The Netflix Story

Watching TV shows has become much like reading books these days. When you pick up an exciting novel, the chapters don’t reveal themselves once a week. Can you imagine how torturous that would be? The joy and excitement of devouring a book in a few days, curled up in your favourite spot is a thrill unparalleled. Thanks to Netflix, this joy has crossed over to TV shows.

Netflix has become a pervasive entertainment phenomenon. As of 2018, it has managed to seep into more than 120 million of our lives worldwide, occupying prime space on our screens across platforms. Not tied to a traditional TV schedule, it has afforded us the luxury of watching our favourite TV shows and movies whenever, wherever, and for however long as we please. This has led to subscribers spending an average of 1 billion hours per week in 2017 alone, with TV shows being more addictive than movies.

In the entertainment industry, gone are the days when studio heads were considered the undisputed Kings of Hollywood. The Crown (pun very much intended) now sits firm on Ted Sarandos, a college-dropout who ran a video rental store and watched hours worth of videos while interacting with customers to learn which videos worked and which didn’t. He is now the Chief Content Officer of Netflix, a $170 billion worth media juggernaut which began as a red-envelope DVD delivery service and is now a cultural behemoth taking on media and movie moguls

What is Netflix made up of?

Netflix has three types of content: (1) Licensed, 2nd-run movies and TV shows (2) Licensed, original movies and TV shows (3) Netflix-produced originals.

In the years 2007 to 2013, Netflix had a collection of only licensed 2nd-run content such as F.R.I.E.N.D.S. and The Office. Their breakthrough moment came in 2013 when they launched House of Cards, their first licensed original content. This wasn’t produced and owned by them but they had the sole 1st-run distribution rights. The $100 million experiment was a huge success with myriads of viewers “binge-watching” it over the first weekend and critics showering it with unanimous praise. The reception encouraged Netflix to dive into producing their own Netflix-Original content starting with Stranger Things in 2016. There has been no looking back ever since with multiple shows being nominated or awarded the coveted Emmy’s, Oscar’s, Golden Globe’s and Grammy’s. Netflix has asserted its presence in a big and grand manner.

Cut to 2018, Netflix is the world’s highest valued media and entertainment company, beating Disney and Comcast in market capitalisation, and worth more than Hollywood behemoths Fox, CBS and Viacom put together. Netflix boasts of more than 120 million subscribers worldwide and an interesting trend to note is that international viewers overtook local counterparts last year indicating Netflix’s move and growth beyond the American territory. International audience now make up for 54.6% of total user base.

What is their strategy?

Netflix is looking to spend north of $12-13 billion this year on content alone. A massive amount, many would say. But they have a plan. The money is going to get them 700 original TV shows and 82 original feature films. These numbers are mammoth and you get a sense of perspective when you compare it to Warner Brothers and Disney who will churn out only 23 and 10 movies in comparison, respectively. With the exponential increase in content, Netflix aims to aggressively drive growth. In the first quarter of the current year, Netflix amassed 7.4 million net new subscribers worldwide. The approach Netflix has taken is “winner-takes-most”. If Netflix can supply enough engaging content to occupy most of a typical person’s TV viewing hours, it would mean that they wouldn’t need to go anywhere else to fulfil their entertainment needs except for sports and news.

But it’s impossible to watch all that content that Netflix has, one may think. An analysis done on Netflix’s content in 2015 showed that it had enough content to span over 3 years, 202 days, 12 hours, and 14 minutes. The numbers would have only skyrocketed since and Netflix understands that very well.

Total Netflix content in 2015

This is where data comes in. A huge set of subscribers for Netflix means data. And data equals access to a wealth of information pertaining to viewing preferences and habits. Every piece of content we watch, we abandon, and the time we spend on it informs Netflix something about our likes and dislikes. This has helped Netflix create around 2000 “taste clusters”. The data is employed to make decisions about projects that they can pursue, how to attract and retain customers in each cluster, and assign a reasonable acquisition cost to it. From a user’s point, the data helps target a particular consumer with content they think is best suited to their taste. With a library that consists of thousands of titles and with a user base spread across different age groups and geographies, it is imperative for Netflix to predict and recommend suitable content.

However, it doesn’t stop at merely recommending. Netflix personalizes the artwork of the posters in such a way that you are most likely to be presented with a version of that may appeal to you the most. So for example, if your history shows a pattern of Ryan Gosling videos, you are more likely to see a poster of Crazy, Stupid, Love with Ryan Gosling on it. However, if you are a Steve Carell fan as suggested by your previous viewings, you’re more likely to see one with him.

