Netflix’s uncertain future
Netflix and the content trap
It is not common for digital platforms to enter content production field. Netflix made the bet, threatening traditional TV networks and film studios, but it is a long way to say that it was the right decision. It may happen that Netflix will find itself in a perfect content trap.
Netflix took off years ago as a DVD rental company. It had been a profitable business but in 2007 Netflix’s CEO Reed Hastings, recognizing new digital trends, decided to build a video streaming service. It quickly turned out to be a success. Netflix has been quickly growing customer base. Searching for content seduced TV networks and bought ‘streaming rights’ for relatively small amount of money. Content providers were impressed with exponential customer growth numbers but in the beginning did not recognize and undervalued Netflix’s strategy. The networks treated deals with Netflix mostly as an additional source of money not thinking much about Netflix’s endgame.
Netflix’s goal is to be the world’s first streaming video platform. But this idea goes across interests of TV networks. Netflix doesn’t care about viewing ratings and is also not interested in the TV bundling protection. The more people ‘cut the cord’, the better for Netflix. The only thing it cares about is subscriber growth. This is the most important thing that matters to Netflix and to any other digital platform. What is also important, Netflix’s CEO is not a TV producer, nor an old-school media executive. He studied computer science at Stanford, at the heart of Silicon Valley, and his company is a tech first company. The platform is based on a solid users’ data foundation. The viewers’ recommendations system is shaped to embrace network effects and connections among streaming videos. Majority of the Netflix’s content is watched through suggestions delivered by the recommendation system.
The relation between platforms and content producers is often called ‘freenemy’. On one side platforms may serve businesses to expand exponentially their customer base but on the flipside platforms’ end game is usually total. They want to take over businesses which seem profitable enough. Amazon starts competing with its best sellers bypassing them and offering the same products with prices below minimal advertising price. Facebook provides platform and tools for media companies allowing them quickly growing user base but takes away majority of advertising money leaving pennies for content creators.
The same rule applies to Netflix. The TV networks finally realized that they cannot sell ‘streaming rights’ for pennies because that way they feed the monster which some day may eat them. They try to find their own way into digital age what is also difficult when old TV culture prevails. Netflix can talk to its users individually because has mastered the art of data analyzing and personalization. This kind of thinking is not common for companies with broadcasting or cable roots.
Netflix decided to take significant risk and produce its own content. In 2013 it offered for streaming ‘House of Cards’ which quickly turned out to be a huge success and sparked also the phenomena of ‘binge watching’. But this step may turn against the platform. Content creation is very expensive and Netflix is a subscription based model. Producing more content demands aggressive fight for new users and subscribers. Taking decision to be content producer Netflix has entered a fast pace path where it is easy to get breathless. Some critics underline that Netflix makes very little profit in comparison to actual revenues.
Netflix subscriber base grows quickly but in non-English speaking markets it may face a problem. For example in Poland Netlix’s offer is pretty poor, probably due to licensing and legal rights, but the price is the same as in the US. Netflix doesn’t offer local content but only its universal content with Polish subtitles. Will it be enough in the future to get attention of its users and built engagement? How to produce original local content for non-English speaking markets? It would be pricey and the platform may find itself in a perfect content trap; or may charge more its customers in order to pay for growing content creation operations. Maybe it will get back to professional content producers, TV networks, but offering them more money. On the flipside the future of TV is on the Internet – whether it will be a Netflix type platform, or a traditional TV platform transformed some way into digital; or a mix of the two.
- ‘Can Netflix survive in the world it created’, The New York Times, June 15, 2016
- ‘The Content Trap’, Bharat Anand, 2016
- ‘Televison Is The New Television’, Michael Wolff, 2015
- ‘Facebook is eating the world’, Columbia Journalism Review, March 7, 2016
Student comments on Netflix’s uncertain future
Thank you Robert, that’s a good one. Netflix executives showed a good understanding of industry trends over time. The trend today is further convergence of media production with telecoms. Most recent acquisitions of Time Warner Cable and DirecTV by AT&T, AOL and AwesomenessTV by Verizon and such are the best examples. Telecoms are becoming more and more providers of the content to the users, thus vertically integrating content production adds more value to their value chain.
In this light Netflix shift towards content production looks absolutely reasonable. With its multiple distribution channels and content production Netflix will be a valuable asset with a time.
Dmitry, thank you for the comment! You are right that telecoms are becoming content providers. The users’ data they have will allow them to target users more precisely. And it is still about cable. People cut the TV cord but on the flipside they still need the Internet cord to watch video on demand. When it comes to Netflix, content production has always been expensive and they will have to figure out where to find additional money to produce high quality content for different audiences in different countries. It is going to be pricey and it is a challenge.