By Noah Al-Hachich (WU - Vienna University of Economics and Business), Charlie Solnik (California Polytechnic University), Harrison Fries (New York University Shanghai), and Dylan Litt (New York University Stern School of Business)
Netflix is a leading streaming entertainment service with 193 million paid memberships across 190 countries. They offer a variety of TV series, documentaries, and feature films in a multitude of different genres and languages. The subscription fee the company charges enables them to offer all of this content ad-free and funds their own original productions, which accompany the non-exclusive titles on the platform.
This August, Netflix is releasing new seasons for some of their more well-established shows. Lucifer will be getting its fifth season, The Seven Deadly Sins it's fourth, and Selling Sunset its third along with a couple of other shows getting their second seasons. There is no material decline in product releases due to COVID-19 as Netflix has a solid release roster for the foreseeable future. However, that is subject to change as the production of highly anticipated Netflix originals such as Stranger Things and Succession has been delayed significantly. Recent reopenings seem to bode well as Netflix is able to continue production in some foreign countries such as Korea, Japan, and Iceland.
Netflix’s revenue model centers around the subscription fees they charge customers. They have three different streaming subscription plans: basic, standard, and premium.
The prices for the different subscriptions range between $9 to $16, with each successive plan offering more users to stream simultaneously on an account and higher video quality. In addition to the streaming subscriptions, Netflix offers DVD rental plans. The standard DVD plan allows the rental of one DVD at a time and the premier plan allows for two. These are priced at $8 and $12 respectively.
In our conversation with Alan Gould, a leading services industry analyst from Loop Capital, he told us that Netflix CEO Reed Hastings has historically been against the practice of acquisitions. Netflix has historically adhered to a model focused on organic growth. That being said, the company made a small exception this May when Netflix acquired the Egyptian Theatre in Hollywood, CA. The theater is an iconic Hollywood landmark, having been noted as the location of the first-ever Hollywood premiere. Thus, it seems fitting that Netflix makes its “Hollywood debut” with the acquisition of this theater.
In the past, other movie chains such as AMC and Regal had been reluctant to play films from the streaming service, since Netflix wouldn’t adhere to the same exclusive windows that other studios abide by. If Netflix is unable to display their films in theaters, the films are barred from participating in many major film awards shows such as the Oscars. Previously, the theatrical exclusivity periods were 90 days, which Netflix considered too long to show movies exclusively in theaters before releasing them on their streaming platform. However, AMC and Universal recently agreed to shorten that period to 17 days, recognizing a trend towards SVOD movie consumption. While the shortening of this period was previously material to Netflix’s movie releases, with their acquisition of the Egyptian Theatre, Netflix will be able to bypass the theater exclusivity period altogether, by premiering their films in their own theatre. This will also allow them to participate in major film awards shows that serve as a marketing opportunity, lending their brand and productions credibility.
In their second-quarter earnings release, Netflix appointed Ted Sarandos as a new co-CEO alongside founder and co-founder, Reed Hastings. With the appointment of Ted Sarandos, many are saying the promotion is simply a formality, as Sarandos has played an instrumental role in running Netflix for years. Others are saying the appointment could be laying the foundation for Hastings' eventual departure from the company.
The co-CEO model is a fairly atypical management structure that a few other notable companies such as SAP, Salesforce, and SoftBank have experimented with. The idea behind having two CEOs is the potential for them to split duties and specialize, working with what they know best. Putting two people into the role of CEO is also supposed to lessen the burden that would normally fall upon a single CEO, allowing them to devote more time to any given issue or project. Historically, while some of the benefits of the co-CEO model have been true, the fatal flaw in the model is inherent in its structure. Having two CEOs means having two bosses, which in the past, has meant mixed messages, incongruent policies, and split management decisions. Netflix’s co-CEO structure seems to differ from the other failed attempts considering Ted Sarandos has functionally been operating as a CEO and the appointment is simply making his title official.
While Netflix produces some of its own content, the majority of the titles available on Netflix are sourced through licensing deals with other production companies. Notable titles such as Friends and The Office are being withdrawn from Netflix’s title offerings as other studios and production companies pursue their own streaming services. That being said, here are a few of Netflix’s key suppliers:
ABC Studio: The network owned by Disney has used all of its licenses and talents to good use over the years. While a large number of ABC titles have been moved from Netflix to Disney’s streaming service, Disney+, a few hit series have remained such as Grey’s Anatomy and How to Get Away With Murder. It remains to be seen whether or not these titles will remain on Netflix.
