Bolder Thinking Blog

[Part 3] Competitive Strategies: What is next for Netflix?

December 18th, 2019 | Behice Ilhan

In this four-part series, we ask the question: “What is next for Netflix?” In the third blog of the series, we will discuss how the consumer decision is taking new shapes and what the new forms of consumer choice are. 

Part III: Consumer Choice

How is the consumer choice changing in the recent market dynamics?

Why is it important for Netflix to understand the new forms of choice?

What are possible habit making processes in these evolving dynamics?

What would be Netflix’s strategy about partnerships and competitive collaboration?

Marketers tend to deem consumer choice as an independent, individual act that needs to be managed across the path to purchase funnel: from awareness to choice. The recent dynamics of the marketplace is going to challenge that commonly accepted thinking. Consumer decision making is changing.

Embedded consumer choice

Consumer decision making will be taking a new shape in smart and connected ecosystems. In the coming era, consumer technology and entertainment choices will be interdependent of each other and dominated by the ecosystem in which they are embedded in. As Internet of Things (IoT) systems get more effective and extensive, consumers will be able to connect more products/machines/services to these systems. Accordingly, choice of the streaming service will partly be determined and sometimes shaped by its compatibility with the other devices/services that are also connected to this IoT system. With 5G, this efficiency will be more emphasized because 5G will unlock and unleash the full potential of IoT systems. The habits and practices around a streaming service will also be dominated by the ecosystem in which it’s located. Will consumers be able to watch Netflix in their home in an Amazon dominated IoT system in 10 years? I cannot say a definite yes.

Consumer choice is taking a new shape where the path to purchase funnel is narrowing at the top but expanding at the mid segment. This puts real challenges on the existing marketing strategies that prioritize and focus on building awareness to initiate consumer decision making. Marketers pour their budgets into building awareness because they deem awareness as the first and necessary step to conversion. If a consumer doesn’t have Netflix, does it matter whether they know about a particular Netflix show or not? Does it really matter that they know about a Netflix show if they are asking Alexa to find a “good flick to watch tonight?” What does that mean for Netflix?

Recommended Strategy 7a: Netflix has problems across the funnel. Netflix has, and will continue to have, problems across the funnel. First, the above questions point to a crucial top-of-the-funnel problem both for Netflix and Disney. The top of the funnel is important touchpoint in the ecosystem approach in dominating the funnel. But neither Disney nor Netflix has a digital, top-of-the-funnel touchpoint for consumers like Alexa, Siri, or a Google search engine. And dominating the top of the funnel and engaging the consumer early on for awareness and search is one of the major competitive advantages of tech giants like Amazon, Apple, and Google. This lack of a top-of-the-funnel strategy will be a growing problem for Netflix given the increasing market penetration of smart speakers and growing voice-activated machine-to-machine commerce. Second, both Netflix and Disney have to rely on other technologies (Roku) or other ecosystems (Apple, Google) to go into consumers’ living rooms. Third, wearable technologies from Apple (iWatch) and Google (FitBit) will put these brands in a very advantageous situation in coming closer to the consumer and also creating the richer ambient experiences for the consumers. (e.g., changing the storyline of the movie or the type of the commercial based on the users heart rate as captured by their iWatch while watching the movie). That’s exactly why Google acquired Fitbit.

7b. This problem will challenge Netflix’s international growth strategy. The majority of Netflix’s growth comes from international markets (2016-2019: 123% international growth; 24.4% domestic growth). In these markets, the penetration of smart speakers is higher than that of the US. In China, although smart speakers were introduced almost three years after Amazon announced its first Echo in 2014, the adoption of smart speakers is growing very rapidly. A quarter (25%) of smart speaker owners in China embraces voice technology for payments. The established Chinese ecosystems like Alibaba and lack of access to Chinese data sets for frictionless voice-activation are, and will continue to be, the major hurdles for Amazon, Google, and also for Netflix for machine-to-machine interactions in China, in Asia, or generally across the globe.

