1. As Andrew Gnananantham pointed out in a recent Low Level Barbarians episode we think a company’s strategy is so brilliant, until it is not anymore. That’s a good fact however – shows that we are learning.
  2. Netflix acquires content through three means: licensing, commissioning and producing. Licensing and commissioning depend on its negotiation power with content producers / studios; while producing depends on its ability to acquire/groom good producers under its wings.
  3. It seems licensing and commissioning are more common, even if Netflix generates its own ideas. It is, however, easier to control costs if Netflix is producing itself.
  4. A key part of Netflix’s intended appeal to consumers is that it produces so much good content that people will have all their entertainment time filled, and no time for alternatives.
  5. That is dependent on its ability to continuously generate the best in class content – and using its vast user base to 1) strengthen its negotiation power; and 2) make sense of the content costs.
  6. This has become difficult when Disney+, HBO etc., which have very strong in house content capabilities and access to capital that is not necessarily more expensive than Netflix’s.
  7. Not to mention deep-pocketed players like Apple and Amazon, who see good content as a feature offered to (and used to retain) their vast user base.
  8. As a result, Netflix 1) can’t monopolise good content; and 2) faces even more expensive costs for good content. These are difficult problems to tackle.
  9. A few friends pointed out to us that political correctness has started to affect the quality of some of Netflix’s shows (vis a vis a those of Disney+ and HBO).
  10. Netflix, it seems, is getting into the same trap that has haunted iQiyi and Tencent’s WeTV for years – high production costs, low ability to raise prices.
  11. iQiyi etc. previously depends on selling VIP consumers the ability to pay to unlock episodes not yet available to everyone as a key revenue source. Alas, that revenue has disappeared after losing a court case.
  12. Remaining revenue sources of iQiyi include membership and advertising. Did we mention that Douyin (TikTok), despite not being a long form content platform, also chips away the time people (especially the young) could have otherwise spent on platforms like iQiyi?
  13. Spotify is different compared to Netflix as it is almost purely a distribution channel for music labels – it is hard for other music streaming services to offer meaningfully differentiated content, and it is hard to see music labels going direct.
  14. Speaking of music labels, as Netflix is exclusively direct, it does not generate revenue through content distribution, in markets/segments where acquisition cost for Netflix itself is high.
  15. It will be very interesting to see how Netflix adjusts its “no rules rules” culture in testing times. Do not underestimate a culture’s resilience.

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].