Comcast: Like many other key content suppliers for Netflix, Comcast has been pursuing their own streaming platform via Xfinity Stream. While many of Netflix’s most popular shows were made by NBCUniversal, most of them are in the process of being migrated to a variety of different streaming services. Shows like The Office and Friends which were integral in Netflix’s rise to prominence are either in the process of being moved or already have moved. Despite this, Comcast still provides Netflix with a plethora of titles, however, it is very likely that these shows will only be on Netflix for a short time before they too are migrated.
Netflix belongs solidly in the subscription video on demand industry (SVOD), but when describing the company’s competition CEO Reed Hastings has said “but think about if you didn’t watch Netflix last night: What did you do? There’s such a broad range of things that you did to relax and unwind, hang out, and connect–and we compete with all of that.” This comment from Hastings represents Netflix’s role as an entertainment outlet of last resort, when consumers have nothing else to do they turn to Netflix.
It was evident during the lockdowns this spring that Netflix is a pandemic and recession-resistant product, when other activities are eliminated people turn to staying inside and watching TV. This was a boon for Netflix, its SVOD competitors, and other at-home entertainment companies that produce content such as books and video games. With its wide variety of content, Netflix is likely to be the last SVOD subscription that consumers eliminate, meaning that if budgets are tight, its competitors will likely lose a greater proportion of their subscriber base.
Figure 1: Fragmentation & Industry Dynamics (Statista)
Due to an intense competition deemed “The Streaming Wars”, Netflix’s biggest competitors are all currently losing money in an effort to take market share. In 2019 the industry was largely controlled by the three early movers, Netflix, Amazon Prime Video, and Hulu made up 70% of SVOD usage. With the wave of new entrants in 2020, the industry will likely become significantly more fragmented and the incumbents’ market share will fall.
Netflix competes with entertainment services in terms of video offerings and consumer time/attention, but also with other content producers in producing or obtaining the best and largest amount of content for its platform.
We need to distinguish between internal and external competition. Internal competition is “genuine”, ordinary competitors who provide entertainment video services, including multichannel video programming distributors (“MVPDs”) and streaming entertainment providers (SVOD - subscription-video-on-demand). The three most important players besides Netflix are Amazon Prime Video, Hulu and Disney+.
Amazon Prime Video: As a part of Amazon Prime, Prime Video already has 150m+ subscribers, only slightly behind Netflix’s ca. 190m. In terms of price, it comes close to Netflix but is cheaper (9$ for regular users, 6.50$ for students). Amazon is so dangerous because almost everybody uses Amazon for e-commerce purchases and benefits from free shipping, which Prime offers. Prime Video is a perfect cross-selling opportunity - users want the free shipping anyway, and gladly take the video offering as well, making Netflix and other streaming services irrelevant for them. They get free shipping and Prime Video for $13, which is in the range of Netflix’s more expensive products.
Hulu: Owned by Walt Disney, Hulu has a differentiated business model compared to Netflix, as it also targets TV viewers and offers TV channels on their platform. While the direct competitor product comes at a quite cheaper price tag, 6$, compared to 9$ for Netflix. Hulu is a formidable competitor as it has a cheaper price for a similar basic offering, targeting price-sensitive customers. a potentially much broader customer group as it also targets TV fans. Hulu has 80,000+ series episodes and movies on their platform. It benefits from cross-product offerings because it has Walt Disney as shareholders, they offer bundle packages with Disney owned Disney+ and ESPN+. In terms of their original content offering, they do not produce as much quantity or quality as Netflix. Hulu offers many anime and animated series, targeting these non-conventional customer groups.
Disney+: Relatively new service; benefits enormously from the amount of original content (Star Wars, The Simpsons, Pixar, Marvel, Nat Geo, etc.) on its platform. It costs 7$ for Disney+ alone or 13$ with ESPN+ and Hulu. Disney+ has had tremendous growth and currently has between 50m and 60m subscribers globally. Walt Disney’s enormous brand power puts its streaming service in a very strong position.
Together with Netflix, these three brands make up a large part of the global SVOD market.
Additionally, there are several up-and-coming competitors that have the potential to seriously challenge Netflix in the medium to long term, but do not do so momentarily:
HBO Max: Has had a relatively good start in Mid 2020. They have a great original offering but this may not be enough. They do not really have a strong competitive edge or wide content library that would take away many customers from the big players.
AppleTV+: It’s Apple. They’re genius in cross-selling and creating demand for their products. So far, they are behind, but they have the resources for great programming and the resources to create something captivating that people want. Additionally, AppleTV works as an aggregator for all forms of streaming content from other providers through their Apple TV Channels feature, similar to Amazon Channels. Apple has partnered with many services such as HBO and CBS All Access, which hope to benefit from Apple’s large customer base as every new hardware purchase - over 250 million per year - comes with a free 1-year AppleTV+ subscription.
