Systems Design and the Future of Netflix

Changing reality is more difficult than changing perception. Innovation has the definition of reification as part of its DNA; bringing something into being and making it concrete. Innovation, if done successfully, can be a badge of honor that so many aggressive CEO’s, of both mature enterprises and eager startups, can brandish proudly. On the other hand, if done poorly, it can insidiously ostracize their companies into irrelevant shibboleths. Today’s economies are uber competitive and research illustrates that the more successful a company is at bringing new products to market, the more likely they are to attain success over their peers and competition (Gourville, J. 2006). The key word is “successfully”, as the vast majority of innovations fail to get adopted by their respective consumer bases. This is ostensibly difficult to comprehend. Aren’t businesses inundated with mandates to constantly innovate and bring new products to market? Time and again, companies fail to tap into the cognition and the psychology of their consumers for better understanding of their consumer’s perceptions. Businesses spend billions to make a better “mousetrap”, only to find their audiences often ignore them (Gourville, J. 2006). Netflix, the darling and first born of the digital media revolution, moved beyond the feature set improvements of their offerings. They were hardwired into the minds and behaviors of movie fanatics and understood their needs, wants, and frustrations (Christensen, C. 2016). Netflix started as a content distributor, offering a service of delivering DVD’s to your home by post. This meant no more late-night runs to Blockbuster or having to start your car on a cold winter night and drive in a snowstorm to rent a movie or pay a late fee.

Sage advice given to the boldest of entrepreneurs, “Pioneers get scalped, but settlers prosper” holds credence in this modern economy. Is it really easier to change consumer behavior, is it worth the cost and effort? New products will require a change in behavior from their buyers, but smart companies know those changes still drag the ball and chain of various types of costs (Gourville, J. 2006) including the cost of re-learning a product.

After enjoying success with its original model and service, Netflix pragmatically transformed into the “scalpable” pioneer it was always meant to be, just no one knew it yet. At first, they enjoyed years of monopolistic profits (Thiel, P. 2012). You can argue that Netflix was successful in creating a new “product” and has since flourished, but how long will that last? Lying in wait, is Disney, the metaphorical sword of Damocles, with its new competitive product Disney+. A proud captain of industry like Netflix inevitably attracts a rope and noose that looms in the background while competitors watch anxiously for which pitfalls to avoid.

Netflix, like a cockroach, has survived the fragmentation of Over-The-Top TV, the advent and subsequent saturation of Set-Top-Box applications, has navigated around the eddying currents of long-tail online offerings and lastly, has conquered the digital bundled packages of traditional broadcasters. Netflix has enjoyed sitting on its throne for the last decade because of its ability to distribute affordable content to anywhere the consumer wanted it. This new movie streaming model was the prescription every movie fanatic needed for their post-Blockbuster era nausea. Now just walking to the post for your movie is a thing of the past. So, what is the next innovative move by Netflix? Utility and value are waning from a fickle organic subscriber base after recent price hikes, incurring cognitive loss aversion and reduced purchasing power (Tversky, A. & Kahneman, D. 1981). A $1 increase per month, just a few years ago had a negative impact on share prices.

Looking to the future, can Netflix stave off a mass exodus from its platform or fight off asset backed competitors with deep pockets? It’s a game of innovate or wither away, but it’s innovate successfully, not just innovate for the sake of innovation. These companies have a fiscal responsibility to their shareholders first, so profits are the priority. As first movers to market, Netflix covered a lot of ground and acquired a lot of market share. The timing today, however, is ripe for a dethroning, a competitive challenge, or at least a bilateral media world. Netflix has managed to keep Amazon and Dish Network’s Sling TV in check and Hulu in stasis. They are battle tested, but are they passed the point of exhaustion? Two major occurrences in the industry of late have changed the game for Netflix’s competitors, namely Disney+. The first market disruption to occur is the phenomenon of convergence. Media and technology have been on a collision course for decades and it is starting its summit to zenith (van Eeden, E & Chow, W. 2018). Consumers are seeing the horizontal expansion of traditional media studios like Disney by acquiring each other for more content, reach, and technology. Technology companies like Netflix are integrating vertically by producing their own content. This move by Netflix is a pioneer move, accelerating change in the industry, and waiting to be scalped. They did it successfully, producing award winning shows and becoming the first non-traditional media studio to win more awards than traditional Hollywood. Netflix continued their skyrocket growth until the second occurrence, which might ultimately be their downfall.

