Netflix Loses Market Share

PGDBFS CASE 04 Introduction

This case study discusses

• The history of the Video On Demand (VOD) service, Netflix.

• The nature of the VOD industry, its competition and challenges

• Strategies used in entering the Indian market. Power to the viewers

For the first fifty years of television, broadcasters determined what viewers could watch and when they could watch it.

Consumers faced limited choices, had to arrange their schedule to watch a show when it was broadcast, wait a week for the next episode, and sit through frequent commercials breaks.

Streaming video pioneers Netflix, , and Amazon Prime Video shifted the power to the viewers When you want, where ever you want, without any commercials

Streaming Services or Video On Demand services assembled large libraries of content and made these shows, movies, and documentaries available over the Internet

Audiences could watch what they wanted, when they wanted, for as long as they wanted, without commercial interruptions. Welcome to Binge Watching

The practice of watching multiple episodes of a television programme in rapid succession, typically by means of DVDs or digital streaming. From a DVD rental service to the billion dollar streamer. Netflix was founded in 1997 by Marc Randolph, a tech- marketing executive, and , a computer programmer

Since its founding in 1997, Netflix evolved from a mail-order DVD rental company to the world's leading streaming video on demand (VOD) provider.

By 2019, Netflix was the dominant subscription based VOD platform, with 167 million paid subscribers around the world and an enterprise value of $157 billion Innovation Culture Netflix attributes its growth, in large part, to a corporate culture that promoted agility and innovation.

A 127-page presentation, knowns as the "Netflix Culture Deck," explained the company's culture and why it mattered for success. By 2017, the Netflix Culture Deck had been viewed 15 million times.

Facebook COO Sheryl Sandberg said it “may well be the most important document ever to come out of Silicon Valley.”

Netflix co-founder and CEO Reed Hastings, published a book, entitled No Rules Rules: Netflix and the Culture of Reinvention celebrating Netflix's culture. Netflix culture deck https://sergiocaredda.eu/inspiration/asides/netflix-culture- deck/ Some excerpts from Netflix Culture Deck Real Values - The real values of a firm are shown by who gets rewarded or let go.

Below are our values, the specific behaviors and skills we care about most.

The more these values sound like you, and describe people you want to work with, the more likely you will thrive at Netflix. 1 – Judgment

• You make wise decisions despite ambiguity • You identify root causes, and get beyond treating symptoms • You think strategically, and can articulate what you are, and are not, trying to do • You are good at using data to inform your intuition • You make decisions based on the long term, not near term 2 – Communication

• You are concise and articulate in speech and writing • You listen well and seek to understand before reacting • You maintain calm poise in stressful situations to draw out the clearest thinking • You adapt your communication style to work well with people from around the world who may not share your native language • You provide candid, helpful, timely feedback to colleagues 3 – Curiosity

• You learn rapidly and eagerly • You contribute effectively outside of your specialty • You make connections that others miss • You seek to understand our members around the world, and how we entertain them • You seek alternate perspectives 4 – Courage

• You say what you think, when it’s in the best interest of Netflix, even if it is uncomfortable • You make tough decisions without agonizing • You take smart risks and are open to possible failure • You question actions inconsistent with our values • You are able to be vulnerable, in search of truth 5 – Passion

• You inspire others with your thirst for excellence • You care intensely about our members and Netflix's success • You are tenacious and optimistic • You are quietly confident and openly humble

6 – Selflessness

• You seek what is best for Netflix, rather than what is best for yourself or your group • You are open-minded in search of great ideas • You make time to help colleagues 7 – Innovation

• You create new ideas that prove useful • You re-conceptualize issues to discover solutions to hard problems • You challenge prevailing assumptions, and suggest better approaches • You keep us nimble by minimizing complexity and finding time to simplify • You thrive on change 8 – Inclusion

• You collaborate effectively with people of diverse backgrounds and cultures • You nurture and embrace differing perspectives to make better decisions • You recognize we all have biases, and work to grow past them • You intervene if someone else is being marginalized • You are curious about how our different backgrounds affect us at work, rather than pretending they don’t affect us 9 – Integrity

• You are known for candor, authenticity, transparency, and being non-political • You only say things about fellow employees that you say to their face • You admit mistakes freely and openly • You treat people with respect regardless of their status or disagreement with you • You always share relevant information, even when worrisome to do so 10 – Impact

• You accomplish amazing amounts of important work • You demonstrate consistently strong performance so colleagues can rely upon you • You make your colleagues better • You focus on results over process Netflix’s Strategy

Netflix is a global Internet entertainment services network offering movies and TV series commercial-free, with unlimited viewing on any Internet-connected screen for an affordable, no- commitment monthly fee.

