Bolder Thinking Blog

[Part 2] Competitive Strategies: What is next for Netflix?

December 17th, 2019 | Behice Ilhan

In this four-part series, we ask the question: “What is next for Netflix?” In the second blog of the series, we discuss the systems thinking and how it might help Netflix identify some strategies that would complement the content excellence approach. 

Part II: Systems Approach

Will content excellence still be a good competition strategy? Why? Why not?

What are some other competitive approaches in the current market dynamics?

Recently, producing premium content has become the name of the competitive game in the streaming category. But, winning with content is getting more expensive – and will get more difficult – against these new big players with multi-billion dollar production and marketing budgets. Bezos has allocated $6B on original content. Apple echoes that figure. HBO has spent $15M on average on a single episode of “Game of Thrones.” Netflix’s $15B content budget was still the highest before Disney came into the picture. Yet, with multiple production houses of Pixar, Lucas, Marvel, etc., Disney will be challenging the content strategy of all players in terms of budget and creativity. Thus, going forward, content excellence cannot be the only competitive strategy for Netflix or other players. 

Recommended Strategy 3: Content excellence vs. evolution of systems. Going forward, content excellence cannot be the only competitive strategy for Netflix or other players. A solid competitive strategy should be built on a deeper understanding of the evolution of systems; not only in the streaming category but at the intersection of entertainment, tech, distribution, policy, and consumer culture. Without a vision of how the whole media ecosystem evolves, the tactical actions and competitive strategies will be less effective.

There is a war at the funnel

Big tech giants like Google, Apple, and Amazon are in fierce competition to dominate the path to purchase (P2P) funnel. They want to create an ecosystem that starts from awareness (upper funnel), to search (middle funnel), purchase (lower funnel) and beyond purchase (delivery). Amazon’s push for penetration of Alexa into many houses with really low prices has a strategy behind it. Amazon wants Alexa as the first thing that touches the consumer so it can build an ecosystem behind it where it starts “framing” consumer choices in several categories around Amazon services. If a consumer has an Alexa, Amazon is planning that they will have lightbulbs that can “talk to” Alexa, a door lock that is compatible with Alexa, a fridge that can order via Alexa, and a streaming service that is “friendly” with Alexa where they can pay via Amazon cashless payments. Is that service Netflix?

What are some possible positioning and cultural branding options for Netflix in this new era dominated by ecosystems? What are the potential bottlenecks in their portfolio management and monetization strategy Disney will experience because of Disney+?

Recommended Strategy 4: Re-defining the business. We highly recommend Netflix re-consider its existing definition as a “streaming service” business and explore a broader role in the wider transforming entertainment ecosystem at the intersection of entertainment, tech, and consumer culture. What are some possible positioning and cultural branding options for Netflix in this new ecosystem era so that they can leverage this interdependent system in the best way possible? Read on.

Disintermediation is tricky

Arbitrage – data or content – is not a sustainable business model. That was Netflix’s original model: the intermediary aggregator platform for content that they don’t own. The rising trend about disintermediation – brands reducing the number of intermediaries to reach out to consumers – signaled a long time ago that this trend will challenge Netflix’s original business model. In 2011, when Stars announced that it will not renew its distribution contract with Netflix – cutting Netflix off from Disney and Sony films – Netflix’s survival move was producing its own content. Fast forward to 2019, disintermediation is an epidemic that took over major content producers, intensifying their direct-to-consumer (DTC) efforts.

Disintermediation also comes with its own challenges. Above all, the disintermediation epidemic overwhelms consumers with a plethora of options that they have to manage separately. For Disney, disintermediation of content via Disney+ will pose short- term and long- term challenges. Once its current licensing deal ends, Disney will pull its content from Netflix at the end of 2019. Coupled with other content revenues from other platforms, that’s a loss of $350M+ in revenue loss for Disney. This year, Disney lost $250M+ on Hulu and that will grow as Disney becomes the majority owner of Hulu. Adding the $500M write-off for ESPN+, Disney will need to determine whether the disintermediation model for their streaming service will give them around $1B in revenue right off the bat. Streaming service business models are rarely that profitable right away. Why, then, is disintermediation so attractive for these big players? Many producers – streaming or other – linearly add up the revenue that each intermediary in the distribution channel earns to assess the potential revenue growth of a possible disintermediation strategy. They assume that if they eliminate these intermediaries and go to the consumer directly, they will easily recoup that profit margin. Nope! Things don’t work that linearly in the real world. There is a reason why supply chain and intermediaries in the distribution channel create value.

