Netflix Can’t Chill Anymore

Has Netflix maxed out the potential of digital transformation?

With humble beginnings as a DVD-rental-by-mail firm, Netflix has grown to be the behemoth that has disrupted the entertainment industry through leveraging digital transformation. Founded in 1997, Netflix’s DVD rental service offered an innovative business model whereby the company only charged a flat, monthly fee for unlimited rentals with no due dates or late fees. While its pricing model offered significant value to its subscribers, Netflix also provided convenience through the digitization of movie selection. This process allowed customers to avoid the hassle of visiting traditional brick-and-mortar DVD rental stores while providing Netflix with valuable data that allowed for better demand forecasting (via the queue) as well as recommendation algorithms to drive usage which leads to better retention.

We all know who won that battle (R.I.P. Blockbuster), but what is most exciting now is Netflix’s more recent transition (2008) into online video streaming and the different set of opportunities/challenges that come with this new digital transformation.

Online Streaming

Netflix’s online video streaming service also has a flat monthly subscription fee for unlimited usage. The service’s value propositions are:

  • Reliable on demand service
  • Access across a broad range of devices
  • Large, high-quality movie and TV show catalog
  • Personalized content recommendation
  • No advertising
  • All of the above for a low price

With respect to digital transformation, the first four value propositions are most directly reliant on leveraging technology to differentiate against traditional competitors (linear TV and movie theaters).

Reliability – With over 86 million subscribers globally streaming more than 125 million hours per day, ensuring reliability is critical but can also be a challenge. [1] With this in mind, Netflix moved its entire database and streaming infrastructure to the cloud through Amazon Web Services. [2] The reliability and scalability of the cloud is critical as the business model relies on the decoupling of growth of content cost via licensing digitized content (vs. physical DVDs) with subscriber growth to drive margin growth.

Multiple Devices – Recognizing very early on the need to move beyond web browsers, Netflix began developing the Roku Player, a streaming set-top-box, with the intention of shifting viewing to larger screens. While the company ultimately decided to spin-off Roku and focus on its core competencies, the vision to be on multiple platforms remained. [3] Nowadays subscribers can access Netflix on almost all popular connected devices. [4] Without the development of the Internet of Things, it would be hard to imagine whether Netflix could have delivered on this value proposition and achieved the level of ubiquity it has now.

Catalog Optimization & Content Recommendation – With content distribution completely digitized, the potential for capturing large data sets to evaluate content strategy is tremendous. And that is exactly what Netflix is doing. To ensure the delivery of quality content at optimal cost, Netflix combs through millions of data points, identify viewing patterns, and extrapolate demand of or satisfaction with certain TV shows or broader genres. [5] These analyses, in turn, help structure licensing agreements for future content. In addition, like the DVD rental service, the data is also utilized to generate algorithms for personalized content recommendations. [6]

What’s Next?

Up until 2016, Netflix delivered on its customer promise to most of its target market because these markets were generally developed countries with established internet infrastructure. However, with the cost of content rising due to competition, Netflix needed to grow its subscriber base quickly to fully leverage its scale. As such, in January 2016, Netflix launched “globally” (added 130 countries excluding China) which exposes them to developing countries with limited broadband penetration, a minimum requirement for streaming Netflix. [7] One potential solution is to offer offline viewing which the company appears to be exploring. [8] Another option, which I am not sure of its feasibility, is to find a way to reduce bandwidth required for streaming without significantly eroding the image quality.

Another headwind that Netflix will face is the scarcity of data as the company moves upstream in the content acquisition pipeline in their effort to shift towards more original programming (aka become a studio). In the past when licensing content from studios, the content has typically been on-air or in theaters or have even been available via Netflix DVD prior to the company having to decide on whether to acquire it. This meant there was some data to inform the decision around the value and potential of the content. With original content, the company can be presented with merely an idea or rough script of a show that have not yet been made. Hence, Netflix may lose its edge in leveraging big data to make bets on what would be the most expensive pieces of content to date. This is one challenge in which I unfortunately do not have a great solution to propose.

(789 Words)

 


Sources:

[1] Netflix Inc., “Company Profile,” https://ir.netflix.com/, accessed November 2016.

[2] Yury Izrailevsky, Stevan Vlaovic, Ruslan Meshenberg, “Completing the Netflix Cloud Migration,” Netflix Media Center, February 11, 2016, https://media.netflix.com/en/company-blog/completing-the-netflix-cloud-migration, accessed November 2016.

[3] Luke, “A Short History of The Roku Player,” Cord Cutters News, December 16, 2016, http://cordcuttersnews.com/a-short-history-of-roku-set-top-boxes/, accessed November 2016.

[4] Netflix Inc, “Connect to Netflix using your favorite devices,” https://devices.netflix.com/en/, accessed November 2016.

[5] Michelle Harnish, “Netflix using data analytics to keep customers watching,” Aviana Global, September 15, 2015, http://www.avianaglobal.com/blog/netflix-using-data-analytics-to-keep-customers-watching/, accessed November 2016.

[6] Lara O’Reilly, “Netflix lifted the lid on how the algorithm that recommends you titles to watch actually works,” Business Insider, February 26, 2016, http://www.businessinsider.com/how-the-netflix-recommendation-algorithm-works-2016-2, accessed November 2016.

[7] Jon Russle, “Netflix Launches In 130 New Countries, Including India But Not China,” TechCrunch, January 6, 2016,  https://techcrunch.com/2016/01/06/netflix-finally-goes-global/, accessed November 2016.