Netflix is a focused passion brand, not a do-everything brand we are a , not a Walmart Netflix strategy in action (1)

• TV series, movies, documentaries, and stand-up comedy

• No sports, no reality shows

• No locking in of subscribers with long-term contracts – any time cancellation and rejoining effortlessly.

• Netflix app allowed for multiple users, each with their own history and personalized recommendations Netflix strategy in action (2)

• Netflix spent $1.5 billion on technology (including staff costs, software, and hardware) in 2019 to improve its product, enhance the user experience, and attract new viewers.

• Netflix spent $15 billion to produce, purchase, and license content in 2019, up from $9 billion in 2017 Numbers

Netflix's total subscriber base now sits at 209 million in Q1, 2021 (167 Million in 2019 – 42 million growth in just 2 years)

Netflix Revenue – 31 March 2021 - $26.39B Netflix Revenue – 2020, $24.996B Netflix Revenue – 2019, $20.156B Netflix Revenue – 2018, $15.794B

Employees - 12,135 (2021) Netflix, International Expansion (1) • Netflix Expanded to 190 Countries in 7 Years

• Netflix’s international strategy, and many of the challenges it’s had to overcome, are unique • Despite global acceptance on English language TV Series and Movies, there is a massive need globally for local content and foreign content dubbed in local languages. • As such, Netflix must secure content deals region by region, and sometimes country by country

• It also must face a diverse set of national regulatory restrictions

• Many potential subscribers, accustomed to free content, remain hesitant to pay for streaming services at all Netflix, International Expansion (2) • In France and , for example, homegrown leaders offer local-language video content, thus depriving Netflix of first- mover advantage.

• In some countries, like Germany and India, rivals such as Amazon Prime were already established.

• Recognizing that in some parts of the world, particularly emerging and developing economies, mobile is the primary way most people access the internet, Netflix also began placing a greater emphasis on improving its mobile experience, including sign-ups, credentials and authentication, the user interface, and streaming efficiency for cellular networks. Netflix, International Expansion (3)

• Netflix has demonstrated that developing country-specific knowledge is critical for success in local markets.

• This knowledge needs to be both broad and deep, extending across political, institutional, regulatory, technical, cultural, customer, and competitor domains.

• Understanding local cultures ensured that Netflix could be sensitive to and respond to their differences The three C’s of Netflix’s international expansion strategy • Content – Best content possible

• Cost – As low as possible market entry costs

• Competition – Beat them with innovation Content (1)

• Create Original Content In 2019, Netflix spent a total of 15.3 billion US dollars on video content, with over 80 per cent of that allocated to original content production.

Netflix is set on creating quality original content that cannot be found anywhere else Content (2) • Release Timely Content

When it comes to releasing content, Netflix does it strategically as well. Take the popular Netflix original series, Stranger Things, for example.

The company released all episodes of the highly-anticipated second season of Stranger Things on a Friday, just days before Halloween.

The show’s scary theme was primed for a Halloween release and also timed to coincide with a popular time in which people binge- watch – the weekend. Cost (1) The company has negotiations with cable and cell phone operators to give it almost instantaneous access to potential new users without having to spend a fortune on advertising and distribution deals in markets where its brand and content are often still relatively unknown.

Though many of them initially resisted such deals with online content providers, gaining access to Netflix’s exclusive programming helps set them apart from local rivals, just as customers’ online habits have shifted toward video, particularly on their smartphones and other mobile devices. Competition (1)

Netflix’s main challenge comes from local competition. In Europe, Sky is a major buyer, and producer, of the kind of binge-worthy TV that Netflix specializes in.

Netflix said it expects to see strong growth ahead even as it faces more competitors such as Amazon, which is also expanding globally.

