By Mohan Rajagopal
Over the past decade, Netflix has become a household name in entertainment and pop culture. With an annual revenue of nearly 30 billion USD in 2021, it is considered a pioneer in streaming services due to its unique business model innovated in the 2000s. The first half of 2022, however, has not been particularly kind to the company; reports have shown that Netflix has begun losing a significant proportion of its long-term subscribers.
Over the past decade, Netflix has become a household name in entertainment and pop culture. With annual revenue of nearly 30 billion USD in 2021, it is considered a pioneer in streaming services due to its unique business model innovated in the 2000s. The first half of 2022, however, has not been particularly kind to the company; reports have shown that Netflix has begun losing a significant proportion of its long-term subscribers. The decline in subscriptions is not a sudden change in fortune, but the predictable side-effect of some questionable policy decisions made within a climate of growing competition from similar sites and platforms. Analysing the company’s current position within the entertainment industry requires a thorough understanding of its history and origins, a description of its business model, and a comparison with emerging competitors.
In 1997, Reed Hastings, a computer scientist, was left disgruntled after having to pay a 40 USD fine to Blockbuster (a movie rental service) for failing to return a copy of Apollo 13 on time. With Marc Randolph, a marketing director, Hastings had wished to enter the online retail sector inspired by the success of Amazon. However, the duo had been unable to decide on the category of items they would sell. Hastings’ dissatisfaction with Blockbuster spurred the partners to test selling and renting DVDs by postal service. In the late 90s, DVDs had only just begun to be produced, since VHS tapes were more popular. Hence, in 1998, Netflix was founded by Hastings and Rudolph with around thirty employees and less than a thousand DVD titles in their roster: a small number, but comprising almost the entire catalogue of DVDs at the time.
Initially, the service operated on the basis of a per-rental model, but by the early 2000s, it switched to a purely subscription-based model instead, doing away with the inconveniences of due dates and late fees. This innovation is what allowed Netflix to gradually dominate the market, eventually surpassing Blockbuster, its primary competitor. In 2007, the company launched a media streaming service via the Internet, beginning the advent of the Netflix that we know today. In another unique business move, Netflix began to develop original content as well, with Lilyhammer being the first. The production of exclusive, original shows and movies, coupled with the ease of access to the content and its advantageous business model, enabled the company to grow in revenue from year to year.
Choosing an Appropriate Business Model
The choice of business model is significant in determining the success of Netflix. As an OTT (over-the-top) platform, there are three main models that can be followed, each of which comes with its own set of costs and benefits: Subscription Video on Demand (SVOD), Transactional Video on Demand (TVOD), and Advertising Video on Demand (AVOD). The modern OTT market usually implements the SVOD model, as is the case with Netflix. Rather than charging a price per unit of media consumed, the customer is required to pay a regular subscription fee to access all the content available on the platform. Most streaming platforms, such as Netflix, Amazon Prime TV, and Disney+, make use of this model since it ensures a steady flow of high revenue. However, such a system also charges exorbitant prices for a subscription: 1 in 4 households report paying more than 75 USD (nearly 6,000 INR) per month on streaming services. As a result, there is a high degree of user churn (this is especially true in case of Netflix, as will be explored later).
As opposed to a subscription model, TVOD customers pay per view, by either renting or purchasing the video they wish to watch. Recently, YouTube and Google Play services have been allowing users to rent movies pertaining to such a TVOD model. However, as the rate of consumption increases, one is forced to spend a greater amount than would have been charged for a subscription, and hence it is difficult to acquire and retain customers through TVOD. Finally, hearkening back to cable television, AVOD content is interspersed with advertisements. The content itself is usually free, but in order to make profits, the service includes advertisements and the customer is unable to view the content seamlessly. In an age where speed and overexposure to content are hallmarks of the entertainment industry, constantly being bombarded with ads can prove to be quite annoying. Nevertheless, most democratic platforms where any user can upload their own content, such as YouTube, usually follow an AVOD model.
