Netflix – The Business Model

Value propositions

Within the very competitive and well-established landscape of the video rental industry, new entrants must present services that are highly valued to the consumer in order to be successful. Netflix’s success is attributed to the three main factors that differentiate it from its competitors: expansive online content, a recommendation engine algorithm and increased mobility (Small, 2012, pp. 51-53).

Content
As of late March 2016, AllFlicks found that the US region of Netflix boasts a catalog of 5532 titles alone (Long, 2016). Where Netflix differentiates from traditional video rental stores is that digital content requires very little physical space which can serve millions of people at once. With so much choice, it’s no wonder subscribers keep paying.

Content Innovation 
Netflix is notorious for funding and supporting an array of fresh content which is exclusive to its services. As Netflix’s most watched original series, Orange Is The New Black has developed a sizeable fan-base with between “8 million and 15 million viewers per episode” (Obenson, 2013). Although the story line follows a female protagonist, the series covers a wide variety of modern themes such as LGBTI rights, racism, gun laws, drug cartels and relationships. This cocktail of themes means that the TV show appeals to a diverse range of people. Due to the exclusivity of this content, people have no choice but to subscribe to Netflix in order to gain access to the TV series (Long, 2015).

OfEHcil-TN8x

Picture 1: Source – http://www3.pictures.zimbio.com/mp/OfEHcil-TN8x.jpg

Recommendation Engine
With content genres ranging from action to indie niches, it is easy to be overwhelmed with choice. To manage this, Netflix relies heavily on a unique algorithm that presents the viewer with related recommendations according to their viewing history (Small, 2012, p. 52). Netflix takes its recommendation engine so seriously that in an effort to better the user experience, they ran a competition with the prize of $1 million. This was to challenge computer scientists to create a more accurate and user friendly algorithm than their existing one, ‘Cinematch’. As a result of this competition, Netflix’s algorithm was optimised with 10% more efficiency (Hallinan & Striphas, 2014).

Mobility and Accessibility
By leveraging the ubiquitous functionality of the internet (Netflix, 2016c), Netflix has negotiated deals with several hardware companies inclusive of Apple, Microsoft and Sony to provide the Netflix customer with a multitude of mediums to view content through. Rather than being bound to traditional means such as a DVD player, subscribers may watch titles on desktop computers, smart devices or other multimedia devices such as gaming consoles and streaming units (Netflix, 2016a). This means accessibility is a major strength of Netflix as viewers are offered more flexibility (Netflix, 2016c) to watch their content on the go and when they want. This winning combination has enabled Netflix to becomes a market leader and competitor to even bricks and mortar video rental stores.

netflix-delivery-route

Picture 2: Source – http://www.electronicliving.com.au/images/editorimages/netflix-delivery-route.jpg

Customers segments, channels and relationships

With as much as 17.2 hours of television and video consumed per week (Deloitte, 2015, p.5) and 99.3% of Australians having reliable access to broadband (Australian Bureau of Statistics, 2015), the growing demand for a variety of entertainment channels has enabled streaming services to be a viable alternative to traditional paid channels (Netflix, 2016c) such as Foxtel and satellite. In a recent survey, 55% of Australian consumers “would rather just subscribe to the channels they watch regularly or purchase the individual shows that they want to watch, rather than subscribe to a broader packaged content offering” (Deloitte, 2015, p.5).

Proportion of Household Types with Netflix (Roy Morgan, 2016)

6499b

Graph 1: Source – Roy Morgan Single Source, September 2015, Australians 14+ yrs old.

(http://www.roymorgan.com/findings/6499-netflix-reach-one-in-ten-australian-homes-september-2015-201510142329)

What is interesting is that Netflix consumption has a strong correlation with demographics that are tech savvy (Statista, 2014), particularly that of the younger generation. The lack of technical ability of some older generations may limit their knowledge or access to streaming services. However, with 65+ yr olds being the biggest TV consumers (Screen Australia, 2014), the potential transition into Netflix could be a promising opportunity.

Revenue

Unlike many other subscription services like Spotify, Netflix does not provide a two-tiered model, where you can access part of the service for free and pay to access the premium. As part of Netflix’s marketing strategy, they offer the first month of subscription for free. This has become a highly successful campaign which boasts a 93% retention rate (Smith, 2011) after the free trial period.

Netflix access starts from as little as $8.99 and ranges up to $14.99 per month. It currently offers 3 plans:

  •    $8.99: Basic plan- lets one person stream movies and TV shows from Netflix in standard definition (SD).
  •    $11.99: Standard plan – lets two people stream movies and TV shows from Netflix at the same time and in high definition (HD) when available.
  •    $14.99: Premium plan – lets up to four people stream movies and TV shows from Netflix at the same time and in high definition (HD) and ultra high definition (UHD) when available (Netflix, 2016b).

