The New Netflix Economy

Last weekend, you may have been one of the many consumers worldwide who binged through the entire fourth season of House of Cards. The acclaimed political drama is exclusively available on Netflix, an online streaming service that has seen immense growth over the past decade. The service allows subscribers to stream a large collection of films and TV shows, made available through the negotiation of numerous licensing agreements.

It seems hardly surprising today that a service like Netflix would be in high demand, given the content and convenience that it offers. However, it does beg the question of why other streaming competitors aren’t enjoying the same level of success, despite possessing the rights to many popular titles. While new services such as Hulu Plus have emerged, Netflix is still by far the leader in internet streaming and accounts for over a third of internet traffic in North America.[i] Let’s explore how Netflix has come to be such a dominant force in the streaming market, as well as the company’s influence on consumer expectations.

Historically, televisions and movie theatres have been the cornerstone of screen-based entertainment. TV networks and cinemas purchase the rights to show programs, controlling the times at which they’re screened. Unfortunately, this method of content distribution is often restrictive – a consumer’s leisure time may not align with programming schedules, or the opportunity cost of watching a desired show or film is incurred due to clashes with another program. Particularly in Australia, TV networks often air international shows months after their initial release, reducing consumer satisfaction due to the long wait and the risk of spoilers. As such, although the demand for TVs and cinemas has been historically high, this is likely due to the lack of better lawful alternatives. In this sense, it can be said that the status quo actually fails to maximise a consumer’s utility.

Rapid developments in technology over recent decades have given rise to opportunities for businesses to combat the limitations associated with traditional mediums of entertainment. Netflix is the most prominent and arguably the most successful example, having anticipated market changes early on and moving to a streaming distribution model around 2008. Unlike cinemas and TV, subscribers can access any number of catalogued items at any time they choose. Hence, the rational choice for many consumers would be to adopt online streaming for greater control over their viewing behaviour.

Of course, this reasoning could apply to many other video-on-demand services. Netflix has distinguished their product from other streaming services by going the extra mile to improve consumer utility. For example, the free one-month trial offered to new subscribers provides the opportunity to see what’s available prior to paying, addressing the issue of buyer’s remorse. Quota-free deals with ISPs alleviate concerns over exceeding data caps, and the exclusion of advertisements and lock-in contracts (prevalent in pay TV) also increase the product’s appeal. But more importantly, Netflix also distributes a range of exclusive shows, such as Orange is the New Black, which have gained strong followings and critical response. Hence, there are many aspects in which Netflix has tried to deliver value for money and provided greater benefit to consumers.

However, with all eyes on the company’s dominance, Netflix is likely to face some stiff competition in the near future. The threat posed by Netflix’s popularity has spurred many firms to start making content available online. Their approaches have ranged from efforts by networks to introduce catch-up TV, to the establishment of rival streaming services such as HBO Go. Success amongst these services is currently mixed, with most firms being unable to surpass Netflix in terms of service and content availability. Entertainment providers are often granted an exclusive license, leaving the provider as the sole distributor of a show or film. In Australia the two major streaming providers (Stan and Presto) have struggled to win over consumers with their current content libraries.[i]

Netflix’s recently announced plan to make the same content available worldwide reinforces the company’s forward-thinking approach and their efforts to appease consumers.[i] However, the move towards a global Netflix library is no simple task. Rival providers have long benefited from the monopolistic nature of exclusive licensing, and are likely to lock down exclusive rights to shows and films before Netflix has a chance to make global arrangements. Copyright legislation around the world also enables such exclusive content deals to take place. Abolition of these licensing barriers would open up more shows and films for Netflix to distribute globally. Moreover, the lack of licensing barriers also means that content providers would hold equal rights to offer the same show to audiences, forcing them to differentiate themselves in aspects such as quality and pricing rather than exclusive content.

With all of that being said, the most likely path to success seems to be major policy overhauls worldwide such as the Digital Single Market initiative in Europe. The initiative is made up of policies intended to make copyright laws fairer, and to end discriminatory practices in Europe such as geo-blocking.[i] The idea is to establish one digital market in which all Europeans have equal access to digital goods such as TV shows. If these policies gain traction, Netflix could have a fantastic opportunity to build a European library, allowing them to evaluate the feasibility of their global aspirations.

It’s no secret that major studios and TV networks are terrified of the damage Netflix is inflicting on their business models. DVD rental outlets such as Blockbuster have already closed down as more consumers abandon physical media. While Netflix is unlikely to obliterate other industries, it is certainly forcing market players to review the sustainability of their current business models. As TVs and cinemas lose some relevance in the technological age, Netflix has prospered by appealing to the desires of consumers. The way in which Netflix has reshaped consumer demand suggests that content providers are operating in a new environment where low prices, convenience and unlimited content access are no longer privileges, but expectations.

[i] Netflix. (2016). Q4 15 Letter to Shareholders. Retrieved from http://ir.netflix.com/results.cfm

[i] Roy Morgan Research. (2015). Netflix is the new black: 1 million users, more than 3 times rivals Presto, Stan, Quickflix & Foxtel Play combined [Media release]. Retrieved from http://www.roymorgan.com/findings/6312-netflix-already-dominates-streaming-video-on-demand-television-may-2015-201506230322

[i] Fullagar, D. (2016). Evolving Proxy Detection as a Global Service [Media release]. Retrieved from https://media.netflix.com/en/company-blog/evolving-proxy-detection-as-a-global-service

[i] European Commission. (n.d.). Digital Single Market: Bringing down barriers to unlock online opportunities. Retrieved from http://ec.europa.eu/priorities/digital-single-market_en

Image source: Matthew Keys