The Netflix Effect

on January 17, 2019
Reading Time: 4 minutes

Netflix is causing profound changes to happen within the entertainment industry. While my opinion, I believe Netflix is the gold standard for a streaming service, sans any live TV option. We can debate how crucial live content is to Netflix’s service, I’m still not convinced it is that important, but where Netflix is causing the most turbulence is in original series.

I outlined why in a post a wrote a few years ago, where I called Netflix’s actual business model stories as a service. If I were to give the edge to any volume producer of episodic based stories I give it to Netflix. Netflix produces a consistent stream of quality episodic content and stories, and in many ways, their model is more aligned with a book than a TV show.

Observationally, the big networks like CBS, ABC, NBC, etc., do a good job with hit shows which are well produced single episodes. Their goal is more the story of the individual episode than the story of the entire series. The networks deliver most of their shows to be stand-alone productions, with a mild continuing narrative, but the emphasis is on a single entertaining hour than a story that plays itself out over a dozen episodes. Netflix’s focus, and Amazon’s in this regard is more on the story arc than the encapsulated single episode. This is where their content model is much more like a book than their competition. I’d argue the latter is more compelling, entertaining, and essentially more in line with what drives customer engagement. This is also the underlying psychology driving binge watching. It is extremely common to binge read more than one chapter in a sitting of a great book, and thus the behavior follows for episodic content when there is a continuing compelling narrative.

I’d also argue, that the model Netflix is betting on, which Amazon follows, is much more aligned with their customer-centric business model of direct customer subscription. The model the networks use which is more focused on the story in a single episode than over the series is more aligned with the network business model of advertising supported.

The latter point convinces me the network attempts to go directly to a consumer like CBS has done and NBC has announced is likely to fail. To be successful here, they would need to entirely change their content production strategy to be more narrative than single episodic. While these networks have had success doing this before, shows like Lost, for example, were highly narrative based, it is not something they do as consistently or repeatedly as Netflix or Amazon have demonstrated.

The wholesale shift to subscription-based streaming of entertainment content is upon us, and it is an era where I’m not sure what the traditional cable networks play. At the moment, I don’t feel they are well positioned. However, there may still be a role in a broader bundle, perhaps with Amazon Prime, or another kind of light service like Apple may offer. But I can say with a relatively high degree of certainty their ambitions to go directly to the consumer are likely to fail.

Disney the Only Other Competitor
While Apple remains a wild card, it seems that Netflix, Amazon, and Disney are the three who have the best track record for a direct to consumer media and entertainment subscription. Regarding overall budget, only Disney outspends Netflix, and a good portion of Disney’s budget goes to live sports. For example, Disney’s sports rights made up just under $8 billion of their total ~ $13 billion content spend in 2018 alone. The rest they spent on original content. Netflix, in contrary, spent just over $12 billion on original content in 2018 greatly surpassing how much story based original media Disney spent. While Disney’s subscription cost is a bit lower than Netflix’s, one does wonder how much more Disney has to increase on original content to drive their new subscription service.

Disney’s brand is powerful, and they have super-power infused branded content to market and drive the subscription. Initial forecasts I’ve seen project Disney acquire approximately 3-5 million subscribers to this new service in 2018. To put that into context, Netflix has consistently added 5 million new users in the US every year. Given Disney’s brand, marketing power, lower price, and unique content, it seems reasonable 5 million subscribers in the first year is achievable and may even be conservative.

Overall, it is clear this shift is happening, and Netflix has had an effect on the entire industry causing forms of turbulence and even some disruption among the traditional entertainment industry players. Netflix is not without its challenges. Their recent price increase validates many observers concerns that unless they see significant S-curve growth cycle, they will have to keep raising their prices to existing customers to justify the massive annual content spend.

The big concern that still lingers is the overall tolerance to pay for a variety of content services from consumers. The worry is consumers will eventually suffer from subscription burnout paying $X to Netflix, $X to Disney, $X to Apple, $X to Amazon, and so on. This is uncharted territory since historically consumers have gotten value and become accustomed to the bundle model for media and entertainment. A la carte subscriptions change the nature of competition, and in a way, competition for share of wallet among these services becomes more fierce than in a bundled world. At this point, it is tough to say which model is better for consumers in the end.

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