The Netflix Problem: Can Other Networks Even Compete?

 

As I talked about in my blog last week, Netflix can help television shows increase their viewership by increasing the availability of the content. However, Netflix has also negatively affected traditional TV ratings because its functionality gives it some competitive advantages.

Revenue Model

Basic Cable (i.e. AMC, FX, etc.) and Broadcast Networks (i.e. FOX, ABC, etc.) are largely based on ad-sales and have to account for their advertising money very early-on in a show’s run. These networks need to consider the opportunity cost of the time slot that the show is airing in, and if they don’t find an audience quickly, then they have to cancel the show and replace it with programming that will make money.

Premium Cable (i.e. HBO and Showtime) and Subscription Video on Demand (SVOD) services (i.e. Netflix and Amazon) make their money based on subscriptions so they are afforded a greater period of time to find an audience for their shows. Premium and SVOD services, like Netflix, can amortize their investments in a show over longer periods of time, so they don’t need to make their money back immediately.

Regulations

Netflix is not subject to the strict regulations that other networks need to adhere to, which allows them to take more risks with their original programming. Netflix is able to offer an environment that is more conducive to creativity than the strict regulations of networks; therefore, a lot of the talent is becoming more attracted to Netflix, which increases content quality.

Ad-Free and Brand-Free

Netflix has the advantage of offering content without commercial breaks or any other digital ads, which is very attractive to younger consumers. The lack of advertisements encourages binge-watching and makes consumers watch more. Netflix is also the only brand represented on the service. Netflix brands their content with “Netflix Original”, but network and cable shows are unbranded, which affects their brand awareness.

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Data

Netflix’s greatest advantage is their ability to accumulate a huge amount of data from their consumers. They use this data to determine consumer preferences, and create content that will appeal to different audiences. Netflix can use their own data, as well as data from social media to tailor their original content to increase the likelihood of a show’s success.

How Will Networks React?

In the short-term, Networks are talking about making changes to their contracts with Netflix, and changing the amount of commercials. Media companies are talking about waiting longer before selling a show to Netflix, or even waiting for the show to completely finish airing (through to the series finale or cancellation) before licensing it to Netflix. Media companies are feeling added pressure to maintain control of their content as the trend of “cutting the cord” continues. There is also talk of airing fewer commercials in the hopes of attracting younger viewers who are not accustomed to watching ads on TV.

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In the long-term, I think there will be more reliance on social data, and greater investment in content. Social media is where networks and basic cable shows can compete with Netflix because they can create live events on social media and engage a large portion of their viewers at once. Netflix viewers don’t watch shows at the same rate; some binge-watch a new season of Orange is the New Black within 24 hours, while others spread out a season over weeks. Investment in content is also crucial; viewers are more sophisticated than ever, and they are seeking out the best content regardless of the medium. If Netflix has the best series, then they’ll subscribe, but if broadcast and cable networks offers quality shows, the viewers might not cut the cord. Some possible future trends:

1) Reduction or Elimination of the Pilot Season

The television landscape is not only crowded across networks, but within them as well. When Networks order too many pilot episodes or too many new series, they spread their resources too thin. The promotional campaigns are too numerous and consumers get overwhelmed with the number of options. Especially on social media; when you hear too much, you commit to nothing.

2) Using Social Data to Target Marketing Efforts

This strategy has already been used to great effect by Pretty Little Liars on ABC Family. Networks can study fan interactions on social media to better understand their audience. With this data, networks can market directly to the consumers based on how the viewers are likely to engage.

3) Tracking Social Engagement for Renewals and New Shows

Nielson already has Twitter ratings for TV, and using social data will only continue. Based on reactions to different shows, it’s possible that networks will use social data to make renewal decisions, and to predict the potential success of shows in development. Netflix has had great success using their data to predict the potential audience for their original content, like House of Cards.

