NETFLIX
2% of the world is subscribed to Netflix
Starting as a small DVD rental company in 1997, Netflix has managed to encapsulate the world bringing in approximately $25 million and a continuous 24% growth (Netflix July and October 2021 Quarterly Financial report) in the last year alone.
The once small market has boomed in the 24 years since Netflix began, with companies such as Blockbuster once seemingly triumphing to modern companies such as Amazon and YouTube engulfing a large portion of the new wave.
As technology continued to evolve, physical distributing companies such as Blockbuster began to collapse. Whilst Blockbuster was an international franchise with stores across North America and Europe, they were once parallel with Netflix. However, having an international franchise doesn’t make it invincible (1851franchise, 2021).
With adults in the UK spending an average of 3 hours and 37 minutes (Ofcom 2021), it is evident that there is an ever growing audience for the market of online streaming, furthermore giving a never ending and growing pathway for Netflix to continue to grow.
COVID 19 & NETFLIX
The pandemic caused increased difficulties for many across the world, from inividuals to global companies; however Netflix was able to thrive.
With a large portion of the world suddenly instructed to stay in their homes, at home entertainment services such as Netflix boomed. Netflix attracted an amazing 15.77 million subscribers in the first three months of 2020 (Walsh, 2020), it's biggest quarter yet and it wasn't slowing with a further 10 million subscribers also joining in the next quarter.
As COVID-19 encapsulated the world, and froze the everyday lives of millions, it did not halt the speed at which those individuals began to utilise online services and platforms to pass the time. The impact on streaming services within the UK alone during the COVID-19 lockdown of 2020 saw these platforms and businesses welcome a large influx of new subscribers, the majority of whom signed up to Netflix and Amazon Prime Video (Rajan, 2020).
Due to the increase of new subscribers since the start of the pandemic in 2020, within the first three months of the year approximately 16 million individuals had signed up for Netflix’s streaming service; which is almost double the new sign-ups it saw in the final months of 2019 (Thomas, 2020). Coinciding along with this, the market and stock value of the business increased by approximately 30%, as investors realised the platform's ability to benefit from people spending more time indoors (Thomas, 2020).
To summarise, whilst the continuous lockdowns of 2020 may have had a large scale impact on individuals, it has dramatically aided the expansion and success of online streaming platforms such as Netflix, Amazon and Disney+.
The largest forthcoming challenge for Netflix coming onto the hopefully tail end of the pandemic would be to avoid what has been described as 'the slump'.
"We can't come off the craziness of
COVID and be confident of the next 2 years." (Hastings: Netflix Investor Relations, 2021)
Customer retention may be one of the largest concerns that Netflix faces post-pandemic, as people return to their everyday lives as social distancing ends, the demand for online services will naturally decline. The challenges that come along with customer retention include creating original content, updates to the streaming services and plans for the businesses future whether that be into other industries or within itself.
2020 saw a large increase in the volume of traffic and success of much of Netflix’s content, however the plateau is inevitable.
The surge into original content is at the forefront of the business strategy to increase it’s revenue and set itself apart from competitors, however with productions and filming coming to a halt as the world experienced the largest pandemic this century; the focus is now on sourcing the licensing and stories for the original content that will be launched in 2021 and further.
The company has emphasised the importance of it’s original content, and that the Netflix productions launching next year plan to exceed 2020 in every quarter (Sherman, 2020).
Throughout this analysis, different aspects of Netflix as a business will be discussed, drawing upon the competition, opportunities for the business and it’s international market; all of which must be discussed whilst still considering the relevance of COVID-19 not only on the business but on the world.
Strengths and Weaknesses
Since Netflix has launched itself into 130+ new markets since 2016 (Netflix, 2020) it is crucial to be able to analyse where the business lies in terms of its current strengths and weaknesses, increasingly so if this is analysis is conducted around the impact of COVID-19 on the business.
Conducting a SWOT analysis helps to aid in finding where a company is already performing well, and which areas could use more development. Using this strategy will enable a clear cut evaluation of Netflix's current position as a business.
Strengths of the business
Brand image and reputation are at the forefront of Netflix’s success, with a vast international library of content it is always attracting creatives and producers which enables it to maximize its operational effectiveness (Rivera, 2019).
As the company extends its creative output, it maximises its strengths as an online streaming platform, as the continuous free flow of new releases and especially its original content, meaning that in addition to earnings from streaming operations (Rivera, 2019) it is able to work beyond the licensing content and produce for itself.
A further strength of the business is that it’s strategic management continually seeks new solutions (Rivera, 2019).
The company has stated that it is aiming to become first choice in online streaming by driving secular growth from linear to streaming entertainment (Neuman: Netflix Investor Relations, 2021) this means that the company is pushing to adapt itself to the wave of new demand, such as COVID-19 has given it with the mass amounts of new subscriptions that the company gained within it’s 2020 fiscal year.
The instructiveness of Netflix’s algorithm could also be considered one of the largest strengths they have with a user interface that quickly learns and makes recommendations based upon individual users' tastes (Netflix, 2020).