Amazon Prime’s streaming service is a major Netflix competitor in select European markets. In Germany, Amazon is actually ahead of Netflix. Competition (2)

In order to continue ingenuity in their business model, the company is tinkering with different formats for the way its 104 million subscribers in nearly 200 countries consume its content. Its newest innovation revolves around interactive technology and story branching options.

What if you could decide whether Frank Underwood from House of Cards should be locked in jail? Perhaps those adorable kids from Stranger Things should pursue another adventure? Netflix – Global vs Local Global Content

Global content is an integral part of Netflix’s international strategy.

Programmes and films that appeal to multiple territories allow the streaming giant to capture viewers in up to 190 countries with one production. When it works, this is an incredibly cost-effective strategy.

In the current environment, these global hits are dominated by US blockbuster films or series. Local Content

Arguably, localized content has been a more important part of Netflix’s international strategy than global content. Netflix has invested billions in funding country-specific original content as well as acquiring programmes in a range of languages spanning all genres.

This is the content that situates Netflix in a new market. They aim to reflect a viewer’s culture, language and lived experience in their catalogue and draw new subscribers with intriguing programmes and locally known cast and crew members. Localized Netflix Originals manage to situate a story in a setting familiar to the viewer, include vibrant and culturally unique characters and feature a theme or tone that speaks especially to the viewers of the country.

While this content doesn’t have the wide scope of potential international hits, it does give programme-makers the chance to market their content across the globe. Netflix’s promotional strategy

1. Use Multi-channel Marketing to Connect with People Online and Offline

2. Make Emails Memorable and People Will Talk

3. Offer Personalized Content to Keep People Hooked

4. Let Data Show You the Secrets to Better Customer Service

5. Embrace Machine Learning to Enhance the User Experience

6. Make Interactive Products and Experiences to Generate a Buzz

7. Focus Your Customer Service On the People Who Matter Netflix is Losing Market Share Netflix outpaced by the old media companies it sought to dethrone

Three of the old media groups that Netflix sought to dethrone “Disney, HBO and Viacom CBS” all grew their streaming services more quickly in the first three months of this year.

This is fueling investors’ fears that Netflix must keep pouring billions into new shows to entice viewers or risk losing its momentum Netflix added fewer than 4m subscribers globally in the first three months of the year, badly missing its own forecasts. Only 450,000 people signed up in the US and Canada, its biggest market.

Disney Plus lured 9m subscribers in the quarter and Viacom CBS added 6m, while HBO signed up nearly 3m US subscribers to its Max streaming service.

A new report from the market researcher Ampere shows that Netflix lost 46% of its U.S. market share last year. The context led Netflix to record its worst historical figures:

Netflix’s market share fell to 48,3% globally and at 46% in the United States in the second quarter of 2021.

In return, Disney + grew with its global share from 6.0% to 7.3% in recent months driven by the releases of Marvel. Netflix is losing beloved shows, subscribers, and confidence the company is facing a steeper path than ever in the United States. Netflix lost subscribers this quarter for the first time in years, a combination of the price hike and a content lull.

As the US market becomes oversaturated with streaming services — with WarnerMedia, Disney, and Apple all launching streaming services — the only way to ensure growth is going outside the United States. Company is facing a number of problems that could affect their overall growth in the years to come.

• Netflix is losing a number of heavily watched licensed series, like Friends and The Office, to competitors Warner Media and NBC Universal respectively.

• A lack of enticing originals, which plagued the company’s most recent quarter and helped contribute to a loss of 130,000 subscribers, will continue to grow unless Netflix can ramp up production. SWOT Analysis of Netflix Netflix’s Strengths

• Exponential Growth – In the past ten years, Netflix has become an influential brand for online streaming content not only in the US but across the world.

• Brand Reputation – Netflix has risen to become a household name within a short period. In 2019, Netflix was ranked at #4 top regarded companies by Forbes. • Global Customer Base – Netflix is serving over 190 countries across the world, having a global customer base.

There are over 209 million subscribers of Netflix, and it gives the company a strong bargaining power with the studios for securing exclusive content. • Originality – Another one of its strength is that Netflix has been producing original content over the years with the highest quality.

Some of its shows like Tiger King, Stranger Things, Money Heist, Narcos, Mindhunter, Orange Is the New Black, Shadow and Bone (2021) became so popular that its subscriber count kept increasing over the quarters.

