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How I.P. Fits Into Netflix’s Business Model

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As part of its overall strategy, Netflix actively employs  intellectual properties in its attempt to innovate and secure its long term competitive advantage. Reflecting the nature of its business model which sees several different service offerings, rather than focus on a particular intellectual property strategy, Netflix utilizes a variety of different intellectual properties in its attempt to limit the appropriability of its core services as well as to protect itself from potential infringement suits.

Patents

Since, its early days as a mail DVD rental subscription service, Netflix has actively applied for many patents that aim to protect many aspects of its core service. Specifically, Netflix has filed and been granted patents for its rental processing system (7848968), the envelopes it uses(6966484) and its rental management system (7546252) to name a few. Notably, Netflix has also strategically acquired a combination of patents that have to a great extent, helped secured its unique business model. Particularly, Netflix has patented its unique processes and approaches, such as patents for its computer-implemented approach to renting (6584450 & 7024381), as well as its approach of allowing renters to hold onto rentals indefinitely without incurring late fees. Both of which, Netflix has employed in a lawsuit against Blockbuster when its competitor attempted to move into its arena of online mail rental services. Having moved into digital streaming services, Netflix has also acquired countless of patents that underlie the technology as well as the technical processes of the streaming service such as digital content distribution systems & methods (8433814), server signalling methods (8443056) and adaptive streaming technology (8631455) as prominent examples. Many of these patented technologies (such as those mentioned) allow Netflix to deliver a unique but yet seamless service experience.

Trade Secrets

Nevertheless, developed technology is prone to periodical updates in an ever changing landscape and the patenting process undoubtedly reveals the underlying technology as part of its qualifying process; as such Netflix has also heavily employed trade secret to guard many of its proprietary technology, especially in its current digital streaming services. Netflix has implemented strict mechanisms to safeguard its interests. For example, Netflix employees are made to sign confidentiality agreements prior to their employment and involvement with the company, and the company has proactively ensured that compliance with confidentiality is realized as it has actually brought suits against former employees alleged to have stolen trade secrets. Within the current Netflix business model, the most fiercely guarded trade secret would be its proprietary Recommendation Engine, CineMatch, which matches content recommendation with the user’s profile and actions. Netflix has not formally patented its recommendation algorithms and has relied on secrecy over the engine, which have been difficult for many competitors to reverse engineer.

Copyrights

The software, content as well as website that Netflix has created are duly copyrighted. Copyrights feature itself in several forms in Netflix’s current business model, depending on the service examined.

DVD Rental Service:

For its DVD rental service, Netflix purchases the movies in wholesale supply based on its own analytics and proceeds to rent it out. Under the current U.S. law, copyright owners possess the exclusive rights over the distribution of a copyright. However, that right is subject to the first-sale doctrine, which states that the right to control the distribution of the copyrighted content generally ceases after the initial sale of the copy.  After the first-sale doctrine, the copyright owners have limited rights over content within the secondary market.

Online Content Streaming:

In order to carry out its streaming services (and the streaming of content), Netflix negotiates with content owners as copyright owners, they possess the rights over the public performance of the work which include its transmission.  At the same time, Netflix also licenses the rights to reproduce the content as  the process of streaming requires the reproduction of a work on Netflix’s server in order to efficiently deliver its service.

Original Content Production:

Netflix has also enjoyed copyrights in its own content. As content producers, it  automatically becomes the copyright owner of any content it produces (such as the House of Cards, etc.). This would essentially subject any other competitors and players in the industry to Netflix’s exclusive rights conferred upon the company over the content’s use and distribution; as such popular Netflix produced content such as House of Cards and Orange is the New Black have only been streamed on Netflix to date and not on major online or television networks.

Trade Marks

Netflix has employed numerous trademarks to ensure that its brand value and assets are diminished or compromised.

 

Analysis of Netflix’s Intellectual Properties

The ability of Netflix to protect and enforce their intellectual property rights is subject to certain risks. To date, the company has relied primarily on proprietary processes and know-how to protect their IPs. Obtaining patents can also be costly and time consuming, costs vary but can easily exceed $10,000 in legal and administrative fees, applications are generally published 18 months after the earlier priority date.

Netflix’s patent portfolio primarily protects aspects of its DVD-by-mail business, they own pending U.S. patent applications that cover technologies to improve and optimise on-demand streaming video delivery. Significant amounts of pending patent applications suggest that Netflix’s current R&D focus is in-line with its business shift towards on-demand video streaming.

Patents confer upon the company to a right of ownership, determining who can and cannot use or dispose of it. Netflix can potentially gain huge awards for parents infringement, the patents computer-implemented approach to renting (6584450 & 7024381) gives Netflix the legal protection to the unique process and approach, consequently raising the monetary or market value.

