Netflix’s Tricky Dance with Facebook

Netflix is going to get more social, with deeper integration with Facebook – and it’s going to be a tricky dance. Don’t get me wrong; Netflix has to do this to stay competitive. It just needs to be very careful about how it negotiates the service’s points of interaction with Facebook’s social graph. Luckily for Netflix, it has a huge asset in its mastery of all things movie.

Thanks to Liz Gannes at NetworkEffect for her “Netflix Gets Social: “Extensive” Facebook Integration Is Coming” piece, highlighting Netflix’s plans as outlined in this recent letter to shareholders. The point of this post isn’t to speculate on the upcoming features of this integration, but to look at some of the implications for a company like Netflix building dependencies on Facebook’s “social network utility.”

I Do Movies, You Do People

First, a picture. This is a really simple version of the the Facebook-Netflix partnership (not something I’d design a database with, mind you – it’s more of a conceptual illustration):

Facebook has a lot more things hanging off the “me” and “you” objects pictured here (like our posts, our photos, our “likes” and other stuff. What this picture does show is Facebook’s crown jewel: the connection between you and me. Facebook’s social graph is the basis of its crazy valuation and growing power in the industry. It’s also what makes companies like Netflix want to partner with them.

Netflix is all about movies. While the Internet Movie Database may have a more extensive movie database, the Netflix movie database is good enough to act as a kernel for aggregating an even more valuable set of data on the preferences and viewership behavior of millions of Netflix movie watchers. So as the graph above shows, what Netflix is really about is my connections with movies and your connections with movies.

For Your Personal Viewing Pleasure…

One of the first thing to look at in the Netflix/Facebook relationship is the issue of identity. Netflix currently faces a problem here in that it’s database doesn’t exactly represent “my” movies, but rather my household’s. This is a legacy of using the US Postal service as it’s initial distribution channel, since the DVDs went to households, not individuals. The company’s shift to digital distribution helps address this in two ways. First, when we consume media on digital devices like iPads and laptops it’s a more personal experience. Second, digital delivery brings interactivity, which makes it easier to track who’s actually watching the movie.

So one of the things Netflix will fix on its way to becoming more social, is to first to become more personal. In other words, it’s going to build out individual accounts and improve its ability to track individual user preferences. My guess is that Netflix will allow individual household members to log-in via Facebook, but that the company will be very careful to ensure it maintains full control of the user data at the heart of its shift from households to individuals.

Expect to see some new user interfaces show up in your Netflix experience over time. When you’re watching streamed Netflix movies with family members via Tivo or a BluRay player, for example, don’t be surprised if you see some simple check boxes to allow each family member to “check-in” to the movie. If I were at Netflix, I’d also be looking at FourSquare-like incentives for “movie check-ins” aimed at simultaneously increasing Netflix’s share of the movie-going experience while learning more about each person in your home who uses the service. What about a “Super Sleuth” badge for people who’ve watched all the classic mysteries, or a “Space Ranger” badge for those who’ve made it through everything in a sub-genre of sci-fi movies?

Once the service becomes more personal, it will be easier for Netflix to invest in creative, fun ways of gathering more meaningful information about your relationships to the movies you watch. You’ll still have the standard star ratings, but these could be supplemented by additional questions such as which character you liked most, whether you liked the soundtrack etc. All this is valuable information in building better marketing profiles, which improves Netflix’s movie recommendations and could enable them to begin offering highly targeted advertising for a new class of less expensive subscriptions.

All Those Facebook Users…

All that could happen without Facebook though, simply from Netflix shifting focus from households to individuals. So what’s the next step – the step from personal to inter-personal and how might Facebook and Netflix work with one another?

User interactions with movies on the Facebook.com site is one area of potential collaboration. People like to “like” things on Facebook and movies are no exception. 18 million people “like” the movie, Twilight, for example. Facebook is a goldmine for word-of-mouth marketing for movie promoters. There’s big money there and Facebook’s not going to feel obligated to share that money with Netflix. Most of that money comes when the movie is still in its first run though, and Netflix distribution happens well after that, so it’s possible the two companies could strike a deal giving Netflix prominent placement in the Facebook experience for users’ interactions with older-run movies. This could take a variety of forms:

1. The lightest weight collaboration would be an old-school Facebook app. Facebook might take steps to more actively promote it, but let’s face it, the Facebook UI buries apps so they’re hard to find – and getting Facebook users to install them is a pain. Yawn.
2. The next step to deeper collaboration would be for Facebook to partner with Netflix in helping people fill out the “Movies” section of the “Arts and Entertainment” tab within the Facebook user profile. Right now, filling that out is a pain. I get no prompting, but Netflix could solve this by surfacing information it already knows about me – and allowing me to pick from there. That would embed my movie preferences pretty deeply in my Facebook experience. More interesting…
3. The deepest collaboration would be actually watching movies on Facebook. It may seem far out today, but people didn’t used to watch video clips on Facebook – and Facebook is now the third largest video viewing site – and growing fast. Sure, movies are different, but with the growth of personal digital devices, we’re going to see a lot more movie-watching triggered by places like Facebook. So Facebook may well emerge as a very important distribution partner for Netflix. Hmmm…very interesting.