• Adaptability – Netflix adapted to various technologies instantly by providing streaming on all internet-connected devices like personal computers, iPads, mobile devices, and televisions. Due to this, their business grew immensely over the years. • Customer Centric Service – For a long time, customers were looking for an offline option to watch Netflix content, in case of travel (plane, subway) or bad internet connection. As a result, Netflix introduced a download now (offline) feature for customers to watch their favorite shows on the go.

• Affordable Pricing – The pricing strategy of Netflix has given it leverage over its competitors. The plans that Netflix has designed are affordable and offer great value. Subscribers can watch unlimited movies, either on DVD or streaming for an affordable price of $8.99 a month. It is less expensive than cable movies or going to the cinema and also offers a wider selection. For a higher quality Ultra HD (4K+HDR) streaming, subscribers can even get premium plans at $15.99 per month. • Award-Winning Shows – It is not a surprise that the popularity of Netflix’s original shows has been growing.

In addition, Netflix has been beating traditional television networks (HBO, NBC) in nominations. In 2020, Netflix has received 160 nominations at the Emmys where as traditional TV networks have received the following nominations:

• HBO – 107 nominations • NBC – 47 nominations • ABC – 36 nominations • FOX – 33 nominations • CBS – 23 nominations Netflix’s Weaknesses

• Limited Copyrights – Netflix does not own most of its content, and this affects the company negatively. The rights taken from other studios expire after few years, and that content starts appearing on other sites.

• Increasing Debt – Netflix is serving its diversified content in many countries around the world which requires huge amounts of money. Netflix keeps adding to its long-term debt to fund new content. As of April 2020, Netflix reported $14.17 billion in debt and plans to raise $1 billion more through a debt offering. The increase in debt every year is a major weakness. • Lack of Green Initiatives – Netflix has still not utilized renewable energy and hasn’t created a business model to promote environmental sustainability. Contrary to this, tech companies like Amazon, , Apple, and have already started using renewable energy to help sustain the environment. The four tech giants have committed to using 100% renewable energy for their businesses. The lack of green energy utilization has a negative impact on the brand image of Netflix.

• Rigid Pricing – Customers demand customized pricing with more options. Unfortunately, Netflix’s pricing model is rigid with only three tiers, Basic, Standard, and Premium. The lack of different options has contributed to stagnation in the number of new subscriptions. • Over-dependence on North America Market – Even though Netflix operates globally, it relies heavily on the North American market. In the fiscal year 2019, Netflix reported $10.05 Billion revenue from North America, which represents about 50% of its total revenue ($20.15 Billion). This a major weakness because the North American Market is nearing saturation.

• Support Shortages – The number of Netflix users and hacked accounts increased in the first six months in 2020 because people were stuck at home due to Pandemic. To make matters worse, Netflix reduced support hours. Users were frustrated by the shortage of customer support and had to wait longer to retake their accounts compromised from hackers. • Raising Prices – Netflix has raised its subscription prices, while other new video streaming services such as Disney+ ($6.99 per month) and Apple TV+($4.99 per month) have introduced their services at much lower prices. • Growing Operational Costs – Adding more content gives Netflix a competitive advantage, but the cost of supporting the content keeps growing.

In 2019, the steaming cost was $14.61 Billion and the amount has exceeded from the last year’s spending of $12.04 Billion. Netflix’s Opportunities

• Low Price Mobile Streaming Option – Netflix can offer a lower- priced option to entice and retain subscribers in international market. Netflix has been testing a cheaper mobile-only plan in India that costs only $3/month. It can expand this lower-priced option globally to compete more effectively against cheaper alternatives like Disney+, Apple+, Peacock, and so on.

• Exploit Ad-Based Model – Google, Amazon, Facebook, and many other service providers make billions in revenue from adverts. Netflix can boost its revenue by adopting an advertising-based business model. • Expand Global Customer Base – With such a huge current subscriber base, Netflix can tap into many other countries and expand its services and subscribers. They can start to target the countries where it is currently not available. Recently, Netflix expanded its operations and added a few more countries on its operation list. However, it is still unavailable in China, Crimea, North Korea, and Syria.

• Refresh Content library – It can expand its content licensing by increasing the contracts with various movie distributors. Additionally, Netflix should refresh its content library as it is now producing its original content.

