The success story of Netflix’s win over Blockbuster is a well known one, but the company increasingly faces challenges as its platform-based business model is under attack by the dominant side of its platform.
Netflix operates as a two-sided platform in the online movie streaming business by connecting producers of movies (studios), with consumers of movies (viewers). The company connects the two parties and realizes its revenue on a subscription-based pure bundling model by charging customers a monthly fee for accessing the platform. The company started its movie streaming business on the platform premises in 2007, but it didn’t take long for Netflix to engage in one side of its platform by starting to produce Netflix original movies in 2013. The multi homing-effect in the industry is relatively high, and Netflix tries to tie its customers to its platform by introducing high-quality movies exclusively (Hagiu, 2018).
The value of the platform for consumers relies on a positive cross-side platform effect, where the wider offering of quality movies drives customer value on the other side. Recent competitive trends in the industry put Netflix, however in a challenging position. Dominant studios launched or will soon launch their own online streaming platforms, thereby limiting their original titles to those platforms and pulling out their movies from Netflix’s offering. In 2019 November, Apple launches its own streaming service called Apple TV Plus. Still, in 2019, Disney launches Disney+. In 2020, TimeWarner is going live with HBO Max and NBC is scheduled to launch Peacock (McBride, 2019).
As Netflix realized the threat in its 2018 annual filings: ”as content providers develop their streaming services, they may be unwilling to provide us with access to certain content, including popular series or movies.” HBO, for example, announced that HBO Max will exclusively have Friends, thereby discontinuing the show’s availability on Netflix (Etherington, 2019). Soon after the announcements of the competing platforms launches, Netflix’s share price plunged and is currently 35% lower than during the peak in mid-2018 (Finance.yahoo.com, 2019).
Even though Netflix tries to fight these threats by increasing its investments in original movie production, its relatively linear business model in a market not described with winner takes all dynamics, makes it a challenging battle. As the company pays more to the original content, it realizes little network effects compared to other digital platforms like Google or Facebook, where most content is generated purely by the users and the platforms itself rely limitedly on content creation. As a result, the business model of Facebook or Google scales significantly better than the platform of Netflix.
The main question is whether more original content will be enough for Netflix’s survival or the increasing competitive threat combined with multi-homing will erode its customer case. One potential way forward is moving towards a multi-sided platform by focusing on services other than movies. The question of whether Netflix’s story will still be a success story in five years is yet to be answered.
Bibliography
– Etherington, D. (2019). AT&T’s new streaming service HBO Max arrives in 2020, will be the exclusive home of ‘Friends’ – TechCrunch. [online] TechCrunch. Available at: https://techcrunch.com/2019/07/09/atts-new-streaming-service-hbo-max-arrives-in-2020-will-be-the-exclusive-home-of-friends/ [Accessed 28 Sep. 2019].
– Finance.yahoo.com. (2019). Netflix, Inc. (NFLX). [online] Available at: https://finance.yahoo.com/quote/NFLX/ [Accessed 28 Sep. 2019].
– Hagiu, A. (2018). The Best Way for Netflix to Keep Growing. Harvard Business Review.
https://hbr.org/2018/08/the-best-way-for-netflix-to-keep-growing
– McBride, S. (2019). Netflix’s Problem Presents A Great Opportunity. [online] Forbes.com. Available at: https://www.forbes.com/sites/stephenmcbride1/2019/09/26/netflixs-worst-nightmare-is-your-great-opportunity/ [Accessed 28 Sep. 2019].
