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This is the 1st edition of Series “The Streamers” . Entire series will cover the breakdown of Video and Audio streaming industry across the value chain including individual business strategies, their key metrics and future prospects. So, stay tuned.
Netflix : The Origin Story
It all started with the blockbuster, at-least that’s how the popular story goes. Just a little backdrop for those who are unaware, Blockbuster used to be the DVD rental giant chain in US. So the story goes like this, Reed Hastings (Co-founder) borrowed a copy of Apollo 13 from Blockbuster and got 40$ late fees on account of late return of the copy which motivated him to start it’s own DVD rental company with better business model. An underdog company trying to win by doing business the right way.
But that might, just be a story. Marc Randolph (Co-founder) has written and talked a few times about the origin story of Netflix. The year was 1997, both were working at Reed’s company Pure Atria, which got sold out to a Software company called Rational Software which means that both have to leave the company soon. In the transitionary period that goes by, Reed and Marc used to come up with Ideas to start a new venture. That was the time, a new video format called DVD has released with the potential to replace the heavy VHS Cassettes. Along with the dot com boom going on in ‘97, their idea was about to start something E-Commerce related, After rejecting a lot of ideas, they finally agreed to start DVD-by-mail rental service. That was the start of a company which later goes on to redefine the media industry and eventually changed the way we watch cinema.
Curious Much → Difference between DVD and VHS
The Business Model
1998 - 2006 : VHS to DVD, Per Sale to Subscription Model
Value migrates from one pocket of industry to another at various times; Recognize the trend early, make the right moves and all bets will be in your favor. Movies were used to being carried on VHS Cassettes. VHS Cassettes were heavy, analog tapes that can’t be rewind or forward. DVDs were new, small, digital, interactive and everything that people could’ve hoped for. Netflix was one of the first adapter of DVDs which provided early mover advantage and help them reach the Million $ revenue mark in 2 years since the start.
Changing Strategies and trying new things has always been a pivotal move in Netflix’s journey. Since DVDs were so new to the market, they get a fair share by selling the DVDs rather than renting. During ‘99, they completely put their focus towards rental and stopped selling considering the fact that DVDs market will eventually be overflown in supply once the competition will enter and it doesn’t offer much competitive advantage considering the cost it takes to deliver. They were one of the first DVD rentals, who has a website which is instrumental in DVDs getting delivered to the mailbox in just a few clicks.
Another pivotal move in the story comes when Netflix came up with the subscription model plan in late ‘99. Subscription gave them the advantage of sticky customers with ability to provide customer friendly pricing plans and no late fees (unlike their competitor). The sound and innovative strategy help them rapid growth of subscribers and become a challenging rival to blockbuster. Blockbuster also tried to join the bandwagon of online delivery and all access membership which allows users with larger database. In-fact, Blockbuster did a commendable job of playing catch-up. However, some unwise decisions and desperate moves led to decline of blockbuster and Netflix has been able to maintain the leadership with it’s superior tech, distribution and recommendation algorithms and it had a long head-start.
If you’re more interested in the story of war between Blockbuster and Netflix this podcast can be a treat → Business Wars Podcast-Netflix and Blockbuster
2007 - 2011 : DVD Renting and Cable TV to Streaming
This period has been “make it or die” for Netflix. As the internet penetration was getting increased, it became clear to Netflix that future will be streaming through internet. Competition has been changed from DVD rentals, blockbuster to Linear Cable TV and Pay TV like HBO.
“My greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something — like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly”
-Reed Hastings, Netflix’s co-founder and CEO.
Business has been shifted primarily to getting license of content from original media houses and providing them at one streaming platform for a subscription fee. In this period, Netflix kept DVD and Streaming under the same subscription providing enhanced value for money to capture subscribers across US. It was a win-win model for media houses and streaming companies because of new revenue stream for media house and streaming hasn’t been considered as a threat to Linear TV and traditional media. However with each passing year, threat became too visible to ignore, Looking at the lucrative business prospects of streaming and people’s interest towards streaming content, media house tend to incline towards starting their own streaming portal rather than licensing it to other streamers. This led to media houses taking out their content from Streamers like Netflix and setting up their own streaming app. Additionally, Content Cost started to grow larger as the media houses (Content providers) started charging higher prices for content, which lead to another shift in strategy : Producing own content.
