Netflix is Streaming!
Netflix clearly disrupted the DVD market, but their greatest disruption is happening today with TV.
During the last several decades, the movie industry has evolved drastically. Through the 90’s VHSs dominated the home movie industry. Around 2000, DVDs started gaining market share, reaching approximately 90% by the end of 2004 [1]. DVD sales, however, began declining from a peak of $21.6 billion in 2006 after the birth of digital streaming services. In 2015, DVD sales declined to approximately $9 billion while digital streaming service sales increased to approximately $8.9 billion [2]. This trend towards digital media can be seen most recently in television, where the percent of consumers “cutting the cord” has increased from 3.3% in 2014 to 12.5% in 2016 [3]. This market disruption will likely continue as more and more consumers tend towards digital streaming services, and Netflix is much to thanks for this shift.
Netflix was founded in 1997 as a subscription model to deliver movies through the mail to member’s homes. Members paid a flat monthly fee, and could order DVDs through the mail without due dates, late fees, or shipping and handling fees. Previously, consumers had to travel to a grocery store, blockbuster, or other physical location to rent a movie. In contrast, Netflix offered a more convenient model that saved consumers both time and late fees. As such, Netflix helped usher in the age of the DVD in the early 2000s.
By 2007, Netflix had accumulated 7.48 million paying consumers. Netflix did not stop there – they continued to innovate and improve the customer experience. In 2007, Netflix again innovated how consumers viewed movies and started offering an online streaming option. Consumers continued to pay a one-month subscription fee, but could access movies and shows online, streaming them through the web. This change in their business model again made viewing more convenient for consumers, and offered much more content. Consumers no longer had to wait to receive movies in the mail, but could view them instantaneously online. By the end of 2015, Netflix had reached 70 million paying customers. By improving how consumers viewed movies, Netflix disrupted the entire market. Corporations that did not evolve to provide content more efficiently quickly lost market share. Blockbuster, for example, had a market cap of approximately $5 billion in 2002. By 2010, Blockbuster had filed for bankruptcy. Many similar companies lost market share and eventually filed for bankruptcy because they were not able to adapt fast enough to Netflix’s disruptive innovation.
Netflix’s latest innovation is the content it provides. Netflix has shifted more from offering movies to offering television shows. The percent of Netflix consumers watching movies on Netflix has declined from 53% in 2011 to 47% in 2012, while the percent of Netflix consumers watching TV shows has increased from 11% in 2011 and 19% in 2012 [4]. Netflix is offering original TV content now as well. Netflix offered 16 new series in 2015, and has new 31 series planned for 2016. The success of their model has created many followers also offering TV streaming services, such as Hulu and Amazon Prime. This shift to TV streaming has led to a decline in traditional tv viewership. Americans aged 18-24 spent on average 26 hrs and 28 minutes watching traditional television at the beginning of 2011. By the end of 2016, this declined to 16 hrs and 47 minutes, a drop of almost 50% [5]. Another study attributed 50% of the decline in traditional tv viewership directly to Netflix offering tv streaming options [6]. Not only have people started watching tv less, but more and more people have stopped purchasing cable all together. The percent of consumers “cutting the cord” has increased from 3.3% in 2014 to 12.5% in 2016. Netflix is now disrupting a whole new group of corporations that have provided tv content for generations, such as Showtime, HBO, CNN, TBS, TNT, etc. These corporations are now scrambling to keep up with Netflix amidst a suddenly morphing industry. This is most evident by recent shifts in the operating and business models of these companies. Cable companies have started to offer online streaming options, for example HBO started offering a standalone on-line streaming option called HBO Now in April 2015. We are also seeing a lot of consolidation in this industry, as corporations try to secure a place for themselves in this new marketplace. For example, AT&T acquired Directv in July 2015 for $49 billion, and agreed to buy Time Warner (which includes HBO) for $85.4 billion. This giant industry will continue to undergo transformation in the coming years, largely due to challenges Netflix has been able to solve. [749]
[1] Coplan, Judson. “Diagnosing the DVD Disappointment: A Life Cycle View.” The Leonard N. Stern School of Business (n.d.): n. pag. Web. 3 Apr. 2006.
[2] “SVOD Extends Dominance of Digital Video Spending.” NScreenMedia. N.p., 07 Jan. 2015. Web. 15 Nov. 2016.
[3] “Cable TV: Cord Cutting Statistics – 2016.” NoCable.org. N.p., n.d. Web. 15 Nov. 2016.
[4] “Netflix Subscribers Shifting from Movies to TV Shows.” Digital Media Wire. N.p., 13 July 2012. Web. 16 Nov. 2016.
[5] “Chart/table From: The State of Traditional TV: Q2 2016 Update.” Chart/table From: The State of Traditional TV: Q2 2016 Update. N.p., n.d. Web. 16 Nov. 2016.
[6] Spangler, Todd. “Netflix Caused 50% of U.S. TV Viewing Drop in 2015 (Study).” Variety. N.p., 03 Mar. 2016. Web. 16 Nov. 2016.
Yes, I definitely miss the days of Blockbuster and traditional DVD’s… but it seems like those days are over for good. As a millennial, I also do not have a traditional TV subscription and suspect that the days of cable TV are numbered. What is so interesting is that Netflix started off just doing mail-order DVD’s and soon established an entire streaming market. I think Netflix has been more popular than Hulu or Amazon Prime, so I would imagine that the Netflix brand is very strong and here to stay. However, does this mean that eventually, the cost of Netflix and Netflix equivalents will go up? I would argue that if streaming becomes so popular, people will become dependent on subscription streaming as a necessity, and subsequently you will see different “Netflix tiers” arise offered at different price points. In addition, just as we have seen the cost of having internet in one’s home rise steadily over the past few years, Netflix and other streaming services may start to price-out lower income people. It will be interesting to see what Netflix’s next move is!
Quite an interesting post, Andrew. Netflix has certainly shaken up the cable industry and prompted content creators, such as HBO, to break with cable companies and offer direct to consumer streaming services. I am curious to hear what you think of more traditional content creators like Disney and NBC Universal offering DTC streaming services. HBO was already a niche offering as an upsell to basic cable subscriptions, whereas traditional providers like Disney need to think about their wide array of networks, like ESPN and Disney Channel, remaining whole in an environment of steep subscriber declines. Do these networks have enough brand power to exist as standalone services that consumers would view as “need-to-have?” With Netflix and Hulu aggregating content across tv networks and neglecting to brand them with their network affiliation, do consumers even associate their favorite shows with specific networks and therefore feel the need to purchase an ABC DTC service?
I also wonder about Netflix’s staying power now that these giant content creators see the negative effect the streaming service is having on the cable industry, and thus their subscriber fees and advertising revenue. In the beginning, digital licensing was seen as an incremental source of downstream revenue beyond syndication. The idea of Netflix as a threat and an alternative to cable was even conceived. Now that content creators see the effects of these previous decisions, will they continue to license their best content to Netflix? Will Netflix’s original shows prove important enough for consumers to continue paying for the service if their content library diminishes?