Exploring the Netflix Business Plan: A Decade of Dominance to Plateau

Netflix suffered its first subscriber loss in a decade, as reported by the company in April this year, sending stock prices crashing by 26% and wiping out $40B of its value. Expectations of adding 2.5 Million new subscribers were dashed with an actual loss of 200,000 subscribers. Further losses of 2 Million subscribers have been predicted for Q2. Netflix, the pioneer in the streaming industry, has had its most recognizable heavyweight status in the industry come under threat from massive entities entering into the industry with their own streaming services. This illustrates the Competitive Advantage of Netflix and how it's evolving.

The Netflix Business Plan and the Future of Netflix are now under intense scrutiny.

Netflix's loss of momentum can be traced back to several factors integral to the Netflix Business Plan:

Increasing competition has brought giants like Disney, Apple, and Amazon into the streaming industry. These giants, unlike Netflix, have much larger and diversified businesses that can be relied upon for synergies, talent, and resources.

Loss of content from Netflix's library occurred when rival Disney launched its own streaming service. Disney, being a longstanding juggernaut of media, owns Marvel, Lucasfilm, and several other brands and managed to move them over to its library from Netflix. This has added further pressure on the company to speed up original content production - but this is a strategy that requires heavy investments and a high risk of failure.

Password sharing has been a big behavioral problem for Netflix, costing it significant revenues. Over 100 million subscribers worldwide are predicted to be sharing passwords with one another without any payment, with 30 Million in US/Canada alone, which are its most charged and profitable markets.

The spurt in subscriber numbers caused by the pandemic and the consequent increase in the number of people staying at home has now begun to fade. As people return to office work and normality, their motivations for paying for a subscription service have dwindled and are likely to result in further subscriber losses.

The Russia-Ukraine war came as a complete surprise, with the following sanctions on Russia driving several Western companies out of the country for legal and moral reasons. It lost another 700,000 subscribers as a result.

Netflix remains one of the most expensive streaming services, even in the US, with monthly plans of $9.99, $15.49, and $19.99. With current inflation and commodity price levels, consumers are facing dwindled disposable income and therefore are less likely to spend on luxuries like Netflix.

Poor performance in India has won the company only 5.5 Million paid subscribers, a number that pales in comparison to Disney+Hostar's 46 Million (that uses a free model that is supported with ads) and Amazon Prime's 21.8 Million.

While this scenario was somewhat expected, it serves as a powerful Lesson from Netflix for businesses that currently have a first-mover advantage:

Understanding the industry and barriers to entering it is critical - if being first in the race is your only call to fame, that fame will not last. In Netflix's case, the barriers to entry were virtually non-existent as larger companies like Apple and Disney managed to venture into the space using their massive cash resources and IP garnered from other business lines. If no barriers exist, a competitive position is hard to sustain and might not last in the long term (a monopolistic market will eventually become flooded with competition, driving revenues down for the industry as a whole)

Invest in competitive moats and advantages, IP - do more of what you do best/can do well with synergies. One of the few cards that Netflix can tout at present is its vast library of highly successful original content from all over the world - Squid Game from South Korea, Lupin from France, and Stranger Things from the US, to name a few. With such hits, it has been able to craft a highly desirable name in the cinema world that is sought after by directors, actors, and writers alike. This advantage will be hard to kill if the right strategic investments are made.

Factors that are seemingly irrelevant may play a big role in your business - the Russia-Ukraine war and the corresponding surge in inflation and commodity prices have dwindled the incomes of consumers from all over the world, making them less likely to spend on unnecessary luxuries like Netflix. Always keep close tabs on geopolitical and macroeconomic events.

Invest in ecosystems that lock in consumers - the advantage that, say, an AppleTV has over Netflix is the ability to entice existing Mac/iOS users to give its content and subscription service a try. Disney already holds a massive portfolio of brands that are well-known to the target market. Amazon enjoys similar advantages by offering Prime streaming as an add-on service to already existing customers. Netflix, having only a subscription service, has less "stickiness" than its rivals.

Netflix suffers from having limited diversification vs. that of key rivals like Amazon, Disney, and Apple. Netflix's options at this point include lower subscription fees and supporting it with ads, banning password sharing or looking for ways to monetize doing so and adding interactive/video game content like Exploding Kittens to stay relevant and financially sustainable.

First-mover advantage must therefore be cemented with other elements that make the market leadership position and the financial rewards that follow sustainable in the long run. This is a critical part of the Future of Netflix.

References:

Predictions for Netflix's subscriber base in coming quarter - https://www.aljazeera.com/economy/2022/4/20/netflix-suffers-first-subscriber-loss-in-a-decade

Netflix's subscriber loss - https://indianexpress.com/article/explained/netflix-subscribers-loss-explained-7888049/