• Alliances – It can also partner up with various telecom providers and offer bundle packages in different countries. Alliances and partnerships can prove to be beneficial for Netflix. In the past, Netflix partnered with Channel 4. It can form more solid partnerships with local broadcasters. • Niche Marketing – Producing region-specific content in their local languages is also another big opportunity for Netflix. Niche marketing has been proven beneficial for Netflix. For example, it started an original TV series ‘Sacred Games’ in India, and Spanish series ‘La Casa de Papel‘ (Money Heist), which are massive hits.

• Introduce Cheaper Annual Subscription – Whenever Netflix releases new or fresh content, users will often pay for one month only and binge-watch all their favorite shows within a short period. Netflix loses a lot of revenue because users can cancel their subscription once they have gone through all the new content, without any penalty. The company can increase its revenue by introducing an annual subscription with discounts to encourage monthly subscribers to switch to yearly plans.

• Support Black Educational Institutions – Netflix has pledged 2% of its holding going forward to support Black communities, which amounts to $100 million. Its shows great Corporate Social Responsibility. Netflix’s Threats

• Competitive Pressure – Netflix is not the only one which provides digital streaming around the world. Its competitor keeps increasing every year. Disney+, Apple TV+, HBO, Amazon, Hulu, and YouTube are competing continuously with Netflix by giving repeated access to new and original content to its subscribers.

• Government Regulations – Strict governmental rules and regulations regarding service providers like Netflix in many countries can be a big threat for them. For example, Netflix expansion to China will be unlikely because of its restriction on foreign content. • Piracy – Digital piracy is still at its peak as thousands of people around the world find ways of downloading media content because of high monthly costs which they cannot afford. It is another big threat that Netflix faces.

• Market Saturation – Netflix added 420,000 U.S. subscribers in Q4 of 2019 and lower than its target of 600,000. In Canada, its target was 218,000 but it added only 125,000 subscribers. For the third quarter in a row, the North American subscriber growth has slowed because the market is reaching saturation. Netflix will find it harder to add new subscribers in the future due to market saturation.

• Account Hacking – The number of hacked Netflix user accounts increased drastically in Q1 and Q2 of 2020 with the increase in daily users due to lockdown. If account hacking persists into the future, frustrated Netflix users can mass migrate to rival companies. • Carbon Emission – According to a study by Shift Project, digital technologies have a larger carbon footprint than the aerospace industry. Online video streaming generates nearly 1% of global emissions. High carbon emission is a major threat in this age and time where countries across the world are threatened by climate change. They can decide to restrict Netflix’s usage.

• Government Pressure due to Capacity Issues – Netflix users are growing rapidly and straining available infrastructures and resources. In March 2020, the European Union commissioner complained about how Netflix’s large HD content strained infrastructure and interfered with critical functions like defense and hospitals. Netflix was asked to reduce the data in video streams to European users for 30 days and urged users to watch in standard definition instead of HD. Major Issues

• How to stop market share loss?

• Content Issues • How to create unique global content better than global competitors? • How to create unique local content better than local competitors? How to stop market share loss?

1. Pricing – Match competitor pricing

2. Free content model – Offer advertising supported free content in selected markets such as emerging markets.

3. Takeover local competitors Pricing – Match competitor pricing

• Disney+: $6.99 pm • Apple TV+: $4.99 pm • Amazon Prime Video: $5.99 pm • Hulu (No Ads): $11.99 pm • Hulu (Ad Supported): $5.99 pm

Viable only if the loss of Revenue is off-set by increased Subscriptions. Free content model – Offer advertising supported free content in selected markets such as emerging markets.

• This is the model used by YouTube. However, YouTube is difference because; • YouTube does not create content. It is a platform for user- generated content and offers the service free with advertising • As such YouTube has not content creation costs • 1.86 billion people use YouTube as of 2021 • YouTube has serious restrictions on showing copyrighted content

• Netflix can offer premium content free with advertising supported format. Will compete with giants like YouTube, Tik Tok and for advertising dollars. Takeover local competitors

• In each local market in Europe and Asia, there are local competitors who are well established • Netflix could try to takeover these content providers and own the market share for themselves. • If Netflix controls the largest competitors in each market, it could be a huge boost to market share.