As detailed in the above scenarios, the choice of entertainment will be interdependent of other choices and will be dominated by the bigger players who build broader ecosystems with multiple touchpoints. To compete well in this dynamic, many brands are collaborating with other brands in their own or other categories to make sure they can create seamless experiences for the consumers across the funnel (e.g., Verizon and The New York Times, HBO and AT&T) and create new places for entertainment content (e.g., Audi and Disney). Several brands, like Disney and Audi, are trying to find solutions to capitalize on the free-d up time and free-d up hands that drivers will have in self-driving cars. Disney is collaborating with Audi to develop a virtual reality (VR) headset and entertainment content for Uber riders now and self-driving car passengers in the future. Car is transforming into an entertainment and lifestyle space.

Recommended Strategy 8: Collaborative Competition: In today’s atmosphere of emerging market dynamics, where several players are joining forces, what would be Netflix’s strategy for partnerships and competitive collaboration? How should Netflix develop a robust collaboration strategy yet still differentiate itself as a prominent entertainment agent, particularly to solve its problems at the top and bottom of the funnel? If I were Netflix’s CEO, I would seriously consider Microsoft as a possible collaboration opportunity. Microsoft has (1) huge potential for an ecosystem approach; (2) a stellar recurring revenue model for its products, (3) digital technology at the top of the funnel with Bing, and (4) a delivery system – Xbox – that would provide the necessary delivery technology for Netflix.

Polarized consumer choice

For a while, Netflix and Hulu wanted to create a “frenemies” situation in the streaming category: a duopolistic competition with polarized rivalries. The Fyre festival joust was an effort to create this rivalry with Hulu. This type of polarized rivalry is seen between XBox and PS, Coke and Pepsi, Colgate and Crest, Spotify and Pandora, Uber and Lyft, etc.  Although polarized rivalries might benefit the jousting rivals, Netflix should be careful in drawing analogies between choice contexts. The way decisions are negotiated between Uber vs. Lyft or Pandora vs. Spotify is not the same for Netflix and its competitors. Uber vs. Lyft and Pandora vs. Spotify are acting in duopolies where the majority of the market share of the category is held by two major players acting in a polarized rivalry. There are different dynamics in a polarized duopoly that impact consumer decision making. Polarized rival categories create more “either … or type of consumer choice negotiations. Yet, Netflix is acting in a more fragmented category where the competition does not primarily come from a single brand but from several brands. According to Mintel research on digital video, the average US household that uses a digital video service subscribes to a mean of 2.4 paid video services. As evident from the data, consumers are more in “both…and” practices when it comes to streaming services where they use 2-3 services. The majority (87%) of US consumers who use an on-demand streaming service use Netflix, followed by 58% who use Amazon Prime and 42% who use Hulu. The next highest usage is the 18% who use HBO Now. It is difficult to compare and contrast the consumer decisions and practices of a fragmented category vs polarized duopolistic category.

Recommended Strategy 9: Transmedia consumption is a patching process. Consumers pick, choose, unite, and affix the content of different platforms to create their content-worlds. In this world building, they patch by bringing various brands together in different ways and for different reasons. For example, they might engage with one streaming service out of habit, another to access their all-time favorite show, and get the password for another from a friend in order to watch a specific series for a limited time (like accessing HBO during Game of Thrones seasons) etc. Understanding the patching – how and why consumers bring together these online streaming services – will help Netflix explore how, when, and why consumers keep Netflix as one of their 3-4 subscriptions.

People who own one streaming service predominantly own Netflix (70%), according to Mintel research on digital video. Apparently, Netflix is the hub of the streaming experience. The other services are patched around Netflix to create a rich streaming and content experience. But Disney+ pre-selling annual contracts to Disney Club Members – and locking in Verizon customers who are on a yearly contract with Verizon – might change the hub status of Netflix in the long run.

Understanding choice as a patching process that consumers adopt in these crowded ecosystem and multi-touch point environments will inform Netflix about the changing consumer choice situations: interdependent choice, by choice (e.g., Amazon Prime streaming is a by choice for many consumers that come as a benefit to Prime delivery service; Verizon offering Disney+ for free to contract holders), choice of the units (e.g. families), etc. Disney also responds to this patching process at the family level and provides something for everyone in the family with the ESPN+, Disney+, and Hulu bundle.

Recommended Strategy 10: Dancing with the enemy? Is Dancing with the Enemy a possible strategy for Netflix? Will creating a polarized rivalry with Disney help Netflix manage their difficult competitive situation? Possibly.

Read part one of the series here and part two 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.