Netflix: Leveraging Data to Win
Netflix is one of the innovators of offering entertainment content using video streaming technology in exchange for a subscription fee, which is a highly scalable solution. Over the years their revenue, subscriptions and stock price have been soaring for as long as we remember. It’s worth to explore how Netflix became an phenomenon and what is behind its success.
Netflix has spun data into its blueprint, and which has resulted in outperformance compared to its competition. And the secret sauce of what has made Netflix a purpose brand is its sophisticated customer data collection and data analysis capabilities which has led Netflix to create its own ecosystem in a traditionally fragmented market of entertainment. Their strategy is to licenses content, distribute that content over their own platform, that content gets consumed, such that it can access and use consumer data to drive success.
The ecosystem that Netflix has created is analogous to the network effects aspired by the platform solutions, the more customer you have the more data you gather and the more data you analyze, then AI and machine learning tools, allows you to improve your product with more and more input from the data and eventually that sidelines your competitors in the same way that businesses do with substantial network effects.
Netflix uses this data to create a recommendation algorithm that users trust and also it helps tremendously to predict demand by providing more personalized offering to the customers based on their past choices. Netflix often cuts the deals with the content providers based on the data model that informs a combination of talent or cast and storyline and that influences the highest probability of success.
But one key difference between Netflix and other prominent OTT provides is that Netflix licenses on the basis of the organic viewing behavior compared to the standard pilot testing and the reactionary hypothesis of success or failure driven from the pilot, which is often adopted by other players in the industry. Another thing Netflix does pretty well is to consider information like ratings and consumers’ viewing history to establish a deep understanding across various viewer profiles or personas, and make sure that the data reaches to the right customer at the right time through its recommendation algorithm. Whereas most of the OTT providers analyze the data after releasing a show. This pattern distinguishes successfully the data-driven decision-making from unsuccessful decision-making using data.
Although data has been at the core to achieve this tremendous success but there are other factors that are critical for Netflix like industry expertise which helps predict what consumers want to watch, has been critical for capturing organic consumer behavior. Additionally, the organization’s culture of championing analytics at all levels and instilling a companywide way of working of measuring, testing, and evaluating quantitative evidence; which requires unwavering commitment from the top management.
I have looked the value creation from the demand and supply side.
Demand side – Netflix has indeed created enormous value for customers by offering personalized and customized content offering at the convenience of home or basically anywhere in the world, enabling binge watching which has immensely increased customer’s willingness to pay for accessing Netflix’s widest catalogue and introduction of new features like offline downloads for mobile. Netflix also creates value by racing with larger macro trends in the entertainment industry, specifically cord cutting. Consumers who are not satisfied with the high price of traditional cable bundles, are willing to choose a cheaper alternative like Netflix. Lastly, Netflix has opened a pandora box by introducing the regional and international content to the global audience, one of the leading examples is the prominence of the Korean series in the United States, which let’s not forget is also partly due to the trending K-pop culture.
Supply side – It has dramatically transformed the Hollywood landscape; it took down the barriers to bring any show to audience without any favoritism or biasness or network of highly influential individuals that long existed. Over the years we have seen, the same production house and similar cast bring hits one after the other, and many times the new talent has been overlooked without the right network, right advice or not being at the right place, the right time. But having Netflix has given the opportunity to many such inexperience but talented production houses with widely diverse and fresh talent to have a platform to reach to millions of customers.
One of the significant challenges faced by Netflix is stiff competition from other OTT platforms. Another challenge is because of the audience’s appetite for new shows and the speed at which we binge them, Netflix has to spend huge amount to produce and acquire content which drastically impacts Netflix’s financial results, and this could mean eventually passing this cost to the customers and charging them higher than the other OTT providers, which can lead to higher churn rates. This problem of stickiness is also interrelated to the growing content of other OTT providers which has led to multihoming as more content is available at cheaper price.
There is this looming question that is the future for Netflix bright? Especially in this complex & challenging environment. But to the least there are some interesting opportunities for Netflix for future that Netflix has to take a bet on, keeping its core of competing with data strong, – 1) Expand Global Customer Base, Netflix can offer a lower-priced option to retain subscribers in international markets, for example – Netflix has been testing a cheaper mobile-only plan in India that costs only $3/month. It can expand this lower-priced option globally to compete more effectively against cheaper alternatives like Disney+, Apple TV, Peacock etc. 2) The ever-expanding and affordability of VR and 4K technology gives an opportunity to Netflix to create more technology competent content by doing partnerships with the VR companies like it has done in the past with the consumer electronics companies to pre-installed Netflix app in the televisions.
There are many opportunities for Netflix as the world and the customer needs are evolving, but what will be the next bet for Netflix using its core – Data – to compete will be worth looking into.
Really interesting post, Isha! Your submission made me reflect on parallels in other industries, where deeply-entrenched traditions or ways of working (often based on bias) can quickly become dismantled through the use of big data. I wonder if the fashion, art or other creative industries have experienced (or will experience) something similar? Is this unique to digitally-consumed products, or can we use data similarly for physical ones?
This was super interesting, Isha! Following Netflix’s first quarter of subscriber loss earlier this year and the company’s ballooning original content budget, I wonder what challenges Netflix’s big data-centric strategy poses in the long run. As you noted, Netflix uses data to make choices about content such as casting or storylines. But this strategy has also generated concerns about shows written by algorithims. Confronting players like HBO and Disney, I wonder whether Netflix will be able to leverage the huge amounts of data it has gathered about customers in ways that help augment, rather than dictate, the creative instincts that seem so important in this industry.
Netflix definitely rocks when it comes to data!
I also believe the next steps for Netflix are VR and gaming. Netflix knows how many users love sci-fi and would pay extra for a VR experience Moreover, gaming production is similar to film production: create something and hope it’s a home run. Netflix revolutionized film production by using data to create sure-things. Can Netflix use movie data to create sure-thing games? Probably yes. Historically, movie-based games have been more successful than independent stories as they exploit existent customer bases.