How to Fix Netflix

It’s a content problem.

The announcement earlier this year by Hulu that they are switching their business model to only offer a paid service caused me to re-examine my own streaming habits. Check out more on the Hulu announcement here.

This introspective targeted at my own viewing habits caused me to realize something. I have pretty much stopped watching Netflix!

Now it is not that I don’t want to watch Netflix. I have been a loyal Netflix subscriber for 12 years (remember the red envelopes?) and during that time transitioned to streaming, expand the service on to just about every device in my home, and think that their original content has only gotten better. By all common indicators I should be the ideal Netflix subscriber. So what’s wrong? qwikster2

Let’s start at the beginning. Netflix is provider of streaming content and DVD rentals that was co-founded in 1998 as a DVD-by-mail service by Reed Hastings (current CEO). Frustrated with existing DVD rental services, Reed envisioned a rental service that would allow customers to rent as many titles as they wished and keep them for as long as they desired without penalty. From this concept he build Netflix which currently has more than 83 million global subscribers, now produces hundreds of hours of original content, and accounts for roughly 30% of downstream web traffic in North America.

To obtain this level of success Netflix has developed and deployed several key organizational capabilities which have highly leveraged the advances in digital business over the last two decades.

  • Video Steaming: On-demand playback video content to a variety of devices and platforms
  • Predictive Analytics: Cinematch algorithm (this is pretty cool) which recommends titles and helps Netflix stock titles at its distribution centers
  • Logistics Software and Planning Innovations : The development of unique processes, technology, and even envelopes allowed Netflix to more effectively process DVDS
  • Online Purchasing: Familiar shopping cart and recommendation technology was used for customers to make selections
  • Mobile: Titles are able to be viewed and managed on tablets and phones
  • Cross Platform Integration: Multi-screen convergence platform that allows titles to be viewed on a variety of devices.

Inetflix-releases-a-new-logo-new-coke-qwikstern 2011, in a product failure reminiscent of the introduction of New Coke, Netflix announced that it would be shifting its business model to focus on video streaming services. Part of this plan included spinning off the DVD-by-mail service that had successfully grown the company to-date. This move was highly criticized by the Netflix user community and just about everyone within the business/product community. It was eventually was reversed.

Today, the Netflix streaming service is successful, yet with the success the company still faces challenges that impact the overall customer experience. All of which are around content, with perhaps the exception of net neutrality, but that could be an entirely different blog post. When I look at my own experience, the drop-off in my own viewership directly aligns to the customer facing results of content related challenges.

  • Challenge 1: Content Selection: Streaming service is at risk of becoming a commodity business. The differences in customer experience between Netflix, Amazon, and Hulu are minor, at best, with the exception of content. Consumers are going to be driven to the device with the best selection and quality of content. Today, I simply cannot find much that I want to watch on Netflix. Binge watching 30 Rock will only take a person so far and the movie selection along with TV content is lacking. In an era Spotify we expect just about all content at our finger tips and, whether that expectation is realistic of not, Netflix has been unable to come close. Yes. Much of the original content is very good, but it is in short supply. I find myself relishing time spent out-of-the country (Netflix content varies by geography) and counting-down the days until the next season of Master of None.
  • Challenge 2: Cost of Content: Yes. It is related, but slightly different from challenge 1. The growth of steaming services is going to create a higher demand for content and place popular content creators in a position to command a higher price. Now in direct competition with Netflix, Hulu has the advantage of being backed by multiple studies (ABC, Fox, and CBS) that provide a direct source of net content. Streaming services like Netflix are even starting to move into the content creation business, but this is a new area for development and the majority of content still sits with traditional movie and TV studios. Netflix continues to incrementally increase the cost of the streaming service (hoping that we will not notice) and my speculation is that the driver behind this is the need to fund the creation and purchase of new content.nflx-2q16-streaming-content-obligations

The majority of the technical challenges with the streaming model have been solved. The opportunity for improvement within the business model behind Netflix streaming service is primarily content driven. Spending on content and selection will continue to strain the business model (Netflix spent $3.3 billion on content in 2015) with the selection and quality of service only making minor improvements.

In order to overcome this content challenge, Netflix needs to look back to the revenue sharing model that was a tipping point for itself and even for Blockbuster video. By creating a revenue sharing model for streaming that includes the distributor (Netflix) and the creator (studio), Netflix would be able to incentivize content creators to get join its library and get more of us watching its service. The basics of such a model could include:

  • Stream-per-minute measurement model would provide single measure for payment
  • Premium for the more popular shows which rewards top content
  • Incentives for offering content as part of a larger library
  • Sliding scale of older or less popular shows

This would become a more complicated financial model for Netflix, however it could open the doors to a significantly expanded content library and with a few additional modifications, such as a quality of service arrangement with ISPs, might even address some of the net neutrality and bandwidth challenges taking place today. The bottom line is that making sure that all participating in the streaming service business are financially rewarded will align goals and make the customer experience a priority. This model could even open the door for the steaming service to add current first-run TV shows and movies to its line-up.

Want to make Netflix better? Look to the past.

5 comments

  1. Great post! I really liked your in-depth look into Netflix. I also realized that I haven’t been watching Netflix this past month (I’ve been spending all my time on YouTube instead) and you did a nice analysis of why people have started to stop watching Netflix. I have a friend who says that he’s basically already watched everything on there that he’s interested in. They do have a good selection of content, but it feels so easy to burn through it quickly. I also happen to know a handful of people who are willing to pay for multiple streaming services (Netflix, Hulu, and HBO) which I was surprised about. That definitely offers a large range of content, but I’m surprised that there are people who are willing to pay three fees just for that large range of content.

  2. francoismba · ·

    Interesting read! I have to admit, I only joined Netflix about a year ago; however, i only kept my subscription for a couple of months. I too found that Netflix lacked in delivering a variety of content; and therefore, no longer had a need for the service. If a new season of a show comes out on Netflix that I am interested in seeing, I just use a friend’s or relative’s account for a few days. On the other hand, I know a lot of people who continue to pay the monthly subscription fee even though they are no longer using their Netflix account. It would be interesting to see how many subscribers are joining Netflix to watch the company’s own content that it has developed.

  3. I agree Netflix doesn’t have nearly as much depth as some other streaming services such as HBOGo. However, I believe as long as they continue to produce good original content, they can continue to captivate their subscribers. The revenue sharing model is a great idea to incentivize the big studios but if it works well, what will stop other streaming services from doing it?

  4. Great post, and interesting take on an improved business model. This approach is very similar to what Spotify is doing in the movie industry. However, I think the biggest challenge to Netflix is the larger scale players – Apple, Amazon, Google. As they continue to bundle services at a reduced per service cost, it makes it harder and harder to justify a Netflix subscription. This is my personal problem at the moment – I have Amazon Prime which includes Amazon VOD, so why bother with Netflix to get the one or two original content shows I want to watch?

  5. Netflix is one of those companies that have managed to stay alive, even though everyone keeps pronouncing their death’s. I have faith they’ll do it again.

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