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Netflix: The Media Killer

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Netflix has upended the media and entertainment industry, becoming one, if not the biggest, winners in the business. With a simple value capture formula, it has focused on ways to create value for its consumers.

Introduction  

When it comes to winners in the entertainment space, it’s hard to argue that Netflix is not the biggest winner over the past five years. Since its near disastrous attempted split of its DVD and streaming services in 2011, Netflix has seen its stock price and market cap skyrocket and is now valued at $120BN. While the company’s method of capturing value, an easily cancellable subscription service, is quite simple, the ways in which it creates value are more complex than what one may see on the surface. This post will go into greater detail on how Netflix creates value to better understand why over 110 million people globally pay for the service.

Watch Convenience  

The most immediate way Netflix creates value is by creating an extremely easy and convenient way for consumers to watch its content. Users no longer have to leave their home (or phone) for a movie theater, nor buy cumbersome hardware (DVDs and DVD players), to watch their favorite movies and TV shows. This has only become easier with the proliferation of Smart TV’s and Smart TV devices. Consumers have choice as to when, where, and how they want to view the content, a level of freedom that they never had before. In addition, Netflix continues to create more ease to watch, with the introduction of new features like offline downloads for mobile. It also revolutionized how TV shows are watched by introducing binge watching, releasing every episode of a TV season at once, allowing consumers to consume as much as they want at any given time.

Content Mix, Volume, and Quality

Netflix started as an aggregator of content, focusing on hard to find independent movies and catalog TV shows. Netflix started as a place for consumers to watch classic shows and overlooked movies. However, realizing that any service could license the same content, Netflix moved into original and exclusive content, beginning with the launch of House of Cards in 2013. Since then, Netflix has continued to focus more on content exclusive to Netflix, creating value for consumers who cannot watch the content elsewhere. Currently, at least 50% of Netflix content is original to the service. In addition, as the company has expanded its global presence, it has focused on local language productions, catering to specific country and region tastes.

And, on a pure content spend basis, Netflix is unparalleled. In 2018, it will spend $8BN on content, double its most immediate rival, Amazon, which will reportedly spend $4BN. The result is not only a volume of content that is hard to match, but a consistently high quality, as well. Because of its war chest, Netflix can spend to attract top talent, as well as allow for production budgets higher than anywhere else. It’s show The Crown, at an alleged $15M per episode, is likely the most expensive TV show of all time.

Appealing to Cord Cutters

Netflix also creates value by riding larger macro trends in the entertainment business, specifically cord cutting. Consumers, unhappy with the high price point of traditional cable bundles, are willing to opt into a cheaper alternative like Netflix. What’s more, Netflix allows consumers to easily cancel, making initial sign-up easier. As skinny bundles become more common, the price of Netflix becomes increasingly more compelling as either a primary service or add-on.

Conclusion

Netflix, of course, is not without its weaknesses. It’s UX and recommendation algorithm are not very good. Content is often hard to find, can be easily buried (sometimes on purpose), and its recommendations often skew to its originals rather than content that a user might like best. As its volume of content has increased, it also has had some real misfires, cancelling shows for the first time in recent years.

That being said, Netflix has become the company to beat in direct to consumer entertainment streaming. It’s significant brand value and large user base give it a significant competitive advantage. Though it will be challenging, it should be able to fend off Disney, who’s acquisition of most of Fox’s media assets was made to better compete with Netflix.

10 thoughts on “Netflix: The Media Killer

  1. Thanks for this post. It’s incredible to see how fast Netflix has grown and how quickly it’s changed the entire media industry. I do wonder how Netflix will react to Amazon and others who are getting into the original content game (even Marriott Hotels has a studio arm to produce original content). Both Amazon and Hulu have been receiving critical acclaim as they work closely with traditional Hollywood studios. Amazon has publicly support exhibitors and, in return, received their stamp of approval (https://qz.com/947237/unlike-netflix-cinema-chains-really-want-to-work-with-amazon/) whereas Netflix is vilified and seen as the aggressor. I agree with your last question on how Netflix will fight off a Disney-Fox combination. Even with titles like “Stranger Things,” Netflix lacks the large-scale movies that a Disney/Fox would be able to produce. Hopefully Ted Sarandos has some magic up his sleeves.

  2. Great post! I do agree that Netflix is a clear winner in the OTT media space. I do however feel that Netflix will have a difficult time competing against other players moving into the space – especially Disney following their acquisition of BAMTech and their recent decision to pull content from the Netflix library. Netflix also competes against other players like Hulu and Amazon through acquiring or creating content premier content which places severe pressure on the Company’s operating margins due to high content acquisition costs. Netflix is currently burning through cash, and I do wonder how viable the business model is when compared to other competitors (Disney, Amazon) that have healthier balance sheets and can withstand the continued cash outflows due to high content acquisition costs.

  3. Netflix has certainly been a leader over the last few years both in terms of how it has changed consumption behavior and in the quality of content produced. I would argue that – at least for many Netflix subscribers – the biggest of the customer value propositions you laid out is (1) the cost and (2) the ability to consume whatever content, whenever the user wants it. With the recent repeal of net neutrality, both of these value propositions are at threat. If I end up paying more for access to Netflix at a speed that allows me to watch whatever, whenever, then I am right back in the position I was before “cord cutting”. In the future, the relative appeal of Netflix to other media solutions could dramatically shift. Of course, what the repeal of net neutrality means for company’s such as Netflix remains to be seen, but I wonder what changes will need to be made in order for this to continue being a winning model.

