Netflix Business Strategy In 2022

As the aphorism says, “what doesn’t kill you makes you stronger.”And I would add, up to a certain extent.

Companies, like humans, are organic creatures living in an environment called a market.

When the market’s landscape changes and challenges the company’s survival, that stressor can finally become a huge motivator to leap forward!

This is what makes startups interesting business creatures. They are often challenged to the point of having to redefine, from time to time, their business playbooks (what’s in startup lingo is called a “pivot”).

This is the essence of post-traumatic growth!

Netflix’s post-traumatic growth

It might seem counterintuitive to many, yet stressors from the environments help us push through hurdles, whether as an individual (there is no muscle growth without intense exercise, which is a stressor) or as a company (when the market landscape changes, you got to adjust your business playbook).

Those stressors challenge our assumptions and make us redefine our beliefs.

This is what happened to Netflix. Let me reconstruct a bit the whole story.

In Q1 of 2022, Netflix’s subscribers slowed down for the first time in a decade.

Various factor seems to have affected this slow-down.

In short, Netflix has identified a few issues with its slow-down business model.

Some are related to the economic slowdown (which the company can’t control).

Some others were related to linear competition (the streaming market has become much more crowded).

And the last one, to me, the most important, was non-linear competition.

In other words, attention might be migrating to other platforms like TikTok/YouTube, especially for younger generations.

Another key point to me is that Netflix has been consolidating its business model playbook, in the last decade, in an era of abundance.

Thus, in the current era, where abundance is over, Netflix is completely shifting its business model toward an ad-supported version, which relies no longer on binge-watching but rather on content releases through theaters.

In other words, the business model that worked as a way to develop and disrupt an industry might not work anymore when you’re operating at scale.

Changing business playbook

Returning to this last quarter’s results, Netflix seems to be back on track.

For Q3 of 2022, Netflix subscribers passed 223 million!

Netflix stock jumped from $230 to $280, levels the company didn’t see in months.

How did this happen? And does it mean the problem is solved?

Let’s see how the Netflix executive team has been tackling the issue. As Netflix explained in its last earnings:

The key is pleasing members. It’s why we’ve always focused on winning the competition for viewing every day. When our series and movies excite our members, they tell their friends, and then more people watch, join and stay with us.

In that respect, Netflix seems to understand the value binge-watching has as a way to retain subscribers and create a viral buzz about new series.

Binge-watching is still a critical brand enabler for new releases

And that is another key point.

Regarding content releases, it’s critical for Netflix to keep a tight schedule of new great releases to enable more and more subscribers to join in, thanks to the strong buzz binge-watching generates.

Netflix highlighted how one of the latest series had gotten substantial traction and buzz thanks to binge-watching.

As the Netflix team highlighted:

It’s hard to imagine, for example, how a Korean title like Squid Game would have become a mega hit globally without the momentum that came from people being able to binge it. We believe the ability for our members to immerse themselves in a story from start to finish increases their enjoyment but also their likelihood to tell their friends, which then means more people watch, join and stay with Netflix.

Going beyond the licensing model

While streaming series have defined Netflix as a company, it now also understood that to become the new Hollywood, Netflix needs to push on original Film production.

This is a key shift. And I’ve been explaining for years that it’s not just about content. This is a massive business model shift.

When Netflix releases Films on its platform, which it licenses from other studios, there is a huge advantage: making the selection on Netflix much wider and at much lower costs (licensing is way cheaper than production).

However, there are some major drawbacks in the long term.

Let’s see the core ones.

Slow and secondary distribution

Due to the pay-one window, movies produced by other studios generally debut well after theatrical release.

This means that a new movie will be available on Netflix much later compared to the theatrical release.

As you can imagine, this makes it way less effective for Netflix to have content already widely distributed elsewhere available on its streaming platform.

Limited availability

With the licensing model, Netflix can expand its selection quickly.

Yet, not in perpetuity. The licensing agreement does not give Netflix ownership of the content but only the ability to distribute it on its platform for some time (usually 18-24 months).

And even there, you’re subject to the change in strategy of other studios.

Limited expandability

Producing movie hits is extremely hard as the movie-making industry is not far from the Venture Capital industry.

You place various bets, hoping one will pay off for all the others.

And when you have a winner, you got to place even more weight on it. In short, movie-making is a winner take all business.

Where the few make for the most of the revenues for the whole industry.

When it comes to movies, therefore, if you don’t own the copyright (as it happens in the licensing model), you can expand a movie into a series. If you think about it, Marvel’s movie series are among the highest-grossing movies!

In addition, as – with the licensing model – you don’t own the IP, and you can’t make out of it other consumer products.

Back to Marvel, the merchandise is a great revenue stream.

Therefore, by pushing into original programming, Netflix is finally transitioning into a media company.

This transition has been going on for almost a decade (starting in 2013) and is now in full force!

Netflix is slowly moving away from the licensing model (Netflix is still a subscription-based streaming platform).

Netflix Original Film Strategy

Thus, it can’t abandon licensing immediately, as it needs to keep a wide selection of movies and series), Netflix is enabling:

1. Fast and primary distribution. Original Netflix Movies will be available on Netflix first, which will greatly benefit subscribers.

2. Unlimted availability. Since Netflix owns the IP of these movies, it can distribute them as much as it wants. And another key point, it can also license it to other streaming or TV services after those have been widely distributed on Netflix. Thus, it can further make money from licensing and distributing its content on other platforms!

3. Unlimited expandability. By owning the IP, Netflix can not only create movie series and spin-offs, but it can easily develop consumer products around these movies!

The strong move beyond the licensing model for movies is the most important element of the last quarter’s results.

Indeed, Netflix has 118 million household subscribers, a great number to generate for the next Oscars!

Competition: linear and non-linear

As highlighted in the last quarter’s results, Netlfix’s executive team is well aware of the competitive landscape.

As they highlighted:

We operate in a highly competitive industry, where people have many different entertainment choices – from linear TV to streaming, YouTube to TikTok and gaming to social media.

That is why Netflix keeps an eye on all these elements for its core strategy. And these are the initiatives in place to defend and attack at the same time:

Account sharing

Netflix is tackling the ability for borrowers to transfer their Netflix profile into their account, for sharers to manage their devices more easily, and to create sub-accounts (“extra members”) if they want to pay for family or friends.

So to monetize all the accounts that, right now, are not monetized.

Ad-supported version

Netflix is officially launching an ad-supported tier, starting at $6.99, making the platform’s price way more competitive.

This will enable Netflix to understand the dynamics of the streaming advertising industry while lowering the basic subscription price and giving an additional reason for basic subscribers to switch to the plan without ads.

Marketing campaigns at scale

To keep generating buzz and a high volume of eyeballs, Netflix has been consolidating its strategy through its event platform, Tudum, which generated over a billion views in a year.

This is the Netflix response to platforms like TikTok/YouTube.

Gaming

Netflix has entered the gaming industry, establishing its infrastructure, with 35 games on the service and over 55 games in development.

The opportunity that Netflix sees is the ability of gaming to cross TV and films. Games are a great IP from which to develop content that can, in the future, become movies or series.

Thus, Netflix is betting on that…

That’s all for now!

Also published here.