Netflix is under attack. Earlier this year, Bob Iger, CEO and Chairman of Disney, announced that the company will be launching a standalone streaming platform by 2019; the content lineup will include live action films and television programming based on its existing intellectual property catalogue, including franchises spanning Marvel, Star Wars, and Pixar . The news came on the heels of an earlier announcement in August that Disney will be pulling its content from Netflix, starting with their 2019 production slate . After many years of partnership, most notably several Marvel Cinematic Universe television adaptations, the break is emblematic of a land grab in an increasingly digital playing field.
The OTT Landscape
Online streaming services, also known as Over-The-Top or “OTT” platforms, follow a subscription payment model, in which users pay a nominal monthly fee for typically unlimited access to a content library; services like CBS All Access and Hulu also generate revenue through paid advertising (though both offer a premium ad-free option), whereas Netflix’ primary revenue stream is subscription fees .
A McKinsey report forecasted that consumer spending to access content will outpace spending to own content in 2017 . Netflix was one of the first players to recognize this trend in consumer behavior, and continues to benefit from its first mover advantage with the largest subscriber base of any online streaming platform at over 100 million globally .
Show Me the Money
Consumers are increasingly demanding high production values, convenience, and low prices from their media consumption. The OTT space is therefore marked by significant content acquisition costs, as platforms compete to offer the most comprehensive libraries across film, television, and most crucially—original programming. Original content improves customer stickiness and lowers churn as viewers renew their subscription to see what happens next, and also attracts new members as blockbuster successes generate buzz .
Netflix has announced that it will spend nearly $8 billion on original content in 2018 , putting it ahead of its competitors like Amazon Prime Video at $4.5bn , Hulu at $2.5bn in 2017 , and Apple at $1bn . As these costs increase with limited ability to minimize risk of content underperformance, Netflix must lean into digitization to make strategic content acquisition decisions, streamline production, and maximize user engagement.
Doing business in Hollywood is similar to playing poker in Las Vegas; even the most skilled players can lose big to a string of bad luck. Customer preferences are extremely diverse and specific, and vary wildly across genre and geographies.
Netflix currently gathers valuable data on viewership trends, which are utilized in green light decisions on new productions (and famously in its proprietary recommendations algorithm) . However, given how quickly viewer sentiment can change, Netflix must create and release content as quickly as possible to maximize time-sensitive insights and consistent audience engagement. The company should therefore explore logistics visibility and ultimately integration with its suppliers—the third-party production companies that create much of the content Netflix purchases—leading to shortened production timelines .
Cross-referenced and enriched information can help Netflix identify and quickly respond to production externalities . Consider for instance the impact of a writer’s strike in Los Angeles, or a geopolitical crisis halting production on an original K-Drama in South Korea. As standalone incidents, individual producers have limited resources to develop efficient tactical responses. However, the sheer volume of projects that Netflix is involved in can provide enormous economies of scale; for example, rationalization of post-production suppliers to lower costs, or use of pooling accounts in Netflix’s cash management strategy to collectively minimize currency risk as Netflix expands globally. This differentiation could attract content creators to Netflix over its competitors, like Disney or traditional TV networks—a crucial advantage as the content war rages on.
In the medium term, Netflix should consider further integration with their suppliers through M&A. Netflix recently made its first acquisition of Millarworld , a comic book publisher, in a move to own the underlying intellectual property that will allow for sustained content opportunities and entry into derivative products like merchandising—or even larger tangible presences, like theme parks. Netflix has a proven track record of identifying and marketing properties that earn their members’ viewing time, and continued diversification will prime further engagement with their massive customer base.
As Netflix faces off against competitors making extensive capital investments in both their distribution platforms and original content, should the company expand into new media types like gaming or live television, or remain focused on its streaming strengths? Should Netflix be concerned about Disney’s forthcoming platform, and to what extent?
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