Global business perspectives

Netflix and why the future of streaming looks like old-school TV

by HBR

October 24, 2017 | 2:12 pm
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Netflix hit the industry with some bombshell moves this month. First, it announced that it plans to spend $8 billion on original content next year (including on 80 new movies). This is far more than any other online player. Obviously, this is great news for Netflix’s 100 million-odd customers worldwide.

What isn’t so great for its customers is the other news. Netflix will raise the price of its standard plan by $1 a month and its premium plan by $2 a month. With these increases the company is slowly edging toward the $15-a-month plan offered by its competitor HBO.

This means that Netflix isn’t just your Blockbuster replacement anymore. Makers of original content — including the likes of Disney — are moving away from Netflix. Instead, Netflix looks like an old-school TV network. If you had to predict what the industry will look like in five years, you might say that there will be a set of online channels with the expectation that consumers will subscribe to all or most of them. At $15 a month each, consumers will likely sign up for four or five of these channels instead of a normal monthly cable bill. Netflix is investing to be the “must subscribe” channel in that world.

There are obvious differences between the new TV industry and the old. On-demand is one difference, as is Netflix’s “born global” approach. This makes it easier to do what Netflix was built for: experiment with the long tail rather than go for mass-market hits. While it might be inconceivable for an old-style network to greenlight a series that appeals to just 0.5% of its viewers, for Netflix, if that series is the reason that 0.5% choose to subscribe, that’s enough to justify the investment.

One great feature of subscriber revenue is that it makes life very comfortable. As Netflix contemplated its $1-a-month rise, I would guess board members had an easy time calculating in their heads the extra $100 million a month, or $1.2 billion a year, that would bring in. And they had every reason to believe that growth would continue, as subscribers are quite sticky. Netflix looks a lot less significant on people’s credit card statements than the traditional cable bill. Small amounts like that can go unnoticed for years. A little while ago, a professor colleague of mine recounted  that in finally reviewing a credit card statement, he noticed a recurring AOL charge. He must have signed up for it a decade or more ago and forgotten to cancel!

Subscriber revenue is nice, but it has a flip side. When your business has reached its peak, letting it go can be hard. This is precisely the challenge that old networks and cable TV are facing. To be sure, every person and his dog can see where the industry is going. But if networks and cable were to jump to online and on-demand right now, that would only increase the number of people cutting the cord. The drive to hang on another year or two and wring more from those sticky customers is just too tempting.

Netflix is banking on that happening. And if Netflix is right, it won’t end well for the old guard. When the traditional players really start to struggle, Netflix and others will be able to scoop up all that old content for a song.

That said, Netflix has its own flip side to deal with. I have a kid in college who still uses my Netflix account. There’s certainly no economic reason for me to cut the parental cord now, but looking ahead, I don’t see when it will ever happen. I have vague hopes that at some point my kid might be embarrassed to still be on a parental account. (Although my 30-something editor informs me that he still uses his parents’ account, too.)

You can see the issue for Netflix. It doesn’t have the luxury that internet providers have, that as soon as a kid leaves home he has to get his own subscription. So its subscription business doesn’t grow with the population. That is perhaps why it raised the price of its top plan by $2, which allows more simultaneous streams — but that increase hardly offsets the loss of a new paying customer.

Without new customers being born that Netflix has to compete for, there may come a time when the company runs out of subscriber growth. Then the circle will come back around for Netflix and, like today’s TV incumbents, it won’t be able to take advantage of new channels without cannibalizing its hard-won legacy customers.

(Joshua Gans is a professor of strategic management at the University of Toronto’s Rotman School of Management and the co-author of “Prediction Machines: The Simple Economics of Artificial Intelligence.”)

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by HBR

October 24, 2017 | 2:12 pm
  |     |     |   Start Conversation

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