Can Netflix Withstand The Competition?
Can Netflix Withstand The Competition: A dozen Netflix staffers gathered in the vast Palazzo ballroom of the Venetian in Las Vegas one evening in early January and soon after 9 p.m.
They'd come to practise for an announcement the business planned to make the following day at the Consumer Electronics Show, the technology industry's massive annual conference.
Last year, Netflix was quietly planning to expand the availability of its streaming entertainment service, which was then available in around 60 countries, to the majority of the rest of the world.
Until that point, Netflix had been quietly expanding into one or two nations at a time.
It planned to expand into 130 new nations, including key markets such as Russia, India, and South Korea. (The business is still “exploring potential collaborations” in China, the only country where it is not yet active.)
Netflix's upper management viewed this as a giant leap toward the company's utopian future: control of the home entertainment market,ix executives saw this as a significant step toward the company's long-envisioned future: dominance in home entertainment, similar to Facebook's dominance in social media, Uber's dominance in urban transportation, and Amazon's dominance in online shopping.
Ted Sarandos, who oversees Netflix's Hollywood operations and negotiates contracts with broadcasters and studios, was first in line to practise his lines.
“Pilots, the fall season, summer reruns, live ratings”—all trademarks of traditional television – are disappearing, he claimed, thanks to Netflix.
Unlike a television network, which requires high-rated episodes to enhance viewership and, consequently, advertising revenue, Netflix values single and double shows that appeal to a smaller section of customers.
Its capacity to analyse massive amounts of data about its consumers' watching habits aids the corporation in determining what content to purchase and how much to pay for it.
When promoting what Netflix perceives as its superior model-streaming on demand and without advertisements on any device-Sarandos can be an ardent, even gleeful, critic of network practices.
To paraphrase what he stated about television, “For years, consumers have been at the mercy of others.” The shows and movies they want to see are governed by business models they don't understand or care about.
They only know the frustration.” That, he continued, “is the insight on which Netflix is built.”
As Sarandos ended, Netflix's chairman and CEO, Reed Hastings, took the stage.
The empty ballroom seemed to swallow the pencil-thin man whole. Under the spotlights, he squinted uncomfortably.
He and several other Netflix executives had spent the morning at a meeting in Laguna, California. A rare torrential downpour had disrupted air travel, forcing them to drive the five hours to Las Vegas.
They were only a couple of hours late. To make matters worse, Hastings was sick.
He fumbled irritably through his presentation, gaunt and exhausted. But, as he approached the conclusion, Hastings cracked a little, satisfied smile.
“The Netflix service has gone live in practically every country in the globe except China, where we aim to be in the future,” he remarked, reading from a monitor.
Even though it was simply a test run and would be long before anyone knew whether the global expansion would pay off, the Netflix executives sat in the ballroom and let out long, prolonged applause.
They had ample reason to rejoice. Netflix's annual income has increased sixfold since the start of its streaming service in 2007, from $1.2 billion to $6.8 billion.
More than 81 million Netflix subscribers pay $8 to $12 a month, and these customers are gradually but unmistakably ditching cable TV in favour of Internet TV:
Cable has lost 6.7 million members in the last five years, and more than a quarter of Millennials (70 per cent of whom utilise streaming services) say they have never had a cable subscription.
Those who continue to pay for cable are viewing less television. According to a survey conducted by MoffettNathanson, an investment firm that analyses the media industry, television viewing time decreased by 3% in 2015, with Netflix accounting for 50% of that decrease.
This has helped Netflix become a Wall Street darling, with its stock price increasing 134% in the last year.
Because of its easy access to finance, the corporation has been able to compete for content for its service aggressively.
Netflix will spend $5 billion on content this year, nearly tripling what HBO does. This includes licenced content, such as AMC's “Better Call Saul,” and original series, such as “House of Cards.”
The dozens of original shows (almost 600 hours of original content are expected this year) are frequently as critically acclaimed as anything on cable.
When Netflix became the first firm to put a complete season of a series online at once, it cemented its place in popular culture with the phrase “Netflix and chill.”
But the assembled CEOs had reason to be concerned as well. Netflix's creation of this new realm of Internet television did not guarantee that it would continue to dominate it.
Hulu, a streaming service owned by 21st Century Fox, Disney, and NBC Universal, has grown increasingly assertive in licencing and programming shows, competing for contracts with Netflix.
There have also been other competitors, including little companies like Vimeo and behemoths like Amazon, which is an active buyer of original programmes.
Even broadcasters, who had long regarded Netflix as a friend, had begun to fight back by creating their streaming apps.
Time Warner intimated last fall that it was considering withholding its shows from Netflix and other streaming platforms for a prolonged time. “I look at Netflix as a company trying to take over the world,”
John Landgraf, the chairman of FX Networks and one of the company's sharpest critics, told a reporter a few months ago.
Netflix currently has a negative cash flow of roughly $1 billion, forcing it to rely on the debt market to replenish its coffers.
Last year's $6.8 billion in revenue pales compared to the $28 billion made by media conglomerates such as Time Warner and 21st Century Fox.
Moreover, despite all of the original series that Netflix has produced, the company remains reliant on broadcasters, who are concerned that it may undermine their long-standing business model, just as Internet competitors have done to the newspaper and music industries.