Recommended Strategy 5: Monetization is a where, how, and when challenge. A good content strategy has to capture the value of content in different ways, across different touchpoints, and over time. The distribution of content across different touchpoints should be designed and executed based on (1) the media consumption patterns of target consumers (where and how they watch content); (2) the necessary partnerships to deliver that content (the form of content), and, most importantly, (3) a better understanding of the value of content as a function of time (the life cycle or the decay rate of the value of content). Many brands and content businesses have a lot to learn from the MLBs, NHLs, and NBAs of this world to leverage the value of “decaying content.”

Scott Galloway, professor of marketing at New York University, calls this ability to monetize content/loyalty across other business units as “flywheel.” Disney seems like they have mastered the “flywheel” strategy. But, the recent disintermediation via Disney+ will challenge several aspects of Disney’s monetization process. Prior to Disney+, to diversify risk and create revenue in its content and brand portfolio, Disney adopts a tent-pole portfolio management strategy where they invest in eight-to-10 “high-budget-high-risk return” movies a year that are produced across their various creative houses. This strategy is grounded in the movie theater performance of these tent-pole movies. The box office success acts as the driving force to provide the necessary buzz and as the aggregator of large audience pools to facilitate and leverage the interest and success of the other touchpoints/platforms. Disney knows exactly when to launch trailers for these big box-office movies, when to launch the movie on DVD, when to sell it to Direct TV or Netflix, when to make it available to cable subscribers, etc. The recent Disney+ disintermediation will probably challenge this existing monetization model and eventually hurt revenues. Disney has an important competitive advantage against its competitors because of its experience and capability to monetize content across its own units and partnerships with other platforms. And, there is not much detail known about Disney’s new monetization model. Will movie theaters still be the hub that drives the monetization process? Or will that be Disney+? If not, when will these big-budget movies be aired on Disney+? At the same time or later than in the movie theaters? If later, will it alienate Disney + subscribers?

Recommended Strategy 6: Netflix has earned some time to figure out a winning monetization strategy. At this point, monetization of content across various touchpoints or via partnerships is one of the major weaknesses of Netflix. Netflix’s own platform is the only touchpoint they rely on to distribute their content (except very few examples like The Irishman that also showed in theaters).  Disney switching to a different content monetization process means more time for Netflix to build its capability to monetize its content across different touchpoints.

Besides monetization, Disney has to adjust its tent-pole-focused portfolio management strategy. In the original model, in addition to the role of the tent-pole movies, Disney leverages the smaller-budget movies to try more risky story ideas, attract niche segments, test new talent, and make sure supply-chain partners (like movie theaters) have content all year long. But putting Disney+ as the hub of performance for all Disney content will put new performance demands on the smaller movies and might shave off the huge box office performances of high-budget movies. My prediction is that Disney will be switching to more balanced portfolio management where they try to squeeze value out of each piece of content – high budget or not – to compensate for the loss of revenue from platforms like Netflix and to keep the engagement on Disney+.

Recommended Strategy 7: Is tent-pole a good strategy for Netflix? One of the successes of Under Armour was to copy Nike’s branding strategy when Nike gave up on the culturally resonant brand storytelling about the individual willpower of athletes. Might Disney’s quitting of a well-oiled monetization model open it up as a possibility for Netflix? It’s a huge strategic question that is worth exploring.

 

Read part one of the series here.

Behice Ilhan

Behice Ilhan

Dr. Behice Ece Ilhan is the Senior Trend Strategist at Mintel. Behice provides futuristic perspectives and opinions on trends and their impact on the brand landscape, which she utilizes to strengthen engagement with CPG and agency clients on storytelling and positioning strategies.