Five notoriously brilliant business models Netflix cobbled together into an undefeatable vortex of binge watching.

This story originally appeared over at The New Daily, where I’ve been writing a consumer-focused story each week.

Netflix – the subscription TV service that launched in Australia this year – is a juggernaut. It drags people in and captures them. And they love it.

Binge-watching TV shows is not just a national pastime. It’s global. The stock-price of Netflix shows the incredible extent of the company’s success. Screen Shot 2015-07-16 at 8.51.18 pmIf you’d put $1000 into Netflix in 2003, you’d have $115,000 now. In just one day last week its stock rose 18 per cent as the company revealed more new users than expected.

How did they do it? What’s the secret to turning the globe into zombies who spend all their spare time consuming your product?

The answer is shamelessly appropriating good ideas.

Netflix has swiped the world’s sharpest and most effective business models – some well-known, some well-hidden – and combined them into one unstoppable force.

Netflix owes a debt to big oil, all you can eat buffets, airlines, Microsoft and casinos.

Screen Shot 2015-07-27 at 1.52.37 pmThe Oil Industry perfected the concept of owning the whole supply chain.

Think about Shell. It owns everything it needs to do business – from exploration activities that discover where the oil is, to drilling machinery, to the service station where you fill up your car.

When Netflix decided it was going to spend $100 million to hire Kevin Spacey and make House of Cards, it was thinking like an oil company.

Owning the whole supply chain is known as vertical integration and it gives a company power. Oil companies do it to control price, quality and quantity.

Don’t just own the distribution mechanism, because that makes you vulnerable. Own what you’re selling too. Netflix’s most famous house-made products are House of Cards and Orange is the New Black, both of which have proven to be black gold. It has dozens more.

The risk for Netflix is a hit show gets made and someone else wants it. For example, Amazon.com got exclusive rights to Downton Abbey by paying up big. The makers of a hit show can charge a fortune for the rights. By making its own shows, Netflix can’t be held to ransom.

Instead, when it owns content we’re dying to watch, it holds us to ransom. When you call the shots you can raise the prices, which Netflix this week announced it would do.

Screen Shot 2015-07-27 at 1.56.56 pmAll-you-can eat buffets perfected the idea of eliminating transaction costs.

In a normal restaurant, you pay only for what you eat. But you do pay for everything. Market economics at its purest.

We weigh up the value of every choice, and get a bill that lists each item. That mental and administrative effort are part of what economists call transaction costs.

Buffets, though, are like an anti-market. Once you’ve paid, it’s a wonderland where the rules of economics don’t apply. Want more lasagne? Go for it!

Humans love buffets. It’s no surprise Netflix acts like a buffet. Who wants to pay every time they click on something? Who wants to weigh up the value of letting the kids watch yet another episode of the Wiggles?

Of course, real world buffets have a problem – if lots of hungry people or lots of fat people show up, they can go broke. To manage this they cut quality and try to entice people into eating bread and potatoes. It’s a fine balancing act.

Netflix, has no such problems. It generally costs them no more whether you watch Seinfeld repeats once or a thousand times. That’s why they are happy to let you binge for hours.

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Microsoft perfected the art of bundling.

Microsoft doesn’t care that you never want to make a slide-show. When you buy Microsoft Office, you get PowerPoint whether you like it or not.

This is bundling. You get some stuff you want, bundled in with some stuff you don’t want. Companies do it because it let them make more profit.

The ideaa is simple: imagine I would pay a maximum of $10 for product A and $6 for product B. Your preferences are the other way round.

If the company tries to charge $10 for product A and $1 for product B we each buy just one thing. The company makes $20.

If the company wants to sell two of product A and two of Product B, it must set the price for each at $6. It can makes $24. Better, but not the best.

If it bundles the products into A+B packages costing $16 each, it can sell all four items and make $32! This is their best option.

When you buy Netflix you get a lot of stuff you’ll never watch. Maybe horror films, or BBC murder mysteries. That’s the Microsoft PowerPoint part of the bundle. IMAG3814Airlines perfected the art of price discrimination.

When you go to the Netflix website, you face a decision. Pay $8.99, $11.99 or $14.99.

No matter how much you pay, you get access to all the same shows. The difference is in whether the content is delivered in high definition, regular definition, or ultra high definition, and how many screens the content can be viewed on.

This is what experts call price discrimination. Airlines do it best.