4) Increase of Spin-offs and Franchises

Once a show gains popularity, networks often attempt to build off of the success by creating a spin-off show that appeals to the existing community. For example, AMC made the spin-offs  Fear the Walking Dead and Better Call Saul based on the success of The Walking Dead and Breaking Bad. Netflix is also attempting to build a franchise through their Marvel properties. Creating shows that exist in the same world offers crossover potential, which allows networks to simultaneously promote multiple shows. When characters appear on multiple shows it creates a big social media event, which often increases viewership.

 

11 comments

  1. Great post highlighting the competitive advantages that Netflix has seized in the TV industry. Specifically, the creativity that leads to content creation and the capturing of social data that Netflix can effectively target content. I think at this point, Netflix has positioned itself as a brand name among our culture that will not be going away anytime soon.

    Do you think that Netflix will implement more advertisements in the future, or will that be too detrimental for driving away viewers? Also, do you think that the premium online providers such as HBOGo will be able to give Netflix a run for the money? (especially as more competitors enter the market)

  2. So in my opinion there are a few examples of networks successfully competing with Netflix, at least in terms of available content. HBO, for example, has control over Curb Your Enthusiasm, Entourage, and Game of Thrones, which have been shown to be some of the most popular shows of the past 10 years or so. Hulu recently scored a major triumph in acquiring all of Seinfeld, which I know plenty of people were excited about. Then lastly, Amazon is really starting to delve into their own original shows such as the new one about the occupation of America by Imperial Japan and Nazi Germany (the name of it escapes me right now). But I think that the easy interface of Netflix does give them a slight advantage, in conjunction with their lack of advertisers, over their competition.

  3. I think your post outlines some extremely valid points. You touched on the major issues that the TV industry has to face and deal with due to the explosion of Netflix. That being said, I think that if networks want to compete with Netflix, they too should release competitive streaming sites. HBO has been doing a great job with HBOGO. Though there’s always the catch of where advertisements will go, I think that if networks up their streaming game, the competition gap could potentially close.

  4. This is a very in-depth analysis of the television market, which like many markets at the moment is changing drastically because of technology advancements. As we have heard in class, data analytics is driving competitive advantage for many platforms in many industries from oil and energy to television. I think this is one of Netflix’s main differentiator, as people love having a service that is customized to their needs. The two areas keeping people watching cable are news and sports because these are in real time and cannot be aired on a platform such as Netflix (at the moment). I do not know if Netflix has any plans to enter into these markets but if they eventually do provide these networks without advertisements, cable television would surely be in trouble.

  5. Love Netflix! As we are temporarily living in an apartment while work is being done on our home, we’ve stripped down what we have for cable TV services, but we’ve been able to watch a lot of stuff via Netflix (we watched the entire Breaking Bad series beginning to end). Although the cable service (not the one of choice, but what was available at this apartment complex) has on-demand, it has commercials which cannot be fast-forwarded (seriously?), leaving us unsatisfied with using that service. So we find ourselves looking for more options via the tablet, Netflix among them, but also on-demand from the cable provider for the house. Even though we don’t live there, we can still access those premium channels and commercial-free on-demand. Priceless. I cannot wait for the Amazon version of Top Gear! Thanks for sharing!

  6. I’ve loved watching how Netflix has forced so many classic industries to change how they operate. Hollywood and big cable has had no choice but to differ how they go about funding, producing and distributing content all in ways that benefit the consumer (viewer) most. They’ve managed to democratize film/tv in many ways by hosting both indie shows/movies as well as major blockbusters. Likewise, the data you mention is the first of its kind to exist. No network or studio has ever had such a good feel for viewer habits like Netflix does.

    Another interesting thing about Netflix that many aren’t aware of is how they’re double dipping with Amazon prime’s VOD platform. All of netflix’s servers run on an instance of AWS (Amazon web services), yet one of their major competitors is apparently Prime VOD. This may be a testament to how reliable and versatile AWS’ servers are, but the pressing question has to be why hasn’t Amazon cut the cord on Netflix if they want Prime VOD to be a hit? The answer I feel is because Amazon is either Just piggy backing on netflix’s success or there’s some sort of collusion going on between the two “rivals.”