Nevertheless, Netflix’s patents do not seem to grant them an advantage over new entrants, competitors do not face significant patent barriers from Netflix, as the company’s US patents are more skewed towards its traditional DVD-by-mail business, and also unlike the unique inventions, processes and approaches, ideas cannot be owned. Furthermore, it is important to consider whether patents are appropriate for important technologies that underlie Netflix, as patenting requires comprehensive publication which may facilitate distinct imitation or adaptation from competitors.  This would suggest that the company’s current approach of employing trade secrets in its streaming service to be the appropriate strategy.

The utilization of trade secrets however has to be considered in light of the potential benefits that may come from sharing its proprietary information.  Sharing can actually benefit innovators more than withholding it, to some extent as proven in some open source innovation business models.  Netflix has realized this as in a surprising recent move, the company opened an aspect of its engine to open innovation by revealing a portion of its database to developers with the aim of inciting them to improve the engine. Another example would be House of Cards, where Netflix worked closely with the production company MRC  in creating this 9 Emmy-nominated show. House of Cards was MRC’s first move into television, and it was also Netflix’s first original show. During production, Netflix fed important data about user preference and behaviour that it had in its database gathered from its preference analytics, in order to strategically appeal to its viewers. Partnering with MRC allowed the cross-utilization of technical know-how and proprietary data, further it eliminated the pressure to move fast in order to make their first original series,  which gave Netflix and MRC (which could have potentially been a competitor), just enough to reduce the risks of concurrent developments and produce a strong hit. This kind of approach may create strong value as well as greater control over the timing of new ideas or technologies and thus significantly reducing the costs of their R&D.

The company also has registered trademarks and service marks for the Netflix name and have filed applications for additional trademarks and service marks. Trademarks provides brand identity and allows others to easily identify the company easily. These trademarks prevents the company against identity theft and attempts to capitalise on recognition and reputation. However, Netflix trademarks do come with disadvantages.

First, the owner will need to show proof of use at regular intervals, the first submission is between 5-6 years after registration, the second is 5 years later and every 10 years thereafter, which can be troublesome. If the owner fails to file these documents on time, it could lead to the loss of trademark. The trademark is also described as the weakest form of intellectual property protection as it protects just marketing concepts and not always product itself. Therefore, trademark should go with other intellectual property rights like patents. Another disadvantage for trademark owners is that they will have to pay fee for registration and renewal. The fee depends on the number of classes of products that are covered in the application and some more additional fees.

Recommended IP Strategy for Netflix

With their current business model, Netflix is competing in an ever changing and competitive marketplace. Thus, in order to continue to stay ahead of competition and build the longevity of their brand, the approach and management of their intellectual properties strategically is important.

Although patenting has traditionally been an important protection mechanism for many businesses, (as has been discussed, was heavily utilized by Netflix in its traditional DVD-by-mail service,) Netflix’s focus and venture into the digital space necessitates a strategic reliance on patents with a stronger emphasis on utilizing trade secrets as well as the careful deployment and utilization of these assets in attempts to innovate and create value.

Netflix’s imitability is currently low in terms of its vast digital media library and its proprietary technologies, as its key assets are seemingly well protected by current IP strategies and tightly held. Yet these barriers can either diminish or continue to grow depending on how Netflix approaches the management of its IP. Notably, Netflix’s digital library consists of licensed and self-invested streaming content, which have been key value drivers for viewers. For licensed online streaming of its partner’s content, Netflix usually holds an exclusive broadcasting contract with a limited period of time. This allows the Netflix to gain a temporary monopoly rent in short term. However, the cost of such a contract is substantial (which has resulted in Netflix’s striking-out certain content) and it cannot prevent competitors from gaining access in the long term as well. In this sense, its move towards investing in original content production provides a strong foundation for achieving differentiation and competitive advantage as it holds the copyright over its original content and it could attempt to realize new revenue streams via broadcast licensing. Nevertheless, this has to be approached strategically as well as the costs of such endeavours should not be overlooked as well.

In the long term, Netflix should continue to focus on developing brand value, with an outlook to expanding globally. Over time they may be able to capture massive markets in developing countries with the leverage of their brand. Yet fully going global is definitely a challenge for Netflix. Not only are the social aspect of viewing different in different countries, but  also more importantly, there various IP rights and contract issues may arise in different jurisdictions that necessitates a modified approach. In order to overcome some of these issues, Netflix must be ready to adapt to  different models in order for them to capture rents in those countries.

A possible way of penetrating emerging markets could be to license country-specific content (e.g. license Bollywood movies in India) in order to both adapt to different cultural differences and reduce dependency on major western production companies.

