Why incumbents fail to respond to the threat of new entrants

By February 4, 2013 5 Comments

Fred Wilson posted yesterday about the emerging battle between Netflix and HBO. Netflix’s strategy of developing their own premium content is in full swing now that House of Cards has been released. For those that haven’t read about it (or, since Friday, seen it) House of Cards is a high budget, all-star-cast 13 episode drama series that Netflix has produced. It was released on Friday, and interestingly, all 13 episodes were made immediately available, so big House of Cards fans can watch the whole lot in one sitting without the torture of wating 13 weeks to find out how it ends. It will be interesting to see if this heralds a change in TV series distribution generally. In ninteenth century England Charles Dickens and other top novellists seriaised their books in newspapers releasing a chapter each week. That practice ended, I assume because people prefer to buy books and consume at their own pace. The same might happen to TV series.

HBO has been producing their own high budget dramas for decades – The Wire is my favourite – and consumers subscribe to the HBO channel much as they can subscribe to Netflix. The big difference is that Netflix goes direct to consumer with their service whilst HBO goes through cable operators. HBO had no choice when they set the business up as their was no web, but there is a choice now.

Fred says in his post that Netflix’s business model is superior because:

Netflix allows you to have a direct relationship with them and use your account on almost every connected device I can think of. HBO requires you to have an account with a cable company and then even if you do, it is hit or miss whether you can use their service on the device you want to.

So the interesing question is why HBO isn’t copying Netflix?

They are providing services in Scandinavia which are very Netflix-like so they clearly understand the opportunity. I suspect it is that they don’t want to alienate their cable company partners, particularly given that Time Warner which owns HBO is also a cable operator.

It is often the case that incumbents don’t respond well to the threat of new entrants because to do so would require them to compete with their existing supply chain which would threaten friendships and most likely undermine revenues and profits in the short term. The other time that incumbents often don’t respond well is of course when to do so would cannibalise their own services. It is not that the management of these companies is stupid and don’t see the threat and opportunity, but rather that on a rational basis the risk-reward analysis of taking the short term hit in the hope of longer term success from a new and untested service doesn’t add up. We, on the startup side of the equation often see the changes as inevitable, but they don’t look that way to incumbents who maybe have less faith in technological change and are hence more open to arguments that the new service won’t compete adquately with what they have at the moment – e.g. streaming video versus cable, or to take an older example VOIP versus traditional telephone. That said, it isn’t uncommon for the rational analysis to be distorted by organisational biases in favour of the status-quo – e.g. over-estimating the importance of voice and/or video quality.