For a streaming service such as Netflix, choosing an SVOD model is inherently responsible for its success, both from a consumer and supplier perspective. In not maintaining a pay-per-view model, consumers enter the service almost with the mindset of a buffet meal. The same fee needs to be paid regardless of how much content is consumed: as a result, customers are willing to pay slightly higher prices than usual as they are convinced that they can watch a large number of shows and movies and get the best value out of their money. Unlike a buffet, however, Netflix does not incur a greater cost when the customer watches more content; there is no cost involved in the consumer watching a particular video. Since they were one of the first services to implement such a strategy, they naturally got a jumpstart, skyrocketing them to immense financial and online success.
Recent Shortcomings of Netflix
However, the same cannot be said for Netflix’s position in the current streaming climate. The market has become increasingly saturated with competitors, with nearly every production company announcing its own streaming and media service. Amazon, Disney, HBO, and Hulu, are only a few of the most popular services that have now made their mark on the online sphere of media. An uproar was created by news portals and social media when reports by The Information revealed that 200,000 users cancelled their subscriptions in the past quarter, marking the first time Netflix faced a net loss of subscribers in ten years. This statistic does not seem to be a mere blip either, as Netflix is expected to lose a whopping 2 million subscribers in the upcoming quarter, increasing tenfold. While this news initially came as a shock, delving into recent developments and decisions made by the company cast this data in a less surprising light. In March 2022, the platform increased prices for all subscription tiers by a dollar or two, a move that is made harsher as it followed a series of price hikes in the past few years.
A standard plan for Netflix now costs 15.49 USD (around 2,000 INR) per month. How does this compare to other services? Disney+, for instance, offers a monthly subscription at only 7.99 USD, while Amazon Prime TV comes in at 8.99 USD. When Netflix costs nearly twice as much as its competitors, it is unsurprising that long-term users are dropping off in favour of the dozen other alternatives. A high price might be justified by the roster of shows and movies available, however, Netflix has recently been fumbling the bag on that front as well. Twitter, Reddit, and other social media sites have been rife with criticism for the streaming service as several fan-favourite original shows have been cancelled in favour of generic, less popular, content starring celebrities and featuring cash-grabbing cameos. Anne With An E, I Am Not Okay With This, and The Chilling Adventures of Sabrina are only a few of the shows that have had fans lamenting online due to their cancellation for unverified reasons. For the past few years, Netflix has shown a remarkable ignorance towards what their customer base wants, choosing to renew shows that not many people care about in the first place.
The apathy towards consumers presents an interesting dilemma prolific within the space of art and entertainment in the current era of late-stage capitalism. It is no secret that production companies prefer making profits to putting out quality content that would be well-received by critics and viewers alike. Coupled with the intense need for constant consumption of shows and movies that have been accelerated by the internet, several companies have fallen back on a formulaic production of content, where something that has sold well in the past forms a framework for brainless iterations. Dominating entertainment through a profit-making lens sets a dangerous precedent not only from an artistic perspective but also for society at large: it is likely that content featuring minorities with strong social messages will be diminished to a minimum in order to cater to larger audiences who would prefer to watch a filtered, mainstream, version of life instead.
This disregard for viewers extends to policy decisions as well. Co-CEO Hastings announced that the platform was looking to introduce a cheaper, ad-supported subscription tier. Such a model seems ridiculous since most ad-based streaming platforms are completely free. Additionally, Hastings has also been vocal about preventing password-sharing, whereby users distribute passwords to their accounts with friends and family, such that each person need not get their own account. The callousness towards customers, coupled with the poor roster of original content, seems to be spelling out a dire fate for the stumbling platform.
Despite the recent shortcomings of the service, Netflix still remains a top contender in the entertainment industry, with several of its original productions receiving critical acclaim and being nominated for Academy Awards and Emmys. However, good reviews and hearty praise will mean nothing to a platform that is primarily a business looking to earn profits and retain customers. Urgent changes are introduced with regards to improving the quality of content, reducing prices to match competition, and augmenting better customer service and care. The company would do well to feature the role of its creators and producers to a greater extent since the decline in quality is only worsening the problem of low customer retention. If not, the streaming giant is likely to lose its spot at the top of the Hollywood sign.
Mohan Rajagopal is a first-year undergraduate student at Ashoka University. He intends to major in Economics and Finance, with a minor in Mathematics.
Image credits – TIME