Ultimately, Netflix has developed a strong innovative business model and generally adopted the right approach towards managing its IP in an ever developing landscape. The future of Netflix will depend on how the company will be balance the importance of minimising costs and implementing innovation, with need to secure the crucial intangible assets that define its business models.

Callum Connects

Benjamin Kwan, Co-Founder of TravelClef

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Making music to create a life for his family, Benjamin Kwan, started an online tuition portal and his music business grew from there.

What’s your story?
I am Benjamin and I’m the Co-Founder of TravelClef Group Pte Ltd, a travelling music school that conducts music classes in companies as well as team building with music programmes. We also run an online educational platform which matches private students to freelance music teachers. We also manufacture our own instruments. I started this company in 2011 when I was still a freshman at NUS, majoring in Mechanical Engineering.

I was born to a lower income family, my father drove a taxi and was the sole breadwinner to a family of 7. I have always dreamed of becoming rich so that I could lessen the burden placed on my father and give my family a good life.

After working really hard in my first semester at NUS, my results didn’t reflect the hard work and effort I put in. At the same time, I was left with just $42 in my bank account and it suddenly dawned on me that if I were to graduate with mediocre results, I would probably end up with a mediocre salary as well. I knew I had to do something to gain control of my future.

During that summer break, I read a book “Internet Riches” by Scott Fox and I knew that the only way I could ever start my own business with my last $42 would be to start an online business. That was how our online tuition portal started and after taking 4 days to learn Photoshop and website building on my own, I started the business.

What excites you most about your industry?
Music itself is a constant form of excitement to me as I have always been an avid lover of music. As one of the world’s first travelling music schools, we are always very eager and excited to find innovative ways to a very traditional business model of a music teaching.

What’s your connection to Asia?
I was born and raised in Singapore and I love the fact that despite our diversity in culture, there’s always a common language that we share, music.

Favourite city in Asia for business and why?
Hands down, SINGAPORE! Although we are currently in talks to expand to other regions within Asia, Singapore is the best place for business. I have had friends asking me if they should consider venturing into entrepreneurship in Singapore, my answer is always a big fat YES! There’s a low barrier of entry, and most importantly, the government is very supportive of entrepreneurship.

What’s the best piece of advice you ever received?
I have been blessed by many people and mentors who constantly give me great advice but right now, I would say the best piece of advice that I received would be from Dr Patrick Liew who said, “Work on the business, not in it.” This advice is constantly ringing in my head as I work towards scaling the business.

Who inspires you?
My dad. My dad has always been my inspiration in life, for the amount of sacrifices that he has made for the family and the love he has for us. He was the umbrella for all the storms that my family faced and we were always safe in his shelter. Although my dad passed away after a brief fight with colorectal cancer, the lessons that he imparted to me were very valuable as I build my own family and business.

What have you just learnt recently that blew you away?
You can not buy time, but you can spend money to save time! With this realisation, I was willing to allow myself to spend some money, in order to save more time. Like taking Grab/Uber to shuttle around instead of spending time travelling on public transport. While I spend more money on travelling, I save a lot more time! This doesn’t mean that I spend lavishly and extravagantly, I am still generally prudent with my money.

If you had your time again, what would you do differently?
I would have taken more time to spend with my family and especially my father. While it is important to focus our time to build our businesses, we should always try our best to allocate family time. Because as an entrepreneur, there is no such thing as “after I finish my work,” because our work is never finished. If our work finishes, the business is also finished. But our time with our family is always limited and no matter how much money and how many successes we achieve, we can never use it to trade back the time we have with our family.

How do you unwind?
I am a very simple man. I enjoy TV time with my wife and a simple dinner with my family and friends.

Favourite Asian destination for relaxation? Why?
Batam, it’s close to Singapore and there’s really nothing much to do except for massages and a relaxing resort life. If I travel to other countries for shopping or sightseeing, I am constantly thinking of business and how I can possibly expand to the country I am visiting. But while relaxing at the beach or at a massage, I tend to allow myself to drift into emptiness and just clear my mind of any thoughts.

Everyone in business should read this book:
Work The System, by Sam Carpenter. This book teaches entrepreneurs the importance of creating systems and how to leverage on systems to improve productivity and create more time.

Shameless plug for your business:
If you are looking for a team building programme that your colleagues will enjoy and your bosses will be happy with, you have to consider our programmes at TravelClef! While our programmes are guaranteed fun and engaging, it is also equipped with many team building deliverables and organizational skills.

How can people connect with you?
My email is [email protected] and I am very active on Facebook as well!
https://www.facebook.com/benjamin.christian.kwan

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Entrepreneurship

Before you enter a Startup or before you choose your founding team or new hires read, “Entering Startupland” by Jeff Bussgang

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Before you enter a Startup or before you choose your founding team or new hires read “Entering Startupland” by Jeff Bussgang.