Personalised posters based on viewing history – Steve Carell

Apart from customising the actors presented, Netflix also algorithmically personalises posters to suit the genre preference. So if a user is into action flicks, the poster might showcase a fight scene from the film. Romance lovers on the other hand might see more passionate aspects of the film in a poster.

Personalised posters based on viewing history – Ryan Gosling

The potent combination of huge and diverse content along with personalised marketing allows Netflix to reach a wide audience and develop a comprehensive catalogue with even niche content. Netflix has helped revive shows that were critical darlings but had to be pulled off air due to a small (but loyal) fan base. Arrested Development and Gilmore Girls are some examples. This is possible because such risks affect Netflix less than it would others.

What lies ahead?

While the Netflix model is unique and has disrupted the entertainment scene, the question remains- is it sustainable? Currently, Netflix strikes an upfront deal with showmakers by paying a mark-up over production costs in exchange for worldwide rights for a project. However, if the show exceeds expectations there isn’t much in it for the creators and there is no scope for signing lucrative deals in secondary markets. If competitors come up with better deals than Netflix, this might see producers flocking to them instead.

Among its competitors is Disney which is readying itself to enter the marker of video streaming services next year. This means its licensing deal with Netflix will come to an end in the near future. Content from Walt Disney Studios (e.g., Pirates of the Caribbean), Disney Animation (Zootopia), Pixar (Finding Dory, Cars 3), Marvel Studios (a plethora of Superhero movies) and Lucasfilm (Star Wars films) will no longer be in the offering, taking an edge off Netflix.

HBO too is ramping up its transformation from a premium-cable TV to a streaming service and will invest north of $2.5 billion this year in content. HBO is also putting its money in international shows and partnering with foreign distributors.

Apple is entering the landscape and has hired Hollywood executives to create services with at least $1 billion investments.

Last but surely not the least is Amazon which is best poised to compete globally and is giving Netflix a run for its money in some markets such as India. While Amazon Prime Video charges Indian subscribers only $14.5 per year, Netflix charges $7.26 per month. Users with a tighter grip on their purse strings might find the Netflix pricing a bit too steep especially when Amazon Prime offers a better catalogue of Hindi films which they might opt for. Additionally, Amazon also gives users access to Amazon Prime on its shopping website and access to its music service, which is a cherry on top. With Indian Netflix users having access to only 11.69% of the US movie library and 17.03% of the US TV show library, consumers may feel shortchanged. Here in Singapore too, user have access to only 10.21% of the US movie library and 14.61% of the US TV show library. However, Netflix aims to have an edge over its competitors by producing successful foreign language shows such “Sacred Games” in Hindi which boasts a high IMDB rating of 9.3 and is currently ranked the 6th most popular TV show in the world on IMDB. Elsewhere, “Money Heist” in Spanish and “Dark” in German garnered millions of viewers in Mexico and Brazil. Netflix is also targeting Turkish and Arabic viewers this year. By producing high in content and production value projects that are edgy and exciting, Netflix aims to market itself as an attractive, high quality premium product. They also ensure this by signing on the best writer and directors to speak for the quality.

Narcos is a successful foreign-language Netflix original series

All eyes are on Netflix to watch how it navigates its way through a fast-changing landscape with many declaring that it will either become “the dominant media monopoly of the 21st century, or else it will go bust”. An indication of its volatility and unpredictability was seen earlier this week when its stocks fell by 14% upon missing out on its subscriber growth target (5.2 million users added in Q2 of 2018 versus 7.4 million in Q1 2018 and 8.3 million in Q4 2017). While 5.2 million users is an impressive number on its own, Netflix has to sustain itself amidst the intense competition from others to ensure they provide everything to everyone. The “you see what you like” algorithm may not always work and this is being proven to be a fallacy in Facebook which is turning into an echo chamber. If watching junk shows on Netflix will only propagate more junk for a user, it might make them want to switch to HBO occasionally to catch Game of Thrones or Hulu to watch This is Us to diversify their content.

Furthermore, Netflix will have to ensure that the huge amount of money they splurge on big names for original shows reap benefits because some failed to do so as was seen in the case of Oscar-nominated director Baz Luhrmann’s show The Get Down on which $120 million was spent but it failed to deliver. For now, let’s hope that the answer to Netflix’s question to binge-watchers after hours of marathon viewing – “Are you still watching” is going to remain a resounding yes for many, many years to come.

Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.



Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].