The Netflix Paradigm

In a recent focus group at the Digital Media Summit, we asked a group of college students and young adults whether they regularly download unlicensed music or copy it from their friends' hard drives.

Affirmative, all eight told us.

And do they also download or copy full-length movies?

Rarely, the anonymous youths said. It takes too long. And why bother, when for around $20 a month they can rent as many films as they want online, for as long as they want, from Netflix or Blockbuster?

In other words, charge kids a reasonable price for a product that they want, and they'll pay for it, rather than ripping it off.

Asked why they don't buy CDs (and not one does regularly), the kids replied that they can't afford $15 to $20 a disc. Naturally, they added that record executives and artists are already stinking rich and don't need the money.

But studio executives and movie stars are also presumably stinking rich; and yet those same kids are willing to put more money into their pockets.

Not because of those MPAA ads before features that tell the kids that downloading movies is wrong. But because they're able to rent as many DVDs as they want per month at a price they can afford.

I have yet to hear a kid on one of these panels show the slightest remorse for ripping off copyrighted material. It's not that they're immoral—they're amoral: they balance convenience against price, and buy or rip off accordingly.

All of the kids in the group had tried Netflix or Blockbuster for online DVD rentals. Surprisingly, Blockbuster was the favorite. A majority of these young people like the idea that their $20 or so a month buys them unlimited online movie rentals and free in-store rentals, too.

Here are my take-aways from the kids' responses:

o The DVD business isn't necessarily about to follow the CD business into a tailspin. Blockbuster and other video rental chains have primed consumers to accept a rental model that works even better online. When consumers can rent ANY DVD they want from a central clearinghouse, rentals become even more attractive.

o The Netflix paradigm could hold the key to the music industry's survival. Kids are sending a loud message: they are not willing to pay traditional CD prices. But they may be willing to pay to rent music. Rhapsody, Napster, Yahoo, and other services are experimenting with portable rental models.

o Don't discount the importance of "clicks and bricks." Blockbuster fared better than Netflix in the kids' affections because it offers them both an online option for their planned rentals and a nearby store for their impulse buys. That doesn't necessarily mean that Blockbuster will flourish (not with ruinous losses and Carl Icahn circling). But others will. Think Wal-Mart.

One caveat: if DVDs get too easy to download or copy, the balance could shift to piracy. In South Korea, where multimegabit-a-second cable modems are in 80 percent of homes, DVD sales have fallen sharply. To avoid that fate in America, Hollywood will need to crack down on the pirates, while offering some enticing packages to consumers who pay. If filmmakers do this, then the kids in our focus group will sign up.

[ Its "reasonably" free ]

ps. what about the kids that borrow stuff from the netflix and just copy them...