NETFLIX - Analysis of Culture, Management Systems and Leadership
Subject: Organizational Behaviour
Professor: Arturo Soler
NETFLIX - Streaming Wars 2019
Subject: Challenges & Opportunities for the Media Industry
Professor: Guillermo de Haro Rodriguez
Which are the business motivations for the actions taken by the leading companies?
In today’s world video traffic accounts for already 75% of internets traffic and is expected to reach 82% by 2021. This being said and watching decreasing interest of the younger generation in regular TV watching, it is more than logical to enter the video streaming market. Due to big competitors such as Amazon and Netflix many companies decide to merge to have better chances of accomplishing higher market shares.
Disney, one of the world’s leading entertainment conglomerates, is building a strong position for the last 13years. Previously famous for its children entertainment, they have diversified their portfolio by acquiring studios such as Pixar, Marvel Entertainment, Lucasfilm, ESPN, National Geographic, The Simpsons und not long ago 21st Century Fox. Disney were able to increase its market capitalization value from $ 46 billion in 2006 to more than $ 230 billion (in 2019). In eight of the past ten years, Disney has produced the world’s top-grossing movies, released in each calendar year.2
Last year they even managed to produce 5 out of the 7 top-selling movies, as shown below:
By offering their fans additional services (and channels) they are expecting to grow even more, which is why Disney is joining the ring with Netflix, Amazon and the other big players (e.g. AT&T).
Nevertheless, it is uncertain whether many other of the major production companies will offer their own streaming services or whether it will still be more lucrative and safer to sell / lend movies and series to the highest bidder in the future.
I believe that due to the increase of competition the prices of available and well ranked movies will go up and can therefore still be a highly profitable business.
Which is the critical success factor in the business of entertainment in general and in video streaming in particular?
The most essential factor is always the content which is why Netflix is expected to spend 15 billion dollars on original shows and movies next year. In the past, Netflix could rely on having long-term Film and TV Rights Deals to ensure its growth. But now, that many of its previous content suppliers are building their own streaming service, Netflix is under pressure to deliver good content by themselves. One of the steps they did, is ensuring the services of famous creators, such as Shonda Rhimes, Ryan Murphy or Kenya Barris.
Additionally, to hiring established producers Netflix realized that the move of creating local original content was very well received from its audience. "La Casa de Papel" (Spain) or Dark (Germany) are just a few examples of those worldwide successes.
By doing this, Netflix benefits in many ways: Being able to better respond to local wishes and trends, hiring not so famous actors and therefore not spending millions for star actors and cutting costs furthermore by getting state fundings from the respective countries. Especially the last two parts are important for Netflix due to their high spendings ($ 12billion for content in 2018). Creating original content will be getting more and more important with new players entering the market constantly.
How much will Netflix be affected if classic series, such as “Friends”, “Californication” or movies like “Batman” and the Fast & the Furious franchises are revoked and suddenly available on competitor’s platforms? Can the savings for these royalties be compensated by creating equivalent original content or will this result in a loss of market share and revenues?
One main aspect will always be the pricing, especially in times when new players are entering the market. It will be interesting to see, if Netflix will have to lower the monthly fee to not lose its customer base. Many of the new entrants will position themselves at a lower price than Netflix (Disney+ at around 6$/month, Apple 5$/month), only a few, like AT&T (HBO, Cinemax and Warner Bros.) will be at a higher fee than Netflix (between 16$-17$ a month).
Growth is also an essential success factor. This can be observed at companies like Spotify, Netflix and many other companies. Their market evaluations are primarily based on constant growth rates than the debt rates. The need to grow as fast as possible to eliminate the competition, even if that means a lot of debt to accumulate.
Nevertheless, it is crucial to stay up-to-date with the movie collection and not to fall behind. Additionally, it seems as if every country has its own national library of movies and series due to licensing agreements. This is a burdensome thing for the customer. This problem can be solved by creating more original content.
Expanding into new countries after establishing brand awareness is also a popular move. Netflix is currently present in 190 countries and is now putting a lot of efforts in gaining market share in India, even though the regular monthly abonnement lies there in the premium service sector compared to Pay-TV.
Is the first-mover advantage in this market enough to develop a sustainable advantage?
Netflix definitely changed the way we watch TV but not so much on what we are watching. Netflix became so mainstream that we even added them into our vocabulary (“Netflix and Chill”). It was definitely an advantage to be the first big player in the market, to create brand awareness, to gather data on customers to know what movies and series are being watched and like, and to create similar ones.
Additionally, Netflix revolutionized the whole TV industry for the younger generation. According to Forbes’s report3 Millennials are already using more digital video streaming than consuming traditional television. This allows streaming providers to even extend their spendings due to the increase of memberships.
Even though Netflix is one of the first-movers in the industry and established a strong position, it is unclear if they can hold it with so much competition on the way. Many of Netflix’s previous content suppliers are now upcoming competitors. Even though Netflix tries to get as independent as possible, they are still hugely reliant on licensed content and this carries a lot of risks.
There has always been the problem with multihoming, but now with so many competitors, who are taking back their own content and not renewing the license, we will see how it will affect Netflix’s’ position. Many subscribers are already on other platforms present, some due to bundles, such as Amazon Prime, who offers many benefits, such as free fast shipping, music & video streaming. Even though Amazon’s movie spectrum is different than Netflix’s, creating their own content is essential. Netflix and Amazon have the advantage of gathering so many informations about its customers, that gives them important insights on trends and more.
How companies fighting for market consider technological innovations will impact their existing business models.
A critical success factor for Netflix is its logarithm, which displays customers optimal suggestions, to hold the viewers as long as possible on the platform. Netflix for instance is working with many criteria to grab people’s attention. They are even changing preview pictures and showing different short teasers to its different users to create a unique experience. Netflix definitely benefitted from being the first-mover in this industry to offer clients customized user interfaces. The had 10 years to test and improve its logarithm and this can be a crucial advantage compared to the rest of the industry, except for maybe Amazon, who is gaining a lot of informations through its own marketplace.
A burden for the customer is the quality of video, which can be a knockout criterion if your video stream is not continuous and always changing the quality settings.
In the last couple of years there has been a shift to mobile phones noticeable, which means that all this content needs to be optimized and watchable for all the different devices.
It would also be desirable to get access to the whole movies library from the supplier and not be restricted to the national library. This would be an incentive for customers to remain loyal with a company.