[8] Chris Smith, “Movie and TV show downloads could be coming soon to Netflix,” BGR, July 19, 2016, http://bgr.com/2016/07/19/netflix-offline-viewing-iphone/, accessed November 2016.

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6 thoughts on “Netflix Can’t Chill Anymore

  1. DVDs by mail in 1997…digital streaming in 2008…I feel like we are due for another revolution in the coming years. Netflix and its competitors reminds me of our discussion of Uber and its competitors: Uber has done the heavy lifting establishing the business model, working out the kinks, battling the lack of legal precedent (just think of our FRC Netflix case!), and educating users. Then the swarms of competitors swoop in and compete on price! While Netflix certainly retains some advantage versus competitors like Hulu, Amazon video, or HBONow in terms of content, user loyalty, and geographic availability, that advantage will not last forever. And as you mention, the encroaching competitors raise content acquisition prices for Netflix, eroding their margin. I’d be surprised (and disappointed) if the only move Netflix has in its pipeline is vertical integration to resemble more of a traditional studio, as Netflix is the poster child for business model innovation. How else can digitization improve user experience and enable our right to lie on our couch for 5 hours in a row? Perhaps Netflix can democratize content development, creating a Youtube-esque ability to crowdsource talent. Or perhaps they can stream live content (sports, news)? Either way, something will be required so that when we say “Netflix and Chill” in 2050, our kids don’t give us that “you’re so OLD” look again.

  2. Great read, Victoria! Digitization of video content has simply been amazing – I still remember Saturday AM Blockbuster visits for my family’s weekly movie nights… never again! I do worry about competition, as Amazon rolls out Prime Video service to 200 countries, versus Netflix’s 130 country presence. Talk about raining on Netflix’s parade, just celebrating 60% outperformance vs. budget in international subscriber growth in last quarter. Is Amazon out to snatch the developing market opportunity? As they compete on price (with Amazon slashing Prime pricing for the holidays), streaming speed (does Netflix regret spending last 7 years shutting down datacenters and migrating to Amazon Web Services… letting their content and customer data sit in enemy camp) and race to acquire and generate new content, how can Netflix differentiate?

  3. With the potential intent to vertically integrate into a studio, do you think Netflix compromises itself as a buyer of content from the traditional studios? Would Disney, Comcast, Time Warner be less willing to enter into licensing deals with Netflix as it continues to be the “competition” with their original programming becoming more and more popular (i.e. House of Cards, Orange is the New Black)? Disney doesn’t seem to thinks so as they have given Netflix “streaming rights to all Disney theatrically released films starting in 2016” [1]. Do you think deals such as these are enough to keep subscribers from leaving while gaining new ones as well? Perhaps as a first mover in the streaming service as an original content provider space they can, but I am worried about Hulu, Apple, and Google, are you? Apple is already filming a series with Dr. Dre with another being developed around Will.i.am [2]. These shows could create major buzz and take new customers away from Netflix.

    [1] Trefis Team, “Here’s How The Exclusive Partnership With Disney Can Impact Netflix,” Forbes, May 26, 2016, http://www.forbes.com/sites/greatspeculations/2016/05/26/heres-how-the-exclusive-partnership-with-disney-can-impact-netflix/#5fcd0c4c65fe, accessed November 2016.

    [2] Matthew Ingram, “Amazon Is Only the Tip of the Iceberg for Netflix When It Comes to Competition,” Fortune, April 19, 2016, http://fortune.com/2016/04/19/netflix-competition/, accessed November 2016.

  4. First off, awesome title (and post). One thing that wasn’t covered in your post is Netflix’s changes to their pricing plans. An initial disadvantage of digitization was the greater ability for “abuse” through sharing accounts (e.g., where multiple individuals share the same login credentials to access Netflix – essentially splitting up the cost of one subscription amongst all of them). I thought it was really smart of Netflix to offer differences in plans by the “number of screens” that can simultaneously access Netflix content (Basic – 1 screen, Standard – 2 screens, Premium – 4 screens). I’m wondering if Netflix can do more around this to capture more value from its customers – for example, enable “add-on screens” similar to how you can add lines to an existing cell phone plan, or implement more sophisticated account validation to enforce unique user access to accounts/ profiles (e.g., 2 step verification for new devices). Curious to hear your thoughts on this aspect.

  5. Great post. It’s interesting to think about the entertainment media pipeline from content creation to content distribution. What I find remarkable about Netflix is that it started at content distribution with, seemingly, the full support of networks who owned the rights to content. Now, after earning a sizable share of how media is consumed by users, Netflix has started to move into content creation. In response, networks are beginning to respond negatively – both by withholding the rights to content or by attempting to enter the digital streaming space themselves [1]. It will be interesting to see if Netflix can walk the tightrope long enough to either generate enough content to become independent from networks or earn enough power to become a necessity as a media outlet.

    [1] http://www.nytimes.com/2016/06/19/magazine/can-netflix-survive-in-the-new-world-it-created.html

  6. Great article, thanks for sharing! One topic I’m particularly curious about is virtual reality and its impact on companies like Netflix. The company’s sentiment on VR may have changed, but as of May it sounds as if the company hasn’t invested much in VR content (http://www.pcworld.com/article/3066045/streaming-services/netflix-isnt-big-on-virtual-reality-for-the-obvious-reasons.html). The company’s stance is essentially that VR essentially removes the “chill” aspect out of Netflix – i.e., it’s exhausting watching a show in full VR for 30 minutes. I haven’t tried VR yet, but I’m curious whether this is the right attitude to take here? Could a lack of focus on VR, or a half-hearted attempt into VR, make the company susceptible to future VR disruptions?

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