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.
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.
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.