With all the great and overwhelming features, Netflix is marked as successful as it prioritizes subscribers' needs. The regular transformation is bringing innovations and creating ease for all its subscribers. The success story of Netflix is their business strategy to make customers glued to this platform
It doesn’t seem like a long time ago when people known as the ‘cable tv operators’, came home and fiddled with something on the television and magically, everything you liked - be it cartoons, sports, news or even shows, just popped up. Right up on your screens. It also seems like yesterday, that all of us used to have wars over which Setup Box service was better. Neither were we the ones paying for it nor did we have any clue about any services, except Tata Sky, Airtel & DishTV. Nevertheless, we do remember these times distinctively. The memories of televisions going blank on a rainy Sunday evening, and the frustration that used to build in our heads over this, still vividly plays in the back of my mind. Fast forward to a couple of years ago, when something extraordinary started to come up the ranks. Something which was undoubtedly the best thing that happened since sliced bread. Something synonymous with the world we live in today. Netflix. It seems like the word ‘OTT’ can easily be replaced by Netflix, just like Xerox did with photocopy or Google with the internet. However, it is important to understand the history of something that has not only become a part of our daily lives but also a massive business market in recent times.
Over the Top services, commonly known as OTT or OTT platforms are channels or mediums that deliver content to their users. No longer does a user or a customer need a broadcaster, cable operator or satellite pay-tv service provider to consume content. All you require now is a high-speed internet connection which, ironically, is provided either by your cable operators or companies established for the same and a connected device like a smart TV or a gadget that supports applications and browsers. Just as simple as that. You are all set to consume content for however long you want, regardless of waiting for channels to play the content you are waiting for, or even, the weather outside. What’s even better is rather than choosing from the available content, which one did earlier, the user now has enough and more varied content to choose from now. To say the least, OTT is the culture of “cool” amongst society.
The OTT market is here to stay and is getting bigger and bigger with each word I am typing here. The demand for content is growing. The companies supplying the content are increasing. And who better to analyze than Netflix itself, which established itself 24 years ago. Quite ahead of its time, wasn’t it?
Netflix Inc is an American entertainment service provider based out of California and was founded by Reed Hastings and Marc Randolph in 1997. It originally started as a DVD sales and rental by mail company before it switched to focus on their DVD rental business. It was only a decade after their operations, in 2007, that Netflix expanded their business with streaming media. Not only are they the first ‘streaming' members of the Motion Pictures Association of America, whose members include big studios like Walt Disney and Warner Bros but they also have over 148 million paid subscriptions worldwide.
With over $24.9 billion in revenue in 2020, and a 23.8% increase year-on-year basis, what Netflix needs to do is to stay one step ahead of the competition in this challenging and dynamic market. With competitors like Disney+ Hotstar, Amazon Prime and Sony Liv underway increasing their market share, there is a necessity of an analytical model that helps managers at Netflix to look at the ‘balance of power’ and analyze their profitability factor. This is where Porter's Five-Factor Model plays an important role.
Michael Porter, generally recognized as the father of the modern strategy field, has been identified as one of the world’s most influential thinkers on management and competitiveness. His model talks about competitiveness not only originating from competitors but also depends on the five basic forces: the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, the threat of substitute products or services, and existing industry rivalry. Therefore, it is important to analyze one of the leading companies in its space - Netflix - using this model to understand the competitiveness of the market that it functions in.
THREAT OF NEW ENTRANTS
Let’s take the example of a new entrant in the automobile arena. For the sake of this example, let’s name it R2D2. On one hand, R2D2 will need a lot of licenses, insurances, paperwork, distribution channels and will have to go through several other legal formalities that may not be very easy on a new company. As of today, Netflix has captured 52% of US households, and in the last year, only 9% of its subscriber base has canceled it. This stat speaks for itself.
ECONOMIES OF SCALE
The concept of economies of scale poses to be one of the most valuable factors from the perspective of the cost structure while integrating it with innovative and creative ideas. This is something to learn from Netflix.
According to the 2007 annual report of Netflix Inc, they were able to maximize their revenues and minimize their costs solely from an increase in their subscriber count. They continued to leverage operational changes in a cost-effective manner leading to a reduction of costs on a per-subscriber basis. Now, this is something a new entrant might fail to achieve in its initial phase.
