Over the last few years I have continued to be impressed by how Netflix continues to innovate to stay ahead of their competition.
It would have been easy to assume that traditional powerhouses, Apple, Amazon, and Disney’s entry into streaming on demand would spell the death knell of companies like Netflix. Afterall, how do you compete with the world’s biggest companies with deep pockets and no motive to make money but rather, to steal market share? I, like everyone else, simply though that, in a traditional world of making entertainment, they would be unable to financially muscle up and take them on.
There was one important thing I didn’t take into consideration, and that was what the world of online streaming offers a company like Netflix that traditionally free to air and cable haven’t been able to get. And that is, a live or deep understanding of the audience. Statistical sampling or ratings boxes were sent out to people and their own patterns or trends were used to understand viewer behavior. Netflix knows exactly who our favorite actors are, which films we tend to gravitate towards, what time and what type of show we watch. By promoting the top 10 years shows in your country, for example, Netflix is not only appealing to our fear of missing out, but also to our laziness – what better way to remove the need to scroll incessantly? Better yet, they have started to work out what draws us to a movie and how long we stick with the movie before we switch it off, thinking that it was rubbish. Netflix now more than ever, has worked out our viewing behavior better than any previous industry leaders like Warner Bros, Disney, Paramount Pictures, and Universal.
So what has Netflix done with this data? Over COVID, we have seen some very good examples of how Netflix are testing out our viewing habits and subsequently changing how films are produced. One of the first that made me sit up and take notice was the Chris Hemsworth film, Extraction. If we look at where most of the costs of the film are its usually in the cast with the traditional fee structure, then the local production cost. They also based it in Asia, meaning they could engage Bollywood to produce it, further driving down costs. It jumped into the Top 10 in Australia, giving it credibility, along with the big-name actor.
We go for things we know and are comfortable with and two great examples of this are Cobra Kai and Ratchet. Karate Kid and One Flew Over the Cuckoo’s Nest were household names 20 or 30 years ago but today we have largely forgotten about them. Picking up the rights to develop sequels to these is cheap and easy to do. Their familiarity immediately gives credibility to the production.
So what will this do to production or investments? It’s a tricky and very new world that could be coming to Hollywood. Previously you would work your way up as an actor and being a well-known person would bring credibility to the production. Now Netflix are basically saying that we only need one good actor and are happy to just use skilled actors who have little to no experience. I mean Hollywood is full of people trying to make a break and thus the quality isn’t that bad. We didn’t seem to mind, and Netflix has found another way to lower one of the biggest overheads in production.
Production companies used to a steady stream of work from the big studios, now find out that arguably the company with the biggest audience in the world doesn’t need them and are happy to go offshore. With the ability to now watch what you want, when you want, means that we demand a regular turnover of quality content, and will stick with the provider that can give it to us. I find Amazon a little slow in bringing on new content and resent that I am also asked to pay to rent a title from their range despite already paying for their service. Apple still can’t get over the fact that maybe we don’t want to have an apple device just to watch their content, so I’ve somewhat avoided this service as well. That leaves just Disney and Netflix for the moment.
With Disney now up and running, I can’t help but think Viacom will be a prime target if they are looking to bulk up their content. AMC and Discovery also can’t be too far behind, as the streaming behemoths start to look at where they can find their next bit of content. This, however, doesn’t address the fact that Netflix have discovered a way to come up with content at a lower cost base.
Lastly, I’m still amazed that no one has figured a way to combine the music and video streaming in one. I would have thought a logical step would be to have say Netflix purchase Spotify and instead of paying $14 for Netflix and $13 for Spotify each month, you purchase a combined pack for $25 taking care of all of your music and video needs.
There is always the risk that a new entrant will come in. Viacom are looking to release their own streaming service, and given their broad set of channels like Showtime, Starz, Paramount, MTV, and Nickelodeon, they certainly have a lot to draw from. We are also entering a point where most of the perspective audience has been captured to some degree, and now it’s about market share. The streaming companies will continue to look to for this via better content. It’s also an interesting point that Netflix keeps lifting its fee yet not having too many disconnections.
With this in mind, I have started to slowly buy up Netflix stock. The way these guys are innovating ahead of the pack and generating their content, is ingenious. Moves such as combinations with Spotify and the biggest captive audience give it a massive lead at the moment. If you want to get your great content to more people globally you now need Netflix more than they need you.
As I mentioned earlier, I think Viacom, AMC and Discovery will see consolidation over the next 18 months. I don’t see a lot of movement with Apple and Amazon over the years ahead in this space, as I’m not sure if they see this as a core offering worth the focus.
For now, Netflix will continue to dominate in the space and build its market share.
At the time of writing the following stocks were at the recorded prices:-
- Netflix – $503.22
- Viacom – $35.60
- AMC – $3.92
- Discovery – $28.93
- Spotify – $341.22
- Disney – $175.72
22nd November 2020