behemoth of an organization could treat you as intimately as the owner of a local store. What happened? A few companies, such as Netflix, managed to make quasi-personalization work, but almost no marketer has nailed the 1to1 concept. Personal relationships between consumer and corporation gave way to networks of consumers talking among themselves; social media arose, and personalization was passed by as companies yearned for “viral” strategies to reach the masses, not individuals, ignoring them. If markets are efficient, and data collection has become easy, why aren’t you greeted at the mall with a digital sign saying, “Hello, Mr. Jones, welcome back, the shoes you like are on sale at the Smithswalk Outlet on Level 2”? Because 1to1 doesn’t sell as much volume as 1tomany (TV) or manytomany (viral success).

Beyond the corporate incentives, 1to1 recognition may never have been what people needed. Perhaps we don’t want unexpected personalization at all, because the serendipity of random product encounters creates desire tied to a whim. Like cotton candy or a high school crush, the sugary rush of blood that comes from longing something unexpected is oh so satisfying, mainly because the desire surprises us with novelty.

Or perhaps more simply, the aura of an unknown someone really knowing us, like a Wired UK magazine cover, just freaks us out.

Netflix pushes you away from discs


R.I.P., DVD.

Netflix, the former movie discs-by-mail company, has been on a growth tear lately, and now it’s all about streaming and avoiding the Post Office. In 2009 Netflix grew nearly 25% to 12.2 million subscribers, of whom 48% have tried streaming TV or movies at least once. The company makes healthy profits on its $1.7 billion in revenue, but more streaming would jack all that through the roof. Netflix has signaled as much with three major moves:

1. Netflix recently recast its subscription pricing to $8 a month for streaming or $10 a month for streaming plus discs — with streaming included in both options, clearly enticing you to go for the lower price point.

2. In early January, news broke Netflix will be added as a remote control button on Blu-ray players from Sharp, Sony, Panasonic, and other major home electronics manufacturers — putting video subscription by Internet in your hands whether you want it or not.

3. Yesterday Netflix announced it would no longer allow its users to manage their DVD queues via connected devices, such as Wiis — you can only set up DVD mailings via the web site.

Hmm. Pricing enticements, buttons on remotes, and forcing you to walk into the home office to pick a DVD mailing — Netflix obviously wants DVDs gone. The photo above of a Netflix distribution center hints why the company is interested in beaming movies over wires vs. sorting and shipping them by truck — imagine what all that costs.

As with any forced customer migration, there are risks. Analyst Richard Greenfield of BTIG Research told Home Media Magazine that Netflix might damage customer loyalty by pushing so hard away from mail, given that in Q3 2010, mailed discs still accounted for 41% of the home video rental market. But Netflix seems willing to take that chance, eyeing millions in freed up costs and a bet streaming video is the future.

Why people don’t work naked at Netflix

View more presentations from reed2001.

HR manuals are often a joke. Enron had its value statement chiseled in marble in its lobby, to no avail. So instead of publishing rules and mission statements, Netflix created a missive on how to get people to do the right thing with free will. For example, after one employee noted that people often work nights and weekends, Netflix agreed to throw out its entire vacation policy — just take the days off you need, we trust you. As one manager says, “there is also no clothing policy at Netflix, but no one has come to work naked lately.”

Netflix
has 10 million subscribers, generates $1.3 billion in revenue and ships nearly 2 million DVDs daily. It’s a big company. Nice to see it avoiding bureaucracy; we smell future success.

Via Adrian Ho.

Maghound: 7 Lindsays in your mailbox for the price of, um, 7?


Magazines aren’t dying like newsprint, which has circulation numbers off the cliff, but mag circs are down as well — about 11% since their peak in 2000. Reading on glossy paper is fast becoming a habit of senior citizens; the top 5 U.S. magazine titles include the AARP bulletin, Modern Maturity, Reader’s Digest, TV Guide (seniors remain the heaviest consumers of TV), and National Geographic.

Which is why we dig Time Inc.’s new Maghound.com, a Netflix-like subscription service where for a set fee each month you get access to as many rotating magazine titles as you like. The service will launch in September with 300 titles. $9.95 a month nets you access to seven titles at the same time, which you can mix and match or cancel without annual commitments. And yes, the magazines arrive in the mail on real glossy paper.

The model behind Maghound is still nascent and a bit unpredictable. Will this boost demand for in-the-mail pubs? Or will readers quickly switch gears, creating no net gains? Or will readers, seeking savings, shift from traditional mag subscriptions to the seven pubs for $10/mo model, cannibalizing existing subscriptions?

Or will readers say, hey, I can find most of this online for free now anyway?

If the past trends of emerging media are any clue, we vote cannibalization. No matter. We’re signing up as fast as we can. Internet hooey aside, nothing beats a well-edited glossy magazine in the hands for an enjoyable hour of reading before bedtime. We’re getting older, and these backlit screens hurt the eyes.