Peacock: Their competitive edge: The product is entirely free. People will give it a try and see how they like it. The premium offering appeals to some particular audiences, for example, they offer British Premier League games. Their business model could enable growth into lower-income sectors that can not afford a paid subscription. It is unclear how financially viable the model is long-term, but of course, Comcast has the money to afford losses.
YouTubeTV: The video giant YouTube has entered the race for market share with its premium YouTubeTV offering, aiming to replace Live TV. A major benefit is their unlimited cloud DVR recording, through which users have a similar experience than when using traditional SVOD platforms like Netflix and Disney+.
Also, there is an increasingly significant long tail of other, partly regional or niche services in the SVOD industry, consisting of the following players:
In conclusion, Netflix needs to keep in mind the immediate threat of Disney’s power through its ability to bundle major streaming products. The threat posed by Amazon is quite different. Its unlimited financial resources and strong cross-selling approach allow it to spend aggressively on content and make it a one-stop-shop for consumers . As of right now, smaller services such as AppleTV+ and HBO Max may become dangerous, but they don’t currently pose much of a threat.
Important Competitor Milestones
Amazon Prime Video: Launched in the US in 2006, acquired LoveFilm in 2011 to expand to EU countries, and expanded globally in 2016. In 2017 they expanded into Anime, Sports, and in 2018 they launched Heema, an Indian category. Thay have strengthened sports offerings with the acquisition of Premier League rights. Around 40 million subscribers had access to Prime in 2015, a number that rose quickly to 150m in 2020.
Hulu: Originally created as a JV between News Corp and NBC, in 2009 Walt Disney took a minority stake. Regular Hulu was launched in 2010 and they launched Hulu + TV in 2017. They started inhouse content production in 2014. Disney gained control of the company as they bought 21st Century Fox in 2017 and are yet to exercise an option to buy out Comcast to take over 100% of Hulu by 2024. They have experienced slow growth with 12m subscribers by 2016, 17m by 2018, and 35m today.
Disney+: Tested DisneyLife streaming service in 2015. In 2016/2017 they acquired BAMTech to help with developing their streaming technology. In late 2017 they acquired key assets from 21st Century Fox to strengthen their content library. Launched Disney+ at the end of 2019 - quite late to the party, the timing was related to a content licensing deal with Netflix which ended in 2019. The new service was an immediate success after launch with over 50 million subscribers only a few months in. The service has also launched in India as Disney Hotstar streaming service.
There is a clear, observable trend of increasing competition in the SVOD industry due to high growth, customer demand, and relatively low barriers to entry. This leads to more players, especially large media companies, entering the field. Each of these firms wants to be the exclusive service for their content produced in-house, and thus, smaller content libraries for each platform are the result. This means that companies such as HBO and Disney, which are famous for content production and have decades-long experience in it, are in a strong position compared to players that do not traditionally have such expertise.
In our interview with the Loop Capital Analyst, Alan Gould, he told us that Netflix has long foreseen this industry trend and has invested heavily in its own content production for many years. Its offerings are quite strong, with original series such as Money Heist, Stranger Things, Orange Is The New Black, House of Cards, Marco Polo, Dirty Money, and Narcos. However, it is hard for the service to lose iconic titles such as The Simpsons, HBO’s collection, and especially films and series by Disney. Acquiring exclusive deals will become more and more expensive in the industry due to bidding wars and increasing competition.
A second industry trend is the growing number of SVOD subscribers globally. Firms in the industry have observed strong growth rates, despite - or rather because of - the global COVID-19 pandemic as people are more incentivized to enjoy streaming with fewer alternatives due to quarantine and shelter in place measures.
Social media companies including YouTube, Facebook, and Twitter have recently made first moves into the digital video market and are trying to enhance users' engagement with their services. Especially YouTube, with YouTube TV and YouTube Premium, it may become a dangerous competitor to Netflix and the SVOD industry as a whole as it takes away attention and viewing time. Facebook with its recent focus on Facebook Watch should be observed with equal caution.
Key Success Factors
What are the key factors that drive financial success in the industry?
Everything is about scale in the SVOD industry, production costs will likely continue to rise, and the fees associated with large licensing contracts for third-party shows are already exorbitant. In order to justify these massive fixed costs, streaming companies must continue to increase their subscribers or their monthly fees.
With the exception of the U.S. and a few European countries, the SVOD global user penetration is below 20%. With increasing access to high-speed internet around the world, Netflix has enormous potential for future user growth internationally. As a result, it is essential for Netflix to successfully adapt their model internationally in order to capture these markets.
If Netflix is able to leverage its data-driven content production to create trending shows in key international markets, they will be able to establish footholds around the globe. What is essential to capturing the users is that these shows become a must-watch phenomenon. This is similar to the hit shows that helped Netflix establish its cultural presence in the U.S. and other western markets.