Whether they sell you an economy ticket for $700, a business class seat for $2000 or a first class experience for $5000, you all take off and land at the same time.

Charging people different amounts for the same basic thing works well because of a concept called “willingness to pay”. Not everyone will pay the same amount for the same good.

If a business sets just one price, it misses out on profit. There are some people that would pay more than that. Even more important, there are people who would be profitable customers if the price was just a bit lower. Different prices for different folks is a proven model.

Netflix wants to skim their first-class passengers for as much as possible, but also fill up the back-end of the plane. The great thing for them is their plane has an unlimited number of seats.

Expect even more pricing levels to arrive in future.

Screen Shot 2015-07-27 at 1.53.43 pmCasinos perfected the art of keeping us hooked

The flashing lights on a poker machine are scientifically designed to provoke the reward centres in our brain. Like rats in a cage we get addicted on the dizzying sequence of highs and lows, pay-offs and disappointments.

Just one more spin, says the poker machine addict.

Just one more episode, says the Netflix addict.

Scientist have shown a good film or a good show controls our brain. A director makes a character act in a certain way and cuts the scene. The brains of viewers all release neuro-transmitters on cue. (The same is not true of a bad film.)

With free-to-air TV there was nothing we could do except wait a week to watch the next episode. But with Netflix the next episode is right there, ready and waiting to deliver more brain stimulation.

Its hard to believe Netflix has only been in Australia for a few months. Its devotees are already wild-eyed with fervour and Google Trends data shows it blowing rivals Stan and Presto out of the water.

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Netflix has nearly doubled its subscriber base outside America from 12.9 million to 21.6 million, in just the last 12 months. And it plans to launch in Japan very soon.

The executive at Blockbuster that passed up the option to buy Netflix for $50 million over a decade ago is probably feeling very sheepish.

The Wilting West

A high-vis vest slowly buried in the blowing sands of the Great Sandy desert.

Screen Shot 2015-07-17 at 9.58.41 amA small business owner awake at 2am, wondering if they should talk first to their bank manager or their spouse.

Screen Shot 2015-07-17 at 10.00.44 am Fridges, clothes, tables and chairs all packed into boxes, in a freight train chugging east across the Nullarbor.

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Four reasons the 53rd President of the United States will be Malia Obama (and one reason we should hope it isn’t).

The 47th President of the USA will be elected in 2016, when Barack Obama leaves the White House. Let’s guess that’s Clinton and she is a one-termer.

If that’s followed by three eight-year Presidents and two one-term Presidents, the 53rd POTUS will be elected in 2052.

By that time Malia Obama, who is seventeen now, will be 53. That’s a very Presidential age. (Her dad was elected at age 47, but the average age for Presidential accession is 54).

Screen Shot 2015-07-16 at 10.32.23 amHere’s why Malia Obama can be a contender.

1. Her dad will go down in history as the greatest Democratic President since Roosevelt. His progressive achievements – health care, gay marriage, and reversing a giant spike in the unemployment rate – far outweigh those of any other Democrat President in the last 50 years. For impact, they may even outweigh the achievements of Reagan.

2. When Malia Obama is prime presidential age, her father’s presidency will be far enough past to have serious mystique. About half of Americans who will vote in 2052 are minors or unborn now. Meanwhile, the people in positions of power will be the generation in their 20s when Barack Obama was elected, i.e. the people who voted for him and therefore keen to burnish his legacy.

Screen Shot 2015-07-16 at 9.53.25 am
Source: Wikipedia

There is precedent for kids who grow up in the white House to have political ambitions. The last young child in the white house was JFK Jr, who was set to enter politics when he died.

3. The Obama daughters look likely to go down the swottish, nerdy path. Their mum is a tiger mum in a way Laura Bush wasn’t. It seems likely an Ivy League university is in their future, and that can’t hurt. (The last seven US presidential elections have seen 12 candidates who went through Harvard and/or Yale and only two who didn’t). One wrinkle in this narrative is that Malia Obama is seemingly trying to get into film and TV. Of course, that and presidential ambition are far from mutually exclusive. (see Reagan, R.)

4. America is reaching its dynastic era. By 2040 that trend may have increased even further. America’s place in the world may well be threatened by China, and these decades of MTV, Nike, Facebook and Apple may be seen as an American golden age. Returning to that may seem very comfortable. Obama, M was literally born on the 4th of July. In an increasingly uncertain world, voting for her may feel a lot like voting for an America that reigns supreme.