2012 - Current : Local to Global Scale, Licensing to Producing Content
Considering the long term view in perspective, Netflix has put focus on producing content along with licensing to control the cost and with the view that once intensity of competition increases further, owning IP (content) will be the only road to survival. Netflix has become successful and the dominant player with 222M subscribers globally.
Let’s put a timeline to the new competition in streaming world. Big Old Media houses like Warner Bros, Disney are joining the game with their large content database while Tech Companies focusing on content acquisition mixing their tech capabilities to operate efficiently and providing new value propositions to existing services.
Currently, again Netflix is facing new competition with the growing list of streamers each year. Before we discuss strategies by major competitors, let’s reflect on how far we’ve already come in last decade. Renting DVDs to not even having Disk drives in our laptops. Streaming has became default option for watching content.
The Strategy : What made Netflix Successful ?
“Strategy is an unusual beast. Most of my time and that of everyone else at Netflix must be spent achieving superb execution. Fail at this, and you will surely stumble. Sadly, though, such execution alone will not ensure success. If you don’t get your strategy right, you are at risk.”
-Reed Hastings
Netflix has changed the way we watch TV. If there’s one thing that made them widely successful is being customer centric. Management has never hesitant to pivot to a new better strategy and taking bold moves to make customers happy.
Superior Technology Built
Having technological capabilities gave Netflix a edge over their traditional media competitors since the start. Easy to use Interface and better recommendations help built trust and customer stickiness.
Data Analytics
One advantage of getting a longer head-start is that Netflix has a ton of data points of its users which help them provide better services to customer by showing recommendations based on the likings of user and also helps Netflix in getting insights to find better content for the suitability of it’s audience; hence creating a flywheel which gives them competitive advantage.
Customer Centricity
Netflix was never in favor of ads on platform to lower the quality of user experience. In 90s, Netflix has removed the concept of late fees for customers to give them better experience. Then, when they decided to roll out the first owned produced series “House Of Cards”, they put out all episode in one go for users to binge watch the show, which might be debatable on phycological level, but sure gave a boost of dopamine to be able to binge watch the full season.
The Competition
Above chart from Neilson Report of Mar-22 represents the share of minutes spend on different channels and streamers. Cord Cutting is the trend which is expanding worldwide where more and more people are moving from Cable TV to Streaming. With 1000+ Million TV subscribers worldwide and ~800 Million broadband internet subscribers, there is large headroom to grow for streaming companies, which allows several companies to focus more and more on content buying to capture this market.
HBO
Netflix management has once said “we want to become HBO before HBO become us”. HBO has always been a trend setter in media industry. They were the first channel to start original programming without ads. HBO is a premium Pay-TV channel in US. They also started online service called HBO Now and HBO GO, but they come with additional cost of Pay-TV, which doesn’t gave them much advantage over streaming apps like Netflix. HBO has finally launched it’s standalone streaming platform HBO Max in 2020 and they’re trying to make it global eventually. They are using the same strategy of original premium content like their channel. HBO currently has 76.8m global subscribers. HBO is part of Warner Media who also has a recent merger with Discovery, which allow them access to streaming content of Discovery+ along with ton of other popular movies and franchises.
Disney+
Disney is one of the giant in media industry. To get a sense of content they own, Popular of them includes - ESPN, Pixar Movies, Marvel, Star Wars Franchise, Fox Media, X-Men and Fantastic Four Characters, National Geographic Channel, 60% of Hulu. Many of the acquisitions has been done recently by Disney and they are geared up for the streaming war. Launched in 2019, Disney + has reached global scale with 138m subscribers. Disney’s collaboration with Hotstar has paid off handsomely to capture a lot of Indian Subscribers through their Cricket Sports Rights which contributes to 50m subscribers out of total.
Amazon Prime
Even though Amazon started video service in 2006 as Amazon Unbox, it grew it’s popularity in 2016 when Amazon split Prime Video from Amazon Prime in the US for $8.99 per month. Amazon Prime Video expanded worldwide (excl. China, Cuba, Iran, North Korea, Russia and Syria). Except selected countries (Belgium, Brazil, Canada, France, India, Ireland, Italy, Poland, and Spain) where it is a part of Amazon’s Prime Subscription, Prime Video is offered as a standalone service.
Prime Video additionally offers a content add-on service in the form of channels called Prime Video Channels, which allow users to subscribe to additional video subscription services from other content providers within Prime Video.
Apple
Other than amazon, Apple is the other tech giant looking to spread its reach into streaming industry with the launch of Apple TV+ in 2019. The streaming service is mainly accessible through Apple's website and through the Apple TV app. It is also a part of Apple One subscription package (which includes Apple Music, Apple TV+, Arcade, iCloud, News+, Fitness+). Currently the Streaming service has around 40m Subscribers. Given the brand moat and global reach Apple has, it will be interesting to see further developments and strategy apple will use to capture the market share.
Other Streaming Services (Paramount+, Peacock, NBC+, Voot, ErosNow, etc.)
Many other regional and global media houses has started their own streaming company. It is yet to see if any of these can reach the global scale that Netflix / Disney has reached. However, with smaller content library and non-technical background, it will be hard for these service to flourish (or survive) for long term.
Lastly, since the target market is not people but the free time we have, other things that capture our free time becomes a competition for Streamers which includes Social Media, You-tube, Games, Sleep (and even this blog - Yup! we’re competing with Netflix)
Way Forward
The thing about life is just about when we think we figured it all out, it changes.
It will be a futile activity to pass judgement in terms of winners and losers of this industry. Things Change, Situations Change, Business Change. I believe the wise thing will be to observe carefully, which implies having understanding of what can impact or benefit any business.
The importance of strategy grows multifold when you operate in the consumer tech industry. Not pivoting at the right time or taking desperate moves has been a major contributor for the decline of numerous companies all across the centuries. Taking risk and bold decision has been one of the factor in Netflix’s success till yet.
Additional Source of Revenue
One of the strategy is to build another revenue stream to take advantage of global scale. Additional revenue streams could be Ads, Gaming, Merchandising, etc.
For e.g. Around ~21% of Disney’s D2C revenues comes for Ads, which is ~30% of the subscription revenue they earn.
Netflix has already partnered with Microsoft as a tech partner for their Ad-supported tier which is expected to roll-out by FY23. This could help them gain additional subscribers at cheaper rates with additional revenue from advertisements. The real impact and strategy on how they’ll implement this is yet to be seen.
Merchandising is another interesting area that Netflix could look to explore in future in a better way. Shows and Franchise like Marvel, Game of Thrones, DC, Star Wars has created a strong merchandising opportunities for their owners.
Adding Value to the membership
Other than adding additional revenue stream, the most important thing for a streaming company is to get the subscribers to stay (reduce the churn) and make the new subscribers the offer they cannot refuse.
Content : One obvious thing is to continue adding value to add relevant high quality content which will keep the subscribers busy.
Games : Another interesting development is Games that Netflix has developed based on famous series like Stranger Things, Money Heist, etc. which could keep the users hooked. Youtube Link - Purpose of games is customer retention. No ads, No in-app purchase and great quality games is a really great business proposition.
Sports : Netflix has always stayed away from sports, and for good reasons. Getting sports licenses are a really expensive affair and generally streamers will make losses if the business model is not based on advertisement. However, it massively increases the user base for a short span of time, which could lead to a certain amount of users to become permanent subscribers. Disney has been able to gain majority of market share in India because of the Cricket Rights that Hotstar have.
Streaming Shows : Netflix has also been clear on strategy on not showing user generated content on it’s platform. That being said, daily / weekly shows of famous quality youtubers / artists / content creators could be an interesting opportunity to explore in future. Similar to sports, this can also be supported by ad-tier they’re currently working upon.
Consolidation
Media Industry has seen a lot of consolidation over the years across the globe. We could expect another several rounds of Mergers and Acquisitions in this space which will improve the economics of business over time. In words of Tech and Media Analyst Rich Greenfield “It’s much easy for tech company to get into content business than for content company to get into tech business”.
If you’ve reached this far, Thank you for reading. In the next edition of streamers, we’ll discuss the quantitative aspect of Netflix Business model, the key metrics to track in this industry, data sheets which will help you track this industry and templates to do valuation modelling (DCF and P2P).
Until then,
Stay curious, Keep healthy !
References
https://bgr.com/business/netflix-co-founder-marc-randolph-on-lessons-from-the-streamers-origin-story/
https://www.britannica.com/art/motion-picture/Qualities-of-the-film-image
Data : Annual Reports