PRODUCT DIFFERENTIATION
Now even though the majority of the competitors provide the same features - originals, exclusives, other content, one striking competitor is Amazon Prime.
Amazon Prime is a subscription service provided by Amazon. It gives its members not only access to their streaming platform - Prime Video but also an exclusive shopping experience that is generally crowded with discounts and a free two-day shipping policy. Prime membership also reaps other benefits like Prime Now shopping that provides free same-day deliveries, unlimited reading on Kindle- the e-book, unlimited music streaming through Amazon Music and many other such benefits. Netflix just provides its video streaming perks making Amazon a worthy competitor.
SWITCHING COST
With no charges on switching between OTT platforms, Netflix does face a risk of being switched over by other platforms that are now not only limited to the content they provide but also their additional services like like television streaming.
BRAND LOYALTY
When it comes to brand loyalty, it’s impossible to come across a person who streams content online and does not have a Netflix account. If not their own, then they surely would have their best friend sharing it with them. Netflix has by far the most loyal subscribers as compared to its competitors. All in all, until Netflix does something different from the ordinary, another competitor or a newcomer can exist in the market but it is next to impossible to replace it due to the huge brand loyalty and fan base.
ACCESS TO DISTRIBUTION CHANNELS
Even when the new entrants, once cleared of all those legalities, will not only desire to gain market share but also have the advantage of liberalization of market access and external finance from institutions. So, it’s not impossible but it is comparatively difficult for new entrants in the majority of the industries due to the existence of other players and corporations and different legal requirements in international markets.
CAPITAL REQUIREMENT
The capital required to generate original content as well as buy rights to shows and movies to stream for a new entrant will pose a chance due to the intensive capital investment and supplier content needed. The regulations on the streaming platform were really liberal and never too negligible until a year back. The new rules passed by the government of India look to hinder the efforts of self-regulation which streaming platforms enjoy. The regulation was passed while keeping the theaters and other television channels in mind. There isn’t much clarity on what a new entrant would face at the moment.
BARGAINING POWER OF BUYERS
Companies need to know that customers are very price savvy. One of the biggest motivators for Indian markets is discounts. Therefore, the company ought to determine its relationship with buyer power and needs to be rather flexible and adaptive while also maintaining a competitive position in the market. The bottom line, buyers want the best offerings available by paying the minimum price, something that might not be attractive to any company. Therefore the bargaining power of buyers is very high. Any kind of revenue generated by Netflix can directly be attributed to the number of people subscribing to their streaming service. The number of users subscribing to the platform has always been on an upward curve. From 124.35 million subscribers in 2018 to the current count of 209.18 million as of Quarter 2 of 2021, the market share keeps on increasing..
The price sensitivity of Netflix adds up to be the second reason for an increased consumer’s bargaining power. At 149, which is the starting pack per month, Netflix is relatively expensive compared to its other competitors.
A streaming platform like Amazon Prime starts at a monthly subscription of 129 whereas Disney+ Hotstar has a no subscription model too. Due to this Netflix often faces the disadvantage of losing its buyers over relatively incremental price increases. Over and above, the availability of N number of free substitutes like YouTube also puts Netflix at an ever-increasing risk.
THREAT OF SUBSTITUTE PRODUCTS
The entertainment industry is faced with an unusual conundrum. Not only is it witnessing a digital rush in the form of digital streaming platforms but there is also an equally stable demand for its substitutes. These being movie theaters, cable and satellite television set ups, DVDs as well as pirated digital copies. However, due to the fast technological pace of the 21st century, satellite television and theater demands have witnessed a decline with the growth of on-demand video streaming to access content.
The propensity to substitute may honestly depend upon the user’s generation and choice. In our belief, our grandparents might not be able to adapt to the latest technology, be it as simple as working with a smart device. Unlike us, they were never bombarded with technology since their childhood. They never had the privilege of even googling every little thing and had to sit through hours in the library to search for simple definitions or even write a paper like this. That’s how much technology has evolved and hence the older generation might be apprehensive to shift to digital streaming platforms.
With the majority of pros on the side of streaming platforms like Netflix, the fact remains that digital platforms aren’t at a stage of overthrowing the conventional means. There are certain live events that only televisions provide users with.
A platform like Netflix can’t take over the traditional news channels since it doesn’t telecast live TV content nor is it a news delivery platform. Talking about movie theaters, it’s only during the COVID era that we saw a lot of movies scheduled for theater releases being exclusively sold to OTT platforms.
