The way in which audiences consume movies and television content appears to be changing. While ‘linear’ viewing of scheduled channels remains robust, the market for DVD has collapsed and new pricing and consumption models are opening up.
At the forefront of this is Netflix – with a total of 63M paying subscribers across 50 markets (it is present in a large number of locations in Latin America and the Caribbean) and a penetration of over 34% in the US, Netflix has created a new paradigm for on demand content.
How this model is going to impact other players in the market in the long term is as yet unclear. To date in the US, pay platform penetration has remained robust, premium channels such as HBO are also performing strongly, and for rights owners and producers a new player bidding for rights is hugely welcome.
So is Netflix a ‘win: win’ opportunity for all concerned? It may not be that straightforward.
- For leading pay TV players, Netflix will be yet another component forcing them to invest in innovation to minimise customers churning from bundled packages, and reducing flexibility around price increases;
- For TV channels Netflix could lead to programme rights inflation, as a new player with a distinct business model comes into bid for premium exclusive content rights
- For both established TV platforms and premium channels there is the risk that in price sensitive markets or demographics Netflix offers may gain traction, particularly among younger consumers at the expense of traditional subscription models.
- For telcos looking to compete with cable and satellite, while Netflix could offer a cost effective way to deliver attractive premium content, it also carries a risk of constraining the telcos into the position of a ‘dumb (or happy) pipe’, not sharing in upsides and not owning the consumer who deals directly with Netflix.
STL Partners has partnered with Prospero Strategy Consultants who work extensively with content and platform players on new market dynamics to prepare this Briefing. The work has drawn on interviews with key players and analysis of quantitative and qualitative market data, to determine the threats and opportunities emerging from this new content ecosystem and how these are likely to develop.
Overview of Netflix History
Netflix began as a postal DVD business in the US in 1997, launching its US subscription streaming service in 2007. Since 2011 it has focused on rapid expansion into international markets with the biggest growth now coming from international subscribers (67% growth between 2013 and 2014) while its US DVD business is now in decline.
Figure 4: Netflix subscribers 1999 – 2014(Q3) in 000s
Netflix changed its reporting methodology from Q1 2011
Consumer Proposition and USPs
The success of the Netflix proposition to consumers has been based on a number of components:
- Low Price and refusal to tie users into long-term contracts
- Volume and exclusivity of content
- Effective User Interface, recommendation engine and multi-device access
- Customer Data
The low monthly price point of Netflix (USD7.99 per month in the US rising to USD8.99 for new subscribers in 2014) has been a key component of the company’s success. This price point is less than the cost of purchasing a single DVD and significantly less than monthly premium drama channels such as HBO (at ~USD15 per month). This price point (and that users are not tied into long term contracts) allows Netflix to attract distinct audience groups.
- First, the high-end audience who are already pay subscribers. These customers have demonstrated that they are typically price inelastic and willing to pay for more, buying Netflix on top of existing services.
- Second, the price constrained audiences, for whom traditional pay TV is out of reach but who are interested in expanded choice. These are often younger demographics for whom the concept of non-linear consumption is very familiar.
- There is a third audience group, the price sensitive pay TV subscribers for whom Netflix could be an effective substitute and who could churn off traditional pay TV (either completely or partially) as a result. While the evidence around the impact on this group is as yet nascent, it is this segment that is making incumbent pay TV players nervous.
Figure 5: Reasons Netflix streamers subscribe to the Service
Source: Alphawise, 3rd Annual Streaming Video Survey – More Devices, More Consumption, March 2013
Volume and Exclusivity
As demonstrated in Figure 5 above a key to success has been offering both range and quality of content. However, over time the shape of the Netflix library has changed as it has used its customer insight and data to inform its rights strategy.
- In February 2012 the Netflix US library consisted of ~15k titles (Source: SNL Kagan) of which nearly three quarters were movie titles.
- Since 2012 the volume of library titles has declined by approximately 30% nearly all of which is accounted for by a decline in movie titles. Netflix has increased its focus on long run drama series which already have brand recognition and which are effective at attracting and keeping audiences.
- Interