Watching what I want, when I want
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Netflix radically changed the way people watch video content. Using the life per month concept, it became bigger than Hollywood.
»Why is there nothing good on TV?« is one of the most commonly asked questions by those who allow their television providers to be in charge of evening entertainment. The cry of »Commercials again!« is a close second. But for many, these frustrations are a thing of the past, ever since several providers of streaming services entered the market, offering their subscribers films, documentaries, series, and sitcoms, whenever and wherever they please.
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Possibly the best example of this business model is Netflix, which has become synonymous with streaming in the USA for a number of years. It was the first to pay serious attention to what viewers wanted, and hit a bullseye. Today, many can’t even imagine having to wait a week to watch the next episode of their favourite show. Binge-watching multiple episodes in a row has conquered the world. Americans even came up with the phrase Netflix and chill, which means watching a series on a date where nobody wants anything to end after one episode.
Netflix’s business model is based on the users and their willingness to think outside the box; to live life per month. In exchange for 8, 10, or 12 euros a month – depending on picture quality and number of screens or devices that can simultaneously play content – the users have the option to watch an ever-increasing selection of video content, including the most popular series, such as House of Cards, Narcos, or Stranger Things, which all received the most prestigious awards in the industry.
Since November 2018, Netflix has been testing a mobile version of its service. In Malaysia, where it first entered the market, it costs users 4 dollars a month, which is half the price of the basic package.
But subscribers conditioned in this way become spoiled quickly, and many think the video library is not extensive enough. The question is how sustainable this business model will prove to be, long-term.
Netflix is spending more each year on the production of original content. In 2018, it produced 700 series and 80 films, starring some of the biggest names in Hollywood. It even asked the former president Barack Obama and his wife Michelle to join the ranks of its documentary producers.
Through the course of the year, it intended to spend at least 8 billion dollars on production alone. If we add marketing costs and getting new subscribers to the mix, Netflix is projected to generate three to four billion dollars of negative cash flow in 2018, which is how much the costs will exceed the revenues created by subscription fees.
Photo: Netflix
But investors don’t appear to be concerned. Despite the growing costs of the »arms race« in video content production, between Netflix, Amazon, Apple, and Disney (which plans to introduce their own streaming platform in 2019, and has already prevented Netflix from using some of the most profitable franchises, such as Star Wars and Marvel), the investors are most interested in growth.
And here is where Netflix shines; on the wings of the growing number of subscribers, the revenues in 2017 increased by 32 percent, to 11.7 billion dollars. The value of Netflix’s shares grew more than tenfold in five years. From autumn 2017 to autumn 2018, it increased by over 50 percent.
Netflix's goal for 2018 was to spend a dizzying 8 billion dollars on the creation of original content, using it to produce 700 series and 80 films.
In May 2018, the American streaming giant outgrew Hollywood for the first time. With a market capitalisation of over 150 billion dollars, it became the most valuable company in the entertainment industry, bigger than even the legendary Disney. The peak came at the end of June, when its market capitalisation, with shares valued at over 411 dollars, reached almost 180 billion dollars, before it started dwindling due to high costs.
Netflix has proven in the past that it is capable of overcoming financially sturdier competitors. When first starting out in 1997, it defeated the then biggest name in the video content rental market – Blockbuster.
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The balance of power was clear. Netflix, following the principles of the subscription economy, had an intriguing business model, but for most, it seemed like merely another niche story, trying to sell to American couch potatoes who could rent an unlimited amount of films on DVD for a monthly fee of 19.95 dollars, with no due dates and no late fees.
Back then, nobody was taking Netflix seriously. In 2000, Reed Hastings, the co-founder and member of the Management Board, offered John Antioc, the head of Blockbuster, 50 million dollars for the possibility of a strategic partnership. He was laughed out of the room. At the time, Netflix had 300,000 monthly subscribers.
Netflix offers its subscribers a selection of video content for 8, 10, or 12 euros a month, depending on picture quality and number of screens or devices that can simultaneously play their favourite films and series.
Blockbuster still didn’t take it seriously in 2007, when online data transmission speed allowed Netflix to become a portal for sharing streaming video content. Four years later, Blockbuster went bust, and Netflix today has nearly 130 million monthly subscribers across the globe.
»Playing« With its Customers
For Netflix, 2011 was nearly fatal. That is when it made the strategic decision that subscribers will have to pay separately for streaming video content online and for renting DVDs by post, which has been Netflix's basic business model since 1997. Instead of 10 dollars, the new services together amounted to almost 16.
In the third quarter of 2011, this lost Netflix a million subscribers, but the investors were more hurt by the interrupted trend of continuous growth in subscriber numbers. The value of Netflix's shares dropped from its highest at 299 dollars to a mere 130 dollars. The company’s strategic error clearly showed how important customer care really is. The lesson was not forgotten.