Now that so many entertainment businesses perceive Netflix as a threat to their existence, the question is whether Netflix can prosper in the new television universe it has created.
That future is now taking shape.
The last time the television business suffered such turmoil was in the late 1970s and early 1980s when cable television first appeared.
Before that, television was mainly broadcast on public airwaves, and the major networks made most of their money from advertising.
Cable television, on the other hand, provided a better picture, and the increasing penetration of cable networks resulted in a significantly more comprehensive range of programmes.
Consumers eventually realised that it was worthwhile to pay for something that had previously been free – television.
This meant that each cable station earned revenue from all cable customers, including those who did not watch the station, in addition to advertising revenue.
By 2000, 68.5 million Americans had subscriptions to several hundred channels, dubbed “cable bundles” by the business.
Hastings anticipated that the Internet would someday compete with the package, but he wasn't sure how.
As a result, he had to be adaptable. According to Sarandos, Hastings anticipated in 1999 that it would be downloaded rather than streamed.
Another time, Netflix created a specific gadget to access its material, only to determine that it made more sense to adapt its service to anything from cell phones to televisions.
(A separate business, Roku, now owns the Netflix gadget.) Hastings directed Netflix to establish a particular streaming service in 2007 when Netflix's mail-order DVD business was still profitable and long before the Internet was capable of providing a streaming movie without interruptions.
Netflix has been similarly accommodating in terms of its streaming services. Initially, the company focused logically on movies: 80 per cent of rented DVDs were movies.
Nonetheless, despite agreements with two premium movie networks, Starz and Epix, Netflix discovered that its distribution system was hostile.
Typically, Netflix did not get access to a new film until around a year following its theatrical debut.
Following that, Netflix had distribution rights for only 12 to 18 months; the film was eventually broadcast on free television for the next seven or eight years.
Customers were irritated because they couldn't understand why a movie was available one month but not the next or why so many titles were missing entirely from the Netflix database.
As a result, the corporation moved its emphasis to television. Cable networks such as FX and AMC created high-profile dramas similar to HBO's “The Sopranos” and “The Wire.”
But, with their complicated, season-long plot arcs and hour-long format, those shows were unsuitable for syndication, in contrast to self-contained, half-hour comedies like “Seinfeld,” which could be watched without interruption.
Hastings and Sarandos recognised that Netflix had the potential to become the syndicator for these one-hour shows. “We discovered an inefficiency,” Hastings says of this insight.
One of the first such series to debut on Netflix was AMC's “Mad Men,” which was available between its fourth and fifth seasons in 2011.
Knowing from its DVD experience that customers frequently rented a whole season of “The Sopranos” in one sitting, Netflix made the first four seasons of “Mad Men” available online. Bingeing has taken off.
Television networks flocked to Netflix to licence their programming, unaware of the threat it posed to the established order. “It's a bit like ‘, Is the Albanian army going to take over the world?'” joked Time Warner CEO Jeff Bewkes in 2010.
There were occasional concerns that Netflix would become too massive for the industry to govern, but for the most part, the legacy media businesses saw Netflix's payments as free money.
Before Netflix began demanding payment for “streaming video-on-demand” rights, they didn't even exist.
Because broadcasters didn't realise how important those rights would become, Netflix was able to acquire them for very little money.
Everyone, including the shows themselves, appeared to be winners. Netflix, for example, began streaming the first three seasons of “Breaking Bad,” the Sony-produced dark drama that aired on AMC in 2012.
Despite receiving critical praise, “Breaking Bad” was yet to attract a following.
“When the people at Sony stated we were going to be on Netflix, I had no idea what that meant,” “Breaking Bad” writer Vince Gilligan told me. “I knew Netflix was a firm that mailed DVDs. “I had no idea what streaming was.” Gilligan figured it out quickly. “It certainly boosted our viewership,” he says.
According to Michael Nathanson, an analyst at MoffettNathanson, “‘Breaking Bad' was ten times more popular when it started streaming on Netflix.”
Around that time, network executives began to recognise the threat that Netflix could pose to them.
“We wrote an article five years ago that stated broadcasters shouldn't licence Netflix because it would unleash a monster that would threaten their business,” says Richard Greenfield, a media and technology analyst at BTIG and the most ardent proponent of Netflix on Wall Street. That appears to be what occurred.
Worse, they discovered that Netflix did not have to follow the same rules as them. Netflix was unconcerned about individuals watching the shows it licenced.
Netflix had no desire to keep the cable bundle. On the contrary, the more users abandon cable, the better for Netflix. Netflix had no old profits in the billions to safeguard.
But broadcasters couldn't abandon the company either. Many of them depended on Netflix licencing fees to compensate for revenue lost due to the drop in traditional viewership.
Negotiations between a broadcaster or studio and Netflix became increasingly contentious as broadcasters wanted considerably greater rates, realising the importance of their streaming rights.
These negotiations failed in certain circumstances. For example, the Starz deal was not renewed once it expired in 2012. (Starz CEO Chris Albrecht later termed the initial deal as “awful.”)
This was also when Netflix began preparing its transition to in-house production.
In 2012, Sarandos began arguing internally that Netflix required unique material that it wholly owned to stand out from the crowd and not be at the mercy of broadcasters. “If we're going to start caring about content ourselves,” Sarandos added, “we'd better start working on those muscles right now.”
In other words, Netflix needed to start producing its shows.