(5. All this is assuming they don’t become basketball professionals. Their dad has a pretty decent game.  Their mum’s brother is a coach and analyst for ESPN. The Obama kids are tall!)

6. But there are serious reasons (other than basketball) why we should hope M.Obama isn’t running in 2040. America is increasingly a land of inherited opportunity. Barack Obama has pledged his presidency against that trend. If his reforms in the areas taxation and health endure, they should help ensure someone other than the child of privilege can become president.

His daughter’s gainful employment in some less consequential office than the White House would be a sign of his legacy.

AFL v NBA. Why Matthew Dellavedova earns less than Buddy Franklin

This story originally appeared in Crikey and is now out from behind the paywall. Here’s a quick excerpt:

Delly is not the star of the Cavaliers. Or he’s not supposed to be, anyway.

His team includes LeBron James, named four times the NBA’s most valuable player and a basketballer many say is the best of his generation.

James’ pay is the sixth highest in the NBA. In 2014-15 he made US$20.6 million. His next highest paid teammate on the Cavaliers made US$15.7 million. Dellavedova got US$816,000. Then you have to add in endorsements. James made $44 million this year.

NBA pay is always an issue.

The NBA has a Gini coefficient of 0.52, according to one estimate, making it more unequal than Mexico

Every team has players that make as much as top CEOs, living, travelling, eating and playing alongside players who make a lot less. (The lowest paid player in the NBA in 2014-15 got US$29,000, according to ESPN statistics. David Stockton was on court for 26 minutes this year, took 9 shots and made 7 points).

For comparison, here’s AFL player pay.  The distribution has a stronger centre. (And the numbers are a lot lower!)

Screen Shot 2015-06-15 at 8.49.04 am Screen Shot 2015-06-15 at 8.48.52 amPlease go check out the full version over at Crikey.

Do we *really* want to be a small business nation?

This story was published by Crikey the day after the Budget and is now out from behind the paywall. Below is an excerpt.

In last night’s budget speech, Joe Hockey spoke extensively of his father’s property business, and made it sound wonderful:

I, like so many of my colleagues, grew up in a small business family. That small business put a roof over our heads. It paid the bills. It gave all of the family a chance at a better life. Small business is often a family business. A business of brothers and sisters, uncles and aunts, cousins, parents and children. And for those who work in a small business, who are not related, well they often become family.”

(The future Treasurer’s experience with small business evidently shaped him so much that upon graduating university he went off to work for major law firm Corrs Chambers Westgarth.)

Today, the head of the small business lobby described himself as “gobsmacked” and revealed that his sector got “far more” than it lobbied for.

Small business owners are a powerful voting bloc. But the budget’s unchained enthusiasm for the entrepreneurial class makes one wonder if it is, in fact, devoid of the ideological touch that soured last year’s effort.

Most of us probably have warm thoughts towards small businesses — the people who cut our hair and wrap our fish and chips in paper. But the Treasurer’s current small business obsession — and make no mistake, this budget is obsessed with small business — could have less benign effects than putting a smile on the local cafe owner’s face.

Please check out the story on Crikey.

Rich, white, connected. How Uber rolled the taxi lobby and won the world

This story is hosted over on Crikey, where it is now out from behind the paywall! I’m rather pleased with it.

Here’s a little excerpt:

Uber’s marketing department gets a lot of attention for stunts. For example, during a recent promotion, Uber drivers delivered kittens to people who requested them through the app. People would play with the kittens and upload photos to social media.

Screen Shot 2015-07-10 at 10.20.31 amIt got a lot of press. But these sorts of stunts are the puff of smoke that happens while the magician is busy, not the real machinery of success.

This misdirection is all the more remarkable because what Uber has achieved is enormous. The company took on one of the most powerful industries, in one of the most heavily regulated sectors in the world, and won.

To read the whole thing, please visit Crikey, who paid for the original story!

How you’ve been buying wine wrong.

This post originally appeared over at The New Daily, where I’ve been writing a consumer-focused story each week.

We’ve all been there. In a bottle shop on the way to a dinner, wondering what kind of wine to buy.

20 per cent of our brain is thinking about the grape varietal, but 80 per cent is wondering if we’ll look like a bogan if we bring something cheap.

Australia has been doing wine wrong for ages. Our approach to vino is getting further and further away from how the Europeans do it, and more and more silly in the process.