Doing so allows the company to utilise a system that prioritizes the viewers satisfaction and aids with subscriber retention, which is at the forefront of worries as Netflix moves to the end of their final 2021 quarter.
Weaknesses of the business
When examining weaknesses of the business, their subscriber based business model is one of the top possible weaknesses. As the company needs a continuous stream of new subscribers the prices vary in price with basic, standard and premium models.
Whilst it seems relatively straightforward a lack of new subscribers or consistent retention also poses a threat for the business which leads to an inconvenience of user subscriptions, which limits the growth of the business (PW Consulting Agency, 2021).
Another weakness to be considered is that as a business Netflix runs on negative cash flows as they source productions, licensing, studios, talent and much more, and the only way in which to occur the profits is back is through their business model, which indicates that it could be some time before money is sourced back into the business.
Using this alongside the pandemic, it is evident that many productions would have been halted as many of the crews and teams had to stay at home, by the end of 2020 Netflix had fallen $15 billion in debt (PW Consulting Agency, 2021).
Business Model
In it’s early days Netflix operated on a pay-per-rent business model, in which customers would be able to order a DVD, and return it. The business then changed to an early subscription-based model without any late fees (Allegretti et al., 2021).
One of the positives of a subscription based model is that there is a stream of regular income, another addition that comes alongside is it brand loyalty which Netflix is very well adjusted with as attachment to the brand develops through continuous usage of a product or service (Pineda, 2021).
(Allegretti et al., 2021)
(Allegretti et al., 2021)
The two tables above show the progression and growth of Netflix as a business since it first started in 1997, showing that as Netflix primarily shifted to being more available online as the subscription service moved away from revenue from DVD rentals, to digital streaming revenue; this is a clear example of vertical growth.
As the company grew it expanded the markets in which it can become more profitable, and with Netflix that lies with its growth of original content, but that also brings with it dangers of lost revenue. A successful original series can bring in new subscribers and keep current ones loyal (Hayes, 2021) this would keep consumer retention, however an unsuccessful original could also do the opposite of pushing it’s subscribers away or deterring new subscribers.
The competition
Netflix as a business has a wide range of competitors, featuring similar subscriber based business models, original content and licensed content that is only available within itself. Competitors that have gained momentum since the international lockdown’s of 2020 due to COVID-19 include platforms such as Amazon Prime, Disney+, Apple TV+, HBO and many more; however to be able to analyse Netflix’s performance against its competitors, it is necessary to limit it to those with the highest market share.
The table above demonstrates that throughout 2020 Netflix held a large share of the market with 52.7%, whilst a variety of competitors occupied the rest of the UK streaming market. The competitors that will be analysed against Netflix are Amazon and Disney+.
Netflix’s strongest competitor by far is Amazon prime, with 150 million subscribers after it’s 2020 fourth quarter (Roy, 2021). Whilst Amazon Prime costs £7.99, the same as Netflix they only have one price plan making it more available to its customers as they do not have to upgrade their subscription to view the service on multiple devices, whereas subscribers to Netflix have three tiers of subscriptions to decide between in order to do so.
Amazon has also grown substantially in size with regards to subscriptions due to the company deciding to expand the output of original content (Roy, 2021) on the platform, making it a key competitor against the Netflix giant.
The second competitor reising alongside Netflix is the streaming service from Walt Disney, Disney+.
The service holds a key advantage to Netflix, as it contains the entire Walt Disney film collection, but also many movies and television shows that are owned by Disney itself.
Franchises include Star Wars and Marvel, a key indicator of the success of Disney+ would be with it’s release of WandaVision during 2020 which managed to attract 589 million total views, whilst only containing five half an hour episodes.
In the week of its launch WandaVision was the lone non-Netflix entrant in the top 10 (Hayes and Hayes, 2021) of most watched shows. The ability for Disney+ to release a mini-series and for it enter within the top of shows most watched, ascertains to the potential of the platform as a key competitor to Netflix.
Internationalism
Netflix has expanded its international presence vastly since it first launched in 1997, with 213 million subscribers across the globe, the business holds the largest market share for subscription based streaming services.
Netflix. (2021). Number of Netflix paying streaming subscribers worldwide in the 3rd quarter 2021, by region (in millions). Statista. Statista Inc..
Netflix. (2021). Number of Netflix paying streaming subscribers worldwide in the 3rd quarter 2021, by region (in millions). Statista. Statista Inc..
The graph above shows the amount of online paying subscribers to the platform, as of Netflix’s third 2021 quarter. The statistics provide evidence that North America, Canada, Europe, the Middle East and Africa total 144 million subscribers alone (Netflix, 2021) indicating that over half of it’s audience is within the western and northern spheres of the world.
“As with every market we’ve launched, our approach is to listen, learn and improve rapidly, adding more content, languages and a better Netflix experience over time to delight members” (Netflix Investors, 2020).