Before this, the OTT platforms didn’t have the luxury of streaming movies at the moment they were released, something which theaters did. Even if we consider the success of OTT platforms during the pandemic, it’s not a viable way for them in the post Covid era.
The platforms wouldn’t be able to achieve a lot of big-budget films and for example films like 83 which were due to release in 2020 are wanted to be watched on the big screen by many. With the rapid rate of change in technology like we have been witnessing, It is believed that Netflix is likely to face a threat from old as well as other new innovative substitutes in the future.
BARGAINING POWER OF SUPPLIERS
When the matter comes down to suppliers, we fall under the assumption that the more suppliers available to us, the easier the option of a cheaper method becomes. However, the power of control depends on the number of suppliers too.
Netflix’s traditional business model involves acquiring the majority of its content through licensing agreements. This gives Netflix the right to stream a particular show or a movie and it is generally a multi-year deal.
It is because of this that its suppliers - the content providers- have a good amount of bargaining power. How is that so? When the multi-year or a single year deal expires, the content provider has the option to continue or terminate its deal with Netflix. This lessens the content which Netflix could be providing to its users.
For example - the latest movie which I wanted to watch left of its shelf was Zero Dark Thirty. The multi-year deal expired and the providers weren't interested in renewing it.
Another very interesting thing that I found out while researching, is that Netflix does not own the rights to its original content. It owns the right to stream shows like Money Heist, Cobra Kai, Breaking Bad and Designated Survivor first and exclusively for a limited time, but the licensing rights may be sold to a competitor once the contract has expired. Therefore you often find a lot of overlapping shows on multi-streaming platforms.
Since Netflix’s model demands it to be dependent on content providers for content, to maintain its viewership, and fan base, the bargaining power of the suppliers to Netflix is extremely high, thus posing a threat to the long-term viability of the company.
RIVALRY AMONG EXISTING COMPETITORS
Rivalry is prevalent in every sector. You’ll have some competitor or the other unless obviously, you are in a monopolistic market. These competitors could be small as well as big or even both in some cases. A normal bystander would view the streaming platforms to have a lot of rivalries. Each day there’s a new platform coming up and there are so many highly established streaming platforms, be it Disney+ Hotstar, Amazon Prime Video, Sony Liv, Zee TV and Voot, to name just a few.
Other competitors like Hotstar, Sony Liv and Voot telecast live sports matches. For instance, the average viewership on Hotstar shoots up multifold, generally during the summer times of April and May due to the broadcasting of the IPL. It also telecasts the Premier League for all football fans. Sony Liv telecasts all Indian Cricket Team matches as well as the Champions League. None of which is done by Netflix as it is yet to hop on the live telecast bus.
With all that said, nothing beats the brand loyalty as well as the content quality provided by Netflix as compared to others. Even though Apple TV+ shows have been nominated for a lot of Emmy awards, like Ted Lasso for 20 Emmy Nominations and ended up winning 7, it is generally only people inside the Apple ecosystem who subscribe to this service.
A lot of companies find it difficult to survive in this market with subscribers either paying to watch a particular show or a movie and then unsubscribing. This was seen when Salman Khan’s "Radhe" was released on Zee5 in pay per view format. It is also important to understand that differences among competing organizations that offer a variety of content, like the Netflix and Hotstar's of the world may have people subscribing to multiple services. Due to the low cost of these services, consumers could purchase multiple subscriptions, and still pay a lesser amount than the cost of a traditional cable or satellite package.
We did a small survey with my friends to understand their likings of OTT platforms and this is what we found out.
Unsurprisingly, the favorite OTT platform across all responses turned out to be Netflix. However, as mentioned above, the low cost of subscriptions packages of the available options makes it easier for buyers to subscribe to more than one platform. Therefore, there is a tight war between Netflix and Hotstar. Hotstar being the broadcaster of the IPL drives a lot of audiences. The majority of them didn’t unsubscribe from the services and if they did do, it was from Zee5. The one attractive thing about OTT is their originals.
By analyzing all the five competitive forces of Netflix Inc, we get a feeling that the company is one of the leaders in the business, however, if they do not alter their plans, then there is a high possibility for them to lose the plot and end up becoming a Nokia equivalent soon.
By using Porter’s Five-Factor Model they’ll be able to counter their demerits and make this company greater than what it already is.