  4. I’m still amazed at how fast Netflix seems to be growing. Taking into account the recent price hikes in subscription, the numbers released during the last Q4 earnings call seem exceptionally good. I do worry though, as others have commented , about the bubble that the company plus competitors seem to be creating in the entertainment industry with the billion dollar budgets thrown into film and TVproduction. Also, increased marketing spending this year (as a % of revenues and vs previous years) might point to some saturation of the market or a more threatening competitive landscape, i.e. they are spending more on acquiring customers, which might lead to some margin erosion. We’ll have to wait and keep on… watching.

  5. One thing I’ve wondered is what happens when Netflix starts to get closer to the global market saturation point? They may be able to sustain their double digit subscriber growth with international expansion for another year or two, but their american market (whom most of their content is produced for) is seeing growth that a company 4x its size would see, in the 4-5% range. Will Netflix continue to charge their consumers more or try and cheapen their content spending habits to eventually return profits to their shareholders? Amazon and Hulu have built their platforms from the beginning to have different tiers and revenue opportunities. Hulu can show ads to most of their users as well as collect a subscription fee for those with a higher WTP. Amazon has prime video for prime members but still sells a la carte for everything else. Apple has their a la carte platform and can introduce a complementary streaming service to apple music. But it will be very painful for netflix to all of a sudden start showing us ads. And very painful if they reduce their content spending habits as consumers and content will always change with social zeitgeist. And very painful if they raise their subscription fees without raising their content spending even more. If they stop spending on new content, I don’t believe a strong historical or legacy library of content is commercializable enough, otherwise Viacom would still be in the $20B+ club. So obviously I completely agree and am still fairly bullish on Netflix, but I do wonder what happens at that inflection point when investors say “great, you have 400M subscribers around the world paying you $11.99 each (or $4.7B) and you’re still spending $8B a year on new shows. When do I see my money back?”. Sounds like the only lever they are really going to have left is to charge consumers more, which I imagine will only work in the US or super premium markets, which could force them to price discriminate.

    Anyway, lots to think about. Excellent piece SLA!

  6. Great read.
    Taking a step back, I do however believe that Netflix’s biggest move in the past few years had been its international expansion. When Netflix was only available in the US and Canada before 2011, it has decided to expand its operations worldwide in a “big-bang” fashion.

    This in and of itself is a direct consequence for the economies of scale it needed and still needs to attain to make its busines model work.
    However, this has also raised new challenges. For example, while pundits laud Netflix for moving into original and exclusive content, few know that outside the US, its catalog appears very different. A Netflix user with a US account, spending a few weeks in Europe (as was my case), would be surprised to see that House of cards (and other Netflix original contents) are not available on the platform in many European countries. This goes to Netflix somewhat conflicting strategic decisions. Before launching into non-American markets, Netflix had signed exclusivity deals with cable providers promissing them Netflix original content in their countries. While this still brings extra revenue from Netflix, it does prevent it today from leveraging its own content in these countries and makes their scaling strategy questionable.

  7. Great read! Although, I do agree with you that Netflix does seem like a clear winner of the new media battle, I do wonder how much more growth can it achieve. The international adoption of Netflix, although driving growth, is a completely different game. Unlike in the US, where Netflix was first, internationally it faces competition from providers such as iFlix who arguably are better positioned to deliver content targeted at local tastes. In addition, similarly to what Twitter experienced, new users become harder and harder to acquire. Increasing subscription price is another source of growth Netflix has been tapping into, but this might be exhausted soon as well. This coupled with pay-for-revenue strategy makes me a little worried for its future.

  8. Shaun,

    Your eloquent assessment of Netflix’s success was a thoroughly enjoyable read; a feat befitting an individual as refined as you.

    I was particularly surprised that over 50% of Netflix’s content is now original. We have learned in DI&T in recent weeks that it is often beneficial to move from a product to a platform, opening up to an ecosystem while making that ecosystem reliant upon you. It appears that Netflix is doing the opposite. It does not have a technology advantage, so it is creating original content and no longer wants to be the medium for disseminating content from all other content creators.

  9. Shaun, I agree that Netflix is a real winner here. The Company’s tremendous success comes at the expense of traditional cable providers as well as traditional film studios. Cable providers have been scrambling to figure out a way to compete with Netflix. Moreover, Netflix has started a trend towards over-the-top distribution of content from providers like HBO and Showtime. This has created major issues for cable companies as consumers begin to cut the cord. Netflix has also evolved to be so much more than just a technology application to stream third-party content. It is now a full-fledged TV and movie studio, competing with the Hollywood big-wigs. Netflix’s original, exclusive content is high quality and further strengthens its customer value proposition.

  10. Is Netflix an OTT content distribution leader? YES. Is OTT the way we are gonna want to consume content in the near future? Probably. Will Netflix win the battle? Well, most of us will have a Netflix account… Is Netflix in the undisputable path to operational and financial success? I have my concerns.

    Again, my argument is for companies to focus on what they do best. As a Big Data company, Netflix revolutionary search and recommendation engine was chapter 1 of Netlflix’s distribution success story. Now, from that to generating content — I don’t know. Studios have been standing on Hollywood’s backyard for ages for a reason. And if I were to be making decisions on Netflix’s management team I would (re)focus my attention in bulding innovative revenue sharing models and partnerirng with great studios (rather than embarking in creating my own original content — which by the way then I need to promote) and doubbling efforts in leveraging better Netflix’s community to improve the recommendation algorithm (for ex. what friends enjoyed watching, follow some profiles and see what they are watching) — Netflix has social network potential!

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