Netflix Investors (2020) write that amongst expanding their subscriber base into many other countries, in order to utilise their service the business aims to bring more original content from these countries and cultures to the streaming platform.
Doing so it aims to bring the new content with updated policies that will aid in the distribution of this content, it is also stated that Netflix believes that high-quality storytelling has universal appeal that transcends borders (Netflix Investors, 2020).
Comparitech. (2021). Countries with most content available on Netflix worldwide as of January 2021. Statista. Statista Inc
Comparitech. (2021). Countries with most content available on Netflix worldwide as of January 2021. Statista. Statista Inc
The size of the Netflix libraries that are available internationally is also important when considering the scale at which Netflix operates, a large portion of the countries with the largest Netflix libraries available are either English speaking, or have various licensing.
When it comes to content that is available the business has to determine what will be profitable in each individual country, licensing fees are expensive and what may not be popular in one country will be in another.
Comparing the two graphs, a clear difference emerges and that is between subscribers and library content available. The first indicates that western countries have higher subscription rates compared to those of Asian countries; however the second graph would contradict the first in terms of supply and demand.
The countries with slightly lower subscription rates, have larger libraries available to them, some reasons for this include language barriers for other Asian countries, as the ones indicated in the second graph have large percentages of individuals that speak English as a second language, for example the Philippines has approximately 50 million (Babbel.com and Lesson Nine GmbH, 2017) citizens that speak English as a second language.
Not only is the size of the libraries and the other segments that have been analysed already so far responsible for Netflix’s success for global dominance, the content that the business creates and puts out is key for it’s international market shares.
Non-English content viewing has grown 3x (Sarandos: Netflix Investor Relations, 2021) since the company began producing content in 2008. The availability of content from other countries to the rest of the world is key in making things more accessible.
With a large proportion of the world staying inside during the COVID-19 pandemic, the availability of content was crucial in order to secure the company's survival and to set it apart from its competitors.
Original content
An aspect of Netflix that sets it aside from its competitors, both in linear media and online streaming is its ability to create its own original content at a large level, with the produced own content being nominated for Oscars or going viral and achieving millions of views.
The company currently contains 1,500 original titles since it began producing original content in 2013 (Cook, 2018).
Whilst companies such as Amazon Prime Video launched 314 hours of original content in 2019, Netflix released a much larger 2,500 hours worth of original content (Advanced Television, 2020).
The success of Netflix’s original content encompasses a large array of categories, a singular one to recognise is the impressive awards that they have been nominated for; including Emmy awards and 5 Oscar-nominated best pictures (Sarandos: Netflix Investor Relations, 2021).
Successful titles from Netflix’s original content include:
Bridgerton S1 – 82 million views
The Witcher S1 – 76 million views
Squid Game (Season 1) – 142 million views
Lupin S1 & S2 (French) – 70 million views & 54 million views respectively
Money Heist S5 & S4 (Spanish) – 69 million & 65 million views respectively
Tiger King: Murder, Mayhem, and Madness – 64 million views
The Queen’s Gambit – 62 million views
(Moore, 2021)
Since Netflix has gained a large success due to their original content strategy the company has begun spending most of its content budget on original content (Cook, 2018).
The success of original content is determined largely by the engagement received outside of the streaming service, primarily through earned media such as articles and user generated content surrounding its releases and new subscriber amounts that correlate with the release of a title.
However, in order to judge how it has been received internally with its existing subscribers it is correlated with retention of existing members (Netflix Investors, 2021).
The business has been focusing on its expansion into international markets which is evident with the amount of it’s originals that have received millions of views since they launched, with the most recent success being of the Korean series Squid Game which totalled 142 million viewers in the first few weeks (Gupta: Netflix Investor Relations, 2021).
Whilst Netflix is still creating and implementing the original content strategy, Co-CEO and Content Officer Theodore Sarandos says that Netflix is still learning how to produce and promote effectively, and about the positive impact of originals on our brand (Netflix Investor Relations, 2021).
Considering this, it is easy to assume that the saturation of original content within the company will only increase in the foreseeable future as the spending budget for original content and the accessibility of the platform within more countries also rises.
Road ahead
With Netflix occupying a large portion of the international streaming market, the logical assumption would be to inquire as to what might be next for the business.
In October 2021, Netflix announced its acquisition of Night School Studios, a video game developer and publisher. The announcement of this new acquisition pushes Netflix further out into uncharted territory but also into a region that it’s competition has not yet moved into.
Night School is the first studio the streaming giant has acquired during its push into the game industry (Hester, 2021), with Night School studios receiving praise for their creative storytelling parallels with Netflix’s approach for original content that drives deep connections into it’s audience.
Creating immersive video games, that could potentially create links and expand upon the stories of some of Netflix’s originals would allow the viewers to go deeper and explore spaces that they wouldn't have otherwise seen on the video side (Peters: Netflix Investor Relations, 2021).
With a push into the industry of video games, and a further emphasis on the creation of original content, it is evident that no market is untouchable for the business.
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