Instant Movie Friends

These ideas are just speculation, but they do illustrate that there’s plenty of opportunity for Facebook in the movie business, and we’ll touch on what that means at the end of this piece. No, Netflix didn’t say anything about a Facebook partnership; what they actually said is that they will be building “extensive Facebook integration.” What they’re clearly talking about here is using the Facebook “social network utility” to strengthen the Netflix service.

The first thing to understand about the Facebook platform is that it isn’t about building the kind of apps people were building on Facebook a few years ago. No, today’s Facebook apps are primarily third-party websites that make heavy use of Facebook’s social graph.

The most common way these websites use Facebook’s platform is pushing information into the Facebook activity stream. In other words, they’re using the Facebook platform to distribute information through Facebook users’ social networks.

Some people might want all the movies they watch on Netflix to go up on their activity stream on Facebook. Personally, I don’t – not all of them anyway – maybe just the ones I have something to say about. No, if Netflix wants people to share information about their Netflix movie relationships up on Facebook, they’re going to have to get more creative. Netflix tried going social before – and felt it didn’t work very well. The first time they tried to build the social graph themselves, but the world has since changed and the network economics of going it alone simply don’t work anymore. The second time out, Netflix tried an early attempt at working with Facebook, but the integration was fairly hard to get to and not all that creative. To get it right this time, the social layer needs to be easy to get to and compellingly social.

This gets us into the tricky question of the interconnections between our relationships with movies and our relationships with people. Netflix knows my movie preferences and those of lots of other people, which means I can compare my tastes with millions of others. That gives me a “people like you, liked these movies” filter that can be pretty useful – and it’s going to get way more useful once they solve the households problem mentioned above.

In the graph above, Facebook controls the blue line connecting you and me, while Netflix controls the red lines connecting me and my movies and you and your movies. The interesting part of this collaboration are the purple lines connecting your movies with me, and my movies with you. These lines depend on Facebook’s platform and they open some interesting possibilities for customers on the Netflix website and through its various distribution channels like Tivo and others. The point of this post isn’t to try to guess these new features, but here are some potential examples:

• Getting updates on which movies are most popular with my friends this month
• Seeing which of my friends are most like me, based on our tastes in movies
• Competing with friends for badges and check-ins of the kind outlined above
• Building custom lists of recommended movies for various Facebook friends lists (e.g. work colleagues, friends with kids, college friends, etc.)
• Giving a shout out to friends to talk about a movie I just saw, and I know they’ve seen recently – to help interpret an ending, complain about the writing or wax on about the symbolism…

You see, movies are social experiences. They come out of a very old tradition of story-telling around the campfire. As our shared movie viewing experience deteriorates with the proliferation of digital devices, people are going to look for other ways to connect socially through movies. So getting this social layer right truly is important. If Netflix messes up, it will leave a huge opening for someone else to fill.

Temptations of the Silver Screen

Over time, I predict that Netflix and Facebook will find it hard not to “cheat” on their relationship with one another.

For Netflix’s part, they will have your movie data and my movie data and it will be natural for them to want to determine whether we know each other. We’ll both be in their database and we’ll both be customers. They’ll just need that one little pointer between us. Not a big deal right? Well, it is to Facebook – that connection is their whole value proposition.

As for Facebook, the relationship is even trickier. The data in those purple lines connecting me with your movies is certainly worth something and Netflix couldn’t take advantage of it without Facebook. More significantly, will Facebook be able to resist the temptation of venturing more deeply into the movie business on its own? Licensing a movie database wouldn’t be hard, and with that Facebook could build a movie preferences database as part of users’ efforts to fill in their profiles on Facebook. What they’d be missing is actual movie viewership data – the kind Netflix has because it sends out so many DVD via the mail today. But in a future where Facebook becomes a place where people watch movies, that could change, and the temptation could easily grow.

It’s a tricky situation. Both companies stand to benefit a great deal from partnership today. Over the long-term, Facebook is in the power seat, however. Other companies will get into the online movie distribution business, and Netflix’s best hopes for building a sustainable competitive advantage center in building the richest, most meaningful connections between me and my movies and you and yours. Replicating Facebook’s social graph is much harder, which is why it is the new computing and communications platform. You can bet that many companies will be closely watching this relationship with Netflix. It will act as a kind of barometer of whether the benefits of building on top of Facebook’s social network utility are worth the risks it entails.

March 8, 2011 update:

Warner Bros. announces plans to digitally distribute movies via Facebook. What was just speculation above, is now reality.