 

Video 1

With affordable plans for every type of user, Netflix has now reached over 2,728,000 monthly subscribers which generated over “$A85 million ($US60.6 million) in revenues last year and is set to more than double that tally to $A178 million in calendar 2016” (Groves, 2016).

Growth in number of Households with Netflix (Roy Morgan, 2016)

6499

Graph 2: Source – Roy Morgan Single Source, April – September 2015, average monthly sample = 4,306 Australians 14+.

Netflix dominates 13.9% (Groves, 2016) of Australian market share while its competitors, Stan and Presto have a combined market share of just over 8%. With a quality service that is also good value for money, it is no wonder that Netflix has trumped all of its competitors to become the global market leader in online and offline markets.

Final word

As technology is subject to constant change and transformation, there is a growing demand by consumers for digital content such as TV shows and movies. This has enabled consumers to transcend the traditional limitations of entertainment channels such as Foxtel, DVDs, and satellite. With a plethora of movie and TV titles to choose from, consumers have the opportunity to always have something new and interesting to watch rather than bad reruns. Consumers now have the opportunity to access their favourite video content almost anywhere, anytime, even on the train to work! Affordable subscription plans and unique, state-of-the-art algorithms have empowered Netflix to become a global leader in online streaming services. Although Netflix Australia is a relatively new service, the sheer expansion and revenue growth is a testament to the success and future of online streaming.

Next page: Internet Business Models

References

Australian Bureau of Statistics. (2015). Internet Activity, Australia, 2015. Canberra.

Deloitte. (2015). Media Consumer Survey 2015 – Australian media and digital preferences 4th edition. Sydney: Deloitte. Retrieved from http://www.magazines.org.au/wp-content/uploads/deloitte-au-tmt-media-consumer-survey-2015-100815.pdf

Groves, D. (2016). Netflix Drives Surge In Online Video Revenues In Australia. Forbes.com. Retrieved 22 July 2016, from http://www.forbes.com/sites/dongroves/2016/02/15/netflix-drives-surge-in-online-video-revenues-in-australia/#41b46dbb7f92

Hallinan, B. & Striphas, T. (2014). Recommended for you: The Netflix Prize and the production of algorithmic culture. New Media & Society, 18(1), 117-137. http://dx.doi.org/10.1177/1461444814538646

Long, S. (2015). Streaming saturation: Netflix to double its original content for 2016. Digital Trends. Retrieved 22 July 2016, from http://www.digitaltrends.com/home-theater/netflix-original-programming-2016/

Long, S. (2016). Why is Netflix U.S. catalog shrinking?. Digital Trends. Retrieved 22 July 2016, from http://www.digitaltrends.com/home-theater/netflix-originals-shrinking-content-library/?utm_source=feedly&utm_medium=webfeeds

Netflix. (2016). Netflix: Devices. Netflix. Retrieved 22 July 2016, from https://devices.netflix.com/en_au/

Netflix. (2016). Netflix: Help. Netflix. Retrieved 22 July 2016, from https://help.netflix.com/en/node/24926

Netflix. (2016). Netflix: Long Term View. Netflix. Retrieved 22 July 2016, from https://ir.netflix.com/long-term-view.cfm

Obenson, T. (2013). ‘Orange Is The New Black’ Is Netflix’s Most-Watched Original Series Ever – Likely Thanks To You. IndieWire. Retrieved 22 July 2016, from http://www.indiewire.com/2013/10/orange-is-the-new-black-is-netflixs-most-watched-original-series-ever-likely-thanks-to-you-164197/

Roy Morgan. (2016). Netflix now in over 1 in 10 homes reaching 2.63 million Australians aged 14 and over. Roy Morgan. Retrieved 22 July 2016, from http://www.roymorgan.com/findings/6499-netflix-reach-one-in-ten-australian-homes-september-2015-201510142329

Screen Australia. (2014). Free-to-air viewing – Audiences – Television – Fact Finders – Screen Australia. Screen Australia. Retrieved 22 July 2016, from http://www.screenaustralia.gov.au/fact-finders/television/audiences/free-to-air-viewing

Small, O. (2012). Reshaping The Music Distribution Model: An Itunes Opportunity. Journal Of Media Business Studies, 9(4), 41-68. http://dx.doi.org/10.1080/16522354.2012.11073555

Smith, S. (2011). Rise in Netflix Free Subscriptions a Cause for Concern?. Inside Redbox. Retrieved 22 July 2016, from http://www.insideredbox.com/rise-in-netflix-free-subscriptions-a-cause-for-concern/

Statista. (2014). Age distribution of internet users worldwide 2014 | Statistic. Statista. Retrieved 22 July 2016, from http://www.statista.com/statistics/272365/age-distribution-of-internet-users-worldwide/

Header image copyright 2013 Charmian Love. Source: sigeneration.ca

Advertisements