Jeff knows how to spot and groom good culture, as the book session was held in Zestfinance a company he invested in and now, “The Best Workplaces for Women” and for “The Best Workplaces for Tech”, by Fortune.

These are the questions during the Book Launch.

How to know if a hire including the founder is Startup material?
Jeff says to watch for these qualities.

First, do the hires think like an owner?
Second, do the hires test the limits, to see how things can it be done better?
Are they problem solvers and are biased toward action?
Do they like managing uncertainty and being comfortable with uncertainty? And comfortable with rapid decision-making?
Are they comfortable with flexible enough to take in a series of undefined roles and task?

How do we know if we are simply too corporate to be startup?

Corporate mindsets more interested in going deep into a particular functional area? These corporate beings are more comfortable with clear and distinct lines of responsibility, control, and communication? They are more hesitant or unable to put in the extra effort because “it’s not my job”.

If you do still want to enter a startup despite the very small gains at the onset, Jeff offers a few key considerations on how to pick a right one.

He suggests you pick a city as each city has a different ecosystems stakeholders and funding sources and market strengths. You have to invest in the ecosystem and this is your due diligence. Understand it so you can find the best match when it arises.
Next, to pick a domain, research and solidify your understanding with every informational interview and discussion you begin. Then, pick a stage you are willing to enter at. They are usually 1)in the Jungle, 2) the Dirt Road or 3) the Highway. The Jungle has 1-50 staff and no clear path with distractions everywhere and very tough conditions. The Dirt Road gets clearer but is definitely bumpy and windy. Well the Highway speaks for itself, doesn’t it?

Finally Please – Pick a winner!

Ask people on the inside – the Venture Capitalists, the lawyers, the recruiters and evaluate the team quality like any venture capitalists would. Would you want to work for the team again and again? And is the startup working in a massive market? Is there a clear recurring business model?

After you have picked a winning team and product, how would you get in through the door?

You need to know that warm introductions have to be done. That’s the way to get their attention. Startups value relationships and people as they need social capital to grow. If you have little experience or seemingly irrelevant experience, go bearing a gift. Jeff shared a story of a young ambitious and bright candidate with no tech experience who went and did a thorough customer survey of the users of the startup she intended to work with. She came with point-of-view and presented her findings, and they found in her, what they needed at that stage. She became their Director of Growth. Go in with the philosophy of adding value-add you can get any job you want.

And as any true advisor would do, Jeff did not mince his words, when he reminded the audience that, “If you can’t get introduced you may not be resourceful enough to be in startup.”

Startupland is not a Traditional Career or Learning Cycles

Remember to see your career stage as a runs of 5 years, 8 or 10 – it is not a life long career. In Startup land consider each startup as a single career for you.

Douglas Merrill, founder of Zestfinance added from his hard-earned experience that retention is a challenge. Startup Leaders to keep your people, do help them with the quick learning cycles. Essentially from Jungle to Dirt road, the transition can be rapid and so each communication model that starts and exists, gets changed quickly. Every twelve months, the communication model will have no choice but to break down and you have to reinvent the communication model. Be ready as a founder and be ready as a member of the startup.

Another suggestion was to have no titles for first two years. So that everyone was hands-on and also able to move as one entity.

Effective Startupland Leaders paint a Vision of the Future yet unseen.

What I really enjoyed and resonated with as a coach and psychologist was how Douglas at the 10th hire thought very carefully what he was promising each of his new team member. He was reminded that startups die at their 10th and their 100th hires. He took some mindful down time and reflected. He then wrote a story for each person in his own team and literally wrote out what the company would look like and their individual part in it. In He writing each of the team members’ stories into his vision and giving each person this story, it was a powerful communication piece. He definitely increased the touch points and communication here is the effective startup’s leverage.

Douglas and Jeff both suggested transparency from the onset.

If you think like an owner and if you think of your founding team as problem solvers. Then getting transparent about financials with your team is probably a good idea. As a member of a startup, you should insist on knowing these things
Such skills and domain knowledge will be valuable. There is now historical evidence of people leaving startups and being a successful founder themselves because they were in the financial trenches in their initial startup. Think Paypal and Facebook Mafia.

What drives people to enter a startup?

The whole nature of work is changing. Many are ready to pay to learn. Daniel Pink’s book Drive showed how people are motivated by certain qualities like Mastery, Autonomy and Where your work fits into big picture. Startups do that naturally. There is a huge amount of passion and the quality of team today and as it grows then the quality of company changes.

The Progress principle is in place, why people love their startup jobs is not money rather are my contributions being valued? Do I see a path of progress and do I have autonomy over work and am I treated well?

Find out more about StartupLand on Amazon

And learn from Zestfinance

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