Netflix Needs to Pivot. Again

Of all the success stories in tech over the past 20 years, the evolution of Netflix is among the most fascinating. Few companies in history have pivoted successfully multiple times. And Netflix is now faced with a situation where they will have to evolve, yet again.

First, a quick history. Netflix, in its initial incarnation dating back to 1997, was that ‘little red envelope’ company. During the time of peak video store/Blockbuster, Netflix created a successful subscription business of movie/TV series rentals by mail. In that pre-broadband/pre-streaming period, Netflix was that era’s Grubhub and DoorDash. And for those who lived a distance from the nearest video store, Netflix was a godsend.

Then, broadband arrived, and with it, services such as iTunes for movie purchases and rentals online. Over a period of about ten years, video stores essentially disappeared, with Blockbuster being among the biggest casualties. But Netflix successfully pivoted here, maintaining its legacy mail order business while simultaneously building a success streaming video business during the 2000s. Their ability to do this on a global basis was somewhat dependent on the availability of decent quality broadband to homes.

Then, yet again, Netflix saw the writing on the wall and engineered a second successful pivot. Competing streaming services had emerged, and on-demand capabilities and libraries from cable companies and other providers continued to grow. This meant that much of the content available on Netflix was also available through other sources. So Netflix made a bet on original content, beginning with House of Cards. Hard to imagine that was only in 2013. During the past six years, Netflix has plowed billions into original content, producing – literally– thousands of scripted shows and movies, globally. Today, Netflix is effectively in two businesses: people still subscribe to Netflix for its vast library and terrific UI; but increasingly, Netflix is another content channel, just like HBO, Showtime, or Hulu. In an era with plenty of competition in streaming, Netflix has continued to grow quickly and have incredible subscriber retention.

Which brings us to this moment, and the need for Pivot #3. Another exogenous market development has the potential to upend Netflix’s business. The slew of media M&A that has occurred over the past couple of years, and the imminent launch of new streaming services from Disney, Warner Media (AT&T), Apple, and others, will have a dual impact on Netflix: the first is a much larger number of streaming options competing for the consumer’s dollar; and the second is a dramatically altered content landscape. With Disney et al getting into the business, Netflix is losing, and is getting prepared to lose, large chunks of its content library, as those companies choose to keep their content on their platforms. For example, Netflix will lose most of its Disney content (which includes many of Disney’s properties from Marvel to Lucasfilm), and is also in danger of losing some TV staples that are among some of its most popular titles, such as Friends and The Office (here’s a good list). Even with all its Originals, 2/3 of the viewing hours on Netflix is licensed content. Another dynamic is that with Apple and other well-heeled players getting into the game, competition for top talent is becoming increasingly intense (this is a great time to be in the upper echelons of the content business!).

The burgeoning of streaming options is competing for viewers’ finite dollars and the explosion of content choices is competing for viewers’ finite time. This is forcing Netflix to dust off its strategic plan yet again. This time, however, it’s less of a dramatic pivot and more of an evolution that has two components. The first part is that Netflix has been steadily raising prices, in order to pay for both more original content and escalating rights fees for licensed content (sound familiar, haters of cable companies?). In the same way cable bills went up largely because of mushrooming fees for sports rights, consumers will pay for this downstream. For Netflix, revenue growth is slower than content expenditure growth (sound familiar, haters of cellular companies?).  But Netflix is clearly taking the long view.

The second component is that Netflix is both broadening and deepening its original content productions. Some detractors describe Netflix as having become the ‘Wal-Mart’ of content. But it’s more like a department store (or at least what department stores used to be), offering content for multiple ages, life stages, and preferences, from lowbrow to highbrow. Another key component to this is investing in more regional content. Although much of its original content library is available globally, Netflix is also creating a lot of content for audiences in particular geographies, that not everyone might see. The fact that Netflix is a global company will be a key strategic advantage, going forward.

Now usually, life’s not so good for companies that raise prices as they lose content. It is interesting that so far, Netflix is relatively unscathed. Its stock price is up 50% this year, and subscriber growth has been solid. Wall Street does not seem to be overly worried. A year ago, there were all sorts of articles popping up, about Apple, Amazon, Warner Media, and Disney being ‘Netflix Killers’. But the tone has changed. It now seems that each is looking more for its specific place in the universe: Disney as the inexpensive add-on that many people will buy, since, in the words of my eighteen-year-old, “owns most stuff”; Apple, with a more Amazon Prime-like model for video; AT&T, adding some gravy to its signature property HBO; and Comcast Universal, which has announced it will launch a streaming service but whose motivations are more to have some leverage vis a vis competitors and some offering for the cord-nevers.

I think Netflix should weather the storm just fine, at least in the short-to-medium term. Mainly because it has made the right moves to become the ‘must have’ channel in a typical consumer or household’s content lineup. And even as the content universe churns up, Netflix will still have the largest stockpile of its own and others’ content. And it has a superior user interface, is on everybody’s platform (including its competitors), and enjoys a sterling reputation among consumers. But it’s interesting to see how Netflix in 2020 is very different than Netflix in 2010, which was very different from the Netflix of 2000. If Netflix is already the stuff of B-School business cases, another chapter is waiting to be written.