Traditional broadcasters with a lot of capital are now recognizing the value of owning their content, and streaming services. It affects their bottom line as their content provides residual revenues, whereas licensing is short-lived. They have the capital to build their streaming services on their own proprietary technology. But more importantly, their patience has paid off — by waiting to see how the pioneers like Netflix have navigated the tumultuous waters and have highlighted the way to the promised land. This is where the latest Netflix innovation may prove to be their last stand by showing everyone else how to accomplish this feat successfully.

Netflix is amassing tremendous debt, $12 billion and rising to produce their own shows and stay ahead of their competition (Perez, S. 2019). However, a large portion of their base is tied to their original distribution model of licensing shows. By losing the license rights to popular content from other studios, Netflix is at risk of losing subscribers. Missing the mark with organic growth and lost market share to competition seriously cripples your future (Favaro, K. Meer, D. and Sharma, S. 2012).

One thing is obvious for Netflix; expansion. There are a number of recommendations to maintain their seat at the head of the table and each one comes with its own consequences and trade-offs. The first growth hypothesis for Netflix could be a series of acquisitions of smaller streaming services that offer niche content and loyal audiences. Grow the viewer base, increase loyalty and reach without having to significantly increase price. However, acquisitions are an operational nightmare (Favaro, K. Meer, D. and Sharma, S. 2012). An acquisition is inherently challenging, with executives succumbing to their own biases (Lovallo, D. et al, 2007). Even if external non-biased expertise is brought in, negotiating takes time and resources. It’s hard to gauge the price of another company when they hold all the cards. There is hope that acquiring smaller streaming services as part of a greater Netflix ecosystem can work out in their favor. Furthermore, the acquirer often overpays, and with Netflix’s debt problem I doubt any new niche audience would make an immediate impact (Samuelson and Baserman, 1985).

The next hypothesis; live streaming. Sports are live streams which bring religious like fan bases and in many cases, they bring with them a strong disregard for price, willing to pay what is necessary to see their team live. This is enticing, it’s sticky, increases prices, introduces new inventory for sponsorships and advertisements, and of course brings new content and potentially new markets. But costs of acquisition for live sports is high and rising. Live streaming technology is complicated and pricey. New markets are enticing, but there are snags with licensing certain sports with geographic limitations.

Advertising revenues have been in the mix and discussions at Netflix for the last few months (Graham, M. 2019). Ads aren’t terribly disliked by consumers, and they add a new stream of revenue. What hasn’t been discussed, however, is the idea of licensing their streaming technology. There are a few ramifications associated with this. It’s a compelling argument, but is it too late? Netflix has their own proprietary intellectual property and possibly their own content distribution network. Could they license this technology as a SaaS model to smaller non-competitive streaming services? This could create brand confusion; how are they perceived by the public — a technology firm or a studio? Who does Netflix want to be? Pixar found themselves in this same scenario in the early 1990’s. They started out selling a software that wasn’t going anywhere. The founders wanted to fulfill a dream of creating the first computer graphic full-length movie. They followed that passion and rebranded as a studio (Catmul, E. 2014). What does Reed Hastings at Netflix want to do, make movies or stream them?

In reality, Netflix’s best option may be the last one they would want to consider; sell. Sell themselves, and why not? They own their content and it’s popular. Their IP is world class. This is a potential clean slate; wipe out debt, get backed by a technology company with deep pockets, and innovate successfully through great, award winning content. Netflix has a good understanding of what job their consumers hire them to do and that is luxury entertainment at the viewer’s fingertips (Christensen, C. 2016). They’ve built the better streaming “mousetrap” and their innovation lies in their ability to continue to successfully entertain their audiences. The point of an acquisition after all, isn’t to grow fast, but to improve what you already do (Harding, D. & Rovit, S. 2004), and for this modern version of Netflix, that’s to produce great content.