A Netflix Experience: Reimagining the Direct-to-Consumer Platform By Gerardo Guadiana B.F.A. Film and Television New York University, 2014 SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY MAY 2020 ©2020 Gerardo Guadiana. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author: ____________________________________________________________________ MIT Sloan School of Management May 8, 2020 Certified by: __________________________________________________________________________ Ben Shields Senior Lecturer, Managerial Communication Thesis Supervisor Accepted by: _________________________________________________________________________ Maura Herson Assistant Dean, MBA Program MIT Sloan School of Management 1 A Netflix Experience: Reimagining the Direct-to-Consumer Platform By Gerardo Guadiana Submitted to MIT Sloan School of Management on May 8, 2020 in Partial Fulfillment of the requirements for the Degree of Master of Business Administration. ABSTRACT As the streaming wars intensify, Netflix cannot rely solely on its first-mover advantage to remain at the top and must continue to find ways to differentiate itself from competitors. While Netflix is known for having disrupted content delivery, there are still many innovations it can make to the content itself. By examining uses and gratifications research (i.e., the theory that audiences seek out media to fulfill certain needs), this paper identifies a set of needs for why audiences turn to media that consistently emerge across time and mediums; these needs, which will be referred to as the fundamental gratifications, drive consumer behavior. The paper then explores how Netflix, as a direct-to-consumer platform not constrained by some of the technological and storytelling-related limitations of traditional film and TV, can better fulfill some of the fundamental gratifications. Specifically, Netflix can better gratify the need for: • social connection by enabling features such as in-video comments and synchronous viewing. • immersion by enhancing the worldbuilding capabilities of the Netflix platform through the use of transmedia storytelling. • achievement by offering an Apple Arcade-like mobile gaming subscription on the Netflix platform. The successful execution of these ideas would make Netflix not simply a platform to watch content, but a place to interact with friends and an immersive home for exploring storytelling universes. In an age where consumers prefer experiences over material goods and services, Netflix has the potential to offer a true entertainment experience, while competitors get stuck behind providing simply streaming services. Thesis Supervisor: Ben Shields Title: Senior Lecturer, Managerial Communication 2 Acknowledgements It is a blessing to be surrounded by such intelligent people who share many of my passions. To everyone who gave me notes or whom I spoke with over the phone – friends, mentors, and those I met along the journey – thank you for lending me your time. Every day gives us new insights on the industry, which means our conversations are never really over. For that, I am grateful. Professor Shields, thank you for helping me refine this paper into something I am excited to share with others. When I first came to you with a half-baked idea for this thesis, you assigned me The Craft of Research to help me home in on what it was that I really wanted to explore. I wrote to you that the following line really resonated with me: “When you write for others, you demand more of yourself than when you write for yourself alone.” Nearly a year later, these words ring even more true. Though at times grueling, this has been the most academically rewarding process of my MBA experience and I am glad you came on board. Nicole, thank you for always asking “how was your day?” even when you knew the response would involve a boring update about my thesis. Your graceful warmth never ceases to amaze me; you are the only person I know who could pack the note-giving process with such kindness. I am profoundly appreciative of the positive energy you bring into my life and I promise to support you in the same way through all your future achievements. To my parents, thank you for showing me the world. You raised me with such a loving freedom, which enabled me to pursue all my curiosities. Not a day goes by where I am not grateful. My time as a student may be coming to an end, but you all inspire me to be a lifelong learner. 3 Table of Contents INTRODUCTION – FROM THE YELLOW PAGES TO YELP .................................................................... 7 PART I CHAPTER 1 – IS NETFLIX IN TROUBLE? ............................................................................................... 10 1.1 – DIMINISHING COMPETITIVE ADVANTAGES ..................................................................................................... 11 1.1.1 – The Troubles of Being a Content Aggregator ........................................................................................ 11 1.1.2 – The Troubles of Being a Content Producer ............................................................................................ 12 1.2 – DIRECT COMPETITION AND SUBSCRIBER COUNT ............................................................................................ 13 1.2.1 – Netflix Domestic Subscriber Numbers .................................................................................................... 14 1.2.2 – The Advantages of Disney ...................................................................................................................... 16 1.2.3 – Advantages of the Others ........................................................................................................................ 17 1.3 – INDIRECT COMPETITION AND TIME SPENT ON NETFLIX .................................................................................. 18 1.3.1 – Netflix’s True Market ............................................................................................................................. 19 1.3.2 – Social Media & The Internet .................................................................................................................. 20 1.3.3 – YouTube .................................................................................................................................................. 20 1.3.4 – Video Games ........................................................................................................................................... 22 1.4 – SUSTAINABLE COMPETITIVE ADVANTAGES .................................................................................................... 25 1.4.1 – The Content Trap .................................................................................................................................... 25 1.4.2 – Building a Moat ...................................................................................................................................... 27 CHAPTER 2 – USES AND GRATIFICATIONS RESEARCH ..................................................................... 29 2.1 – OVERVIEW OF USES AND GRATIFICATIONS THEORY ....................................................................................... 29 2.1.1 – Brief History of UGT .............................................................................................................................. 29 2.1.2 – Assumptions of UGT ............................................................................................................................... 30 2.1.3 – Criticisms of UGT................................................................................................................................... 31 2.1.4 – Consumers’ Evolving Relationship with Media ..................................................................................... 32 2.2 – USES AND GRATIFICATIONS RESEARCH IN RELATION TO DIFFERENT MEDIUMS ............................................ 34 2.2.1 – TV ........................................................................................................................................................... 34 2.2.2 – The Internet ............................................................................................................................................ 35 2.2.3 – Video Games ........................................................................................................................................... 36 2.2.4 – Social Media ........................................................................................................................................... 36 2.3 – THE FUNDAMENTAL GRATIFICATIONS ............................................................................................................ 37 PART II CHAPTER 3 – SOCIAL CONNECTION ..................................................................................................... 41 3.1 – TV AS A SOCIAL EXPERIENCE ......................................................................................................................... 41 3.1.1 – Social Networking Sites .........................................................................................................................