The price of grapes has been tumbling.Screen Shot 2015-07-03 at 3.40.50 pm

Source: Australian Government Wine and Grape Authority Vintage Report 2014

Just 15 per cent of grape growers made a profit last year.

But has that meant cheaper plonk for us? Hell no. The average price paid for wine has now risen over $10/litre.

As the cost of grapes falls, we buy more and more pricey wine.

Screen Shot 2015-07-03 at 3.30.41 pm Price per bottle (equivalent).

Source: Coles Report for Winemakers Federation of Australia

Wines that sell for over $15 and over $30 have seen sales grow by about 50 per cent in five years.

(The under $7 category looks big, but remember that will include sales of those commercial-size 30+ litre casks to pubs, restaurants and commercial kitchens, – what you’re left with is a market for bottled wine that has turned quite fancy.)

FLAVOUR SAVER?

It may be hard to believe but a $35 bottle of wine may be no better than something that costs 10% as much. Here’s why:

Scientists showed people rate a wines as delicious if they’re told they’re expensive, and not delicious if they’re told it’s cheap.

Those scientists found real differences inside people’s brains during tasting, just depending on the price point they were told about. (It was the same wine.)

Screen Shot 2015-07-03 at 4.26.28 pm

They really experience a difference. But here’s the thing. If you know there’s no difference between the expensive wine and the cheap wine, the trick doesn’t work.

THE BIG TWO

So buying cheap wine and being confident it will taste good should be a winning strategy.

It’s not easy to do that in Australia. Part of the reason is the grip the big supermarkets have on the wine market.

According to a report published by the Winemakers Federation of Australia, Supermarket chains account for 56 per cent of wine sold. Independent bottle shops for 14 per cent. Cellar door online and wine clubs are 11 per cent. And food service accounts for 19 per cent.

When you stroll the aisles at Dan Murphy’s, your eye might settle on a bottle like Silver Moki, a Marlborough Sauvignon Blanc.

Screen Shot 2015-07-08 at 10.13.48 amWhere’s that winery, exactly? Good question.

The answer is there is no such winery and the brand on the bottle is owned by Pinaccle Liquor, which is associated very closely with Woolworths. Pinaccle Liquor essentially makes home brand drinks for Woolworths. Not just wines but also spirits. It also has the license for certain imported brands.

Dan Murphy’s is also owned by Woolworths. But on the shelves at the bottle shop, unlike at the supermarket, these Woolworths brands don’t have the word Select on them.

Owning their own brands gives Dan Murphy’s market power. It can fill its shelves without having to give in to every demand that comes from every vineyard.

Dan Murphy’s success contributed to the 27 per cent gross profit at Woolworths (translating to $2.5 billion of net profit after tax) in the 2014 Financial year.

The company-owned wines are apparently something they don’t like to talk about much. Woolworths wouldn’t send me a list when I asked. But a huge range of company-owned brands (Coles as well as Woolies) is outlined at the independent website whomakesmywine.com.au.

These company-owned wines are not necessarily bad. Some have local wine-makers involved in their production and have great marketing, like this Yarnbomb wine. It’s made in the Pinnacle Drinks production facility, from grapes sourced from across Maclaren Vale.

Video:

But some home brand wines are just mass-produced, like a bottle of Sprite. Pinnacle Drinks also makes the Spanish Tempranillo ‘Lovers not Toreadors’ for Woolworths ($16.99 a bottle), and C’est La Vie Rose ($13.99 a bottle).

We love the stories of independent winemakers. We love to visit cellar doors and see a few generations of one family at work among the intoxicating smell of the barrels. But we refuse to admit most wine is not made like that.

We are paying a premium for home-brand wines, and kidding ourselves.

LA DOLCE VITA?

Australia is like America in this respect.

Because our nation is relatively new to wine, wine is a source of fear as well as delight.

In Europe, families might take a plastic bottle to the supermarket to fill up with a litre of table wine for a euro or two.

Meanwhile we worry about being seen drinking the wrong kind and worry that we are insufficiently expert. We do wine appreciation courses and we spend up big to compensate.

We weren’t always so fussy about wine. It used to be acceptable to get wine in a box. But around about eight years ago the cask became a minority item.

Screen Shot 2015-07-03 at 3.20.15 pm

But maybe it’s time for the comeback of the cask. If we’re going to be drinking wine that’s made much like Sprite, why kid ourselves that it’s fancy?