  7. I honestly loved netflix throughout its whole life. Right now however, I have stopped using it and have geared towards hulu. Personally i think that the current selection on netflix is not as strong as it once used to be. I do agree that their strategy has been completely dominant in the market and has forced others to act similarly, however i believe they are starting to stay behind. Hulu is taking all of the current shows and streaming the episodes one day after they air, while netflix only has old shows on there. It is pretty much a site for binge watching. Once again, although this is a potential good, i don’t necessarily like it anymore. This is just a matter of personal taste however. One question I would ask you however, is what do you think Netflix can or should do if it sees that it starts losing many customers to the fact that their model hasn’t evolved much? Should it even consider evolving? or should they simply stay as they are?
    Great blog post btw!

  8. Really interesting post about Netflix. I definitely think that the more established networks will have to come up with a new strategy regarding attracting viewers. That being said, I feel like networks still do have an advantage with some fan favorite shows such as Scandal and Grey’s Anatomy attracting a huge viewership each week. In fact, these networks can leverage Netflix by putting the first few seasons on the site to have people quickly and efficiently catch up to the current season by binge watching the show on Netflix. Netflix and other Subscription Services are definitely the future, but I wouldn’t count out the networks just as yet

  9. Arielle, this was an extremely interesting and informative post on Netflix. I think you did a great job at outlining the advantages that Netflix has over basic and premium cable, as well as the effects social media is and eventually will affect these different mediums. I personally do not have a Netflix account, but I have my friend’s account saved on my AppleTV (originally so I could watch House of Cards, but I do dabble with older series). While I do watch Netflix occasionally, I find myself watching regular TV more on a weekly basis (by regular I mean my DVR and OnDemand). When I am engrossed in a series, I actually care about not knowing what happens before I see it and the social aspect of being connected to others who also enjoy the same shows. While my social activity on Twitter when watching a show these days is little to none, when I was in college, I was actively engaged in tweeting while watching and interacting with my other friends who were also watching the episode live. Netflix cannot really do this live social engagement because viewers are either binge-watching older series, or the viewers are simply not watching the same episode at the same time. With live TV, there is nothing quite like the suspense of not knowing – the previews for the following week always leave me on the edge of my seat! That being said, I have to agree with @bismansethi123‘s point about not discounting network TV quite yet.

  10. Great post! I am definitely a stereotypical young person who hates watching live tv and a is a cord cutter because of the commercials. I am a very active channel switcher when I do watch live tv. Besides sports, there is not any programs on tv that I prefer to watch live. Even watching network and cable shows on their respective website is pain because many of them still have commercials. For this reason when I want to start a new series, I first investigate Netflix and premium channels’ websites for shows since they avoid advertisements altogether. When starting a network or cable series, many people might even prefer to illegally stream just to avoid ads. While I do think spinoffs can be good for attempting to retain a fanbase similar to the original show, I also think that they usually are not very well done and therefore I do not tend to watch them. Many people would probably agree with me. Network and cable channels need to use social media to in order to use live discussion as a selling point to watching a show live and therefore maximizing ad revenue.

  11. Excellent post, thank you for sharing. It certainly is true that Netflix’s great original television content is something that traditional media did not anticipated being so successful. Netflix will certainly be a difficult giant to overthrow. That being said, there have been a number of blog posts made about social engagement during live tv broadcasts. You are smart to tie this into your recommendations to traditional tv networks, as leveraging their social reach figures will help continue to justify the cost of advertising during their programming. I think chord-cutting is the trending inevitability for all American’s, so if I was working at one of the major networks I would be focusing on what role my company will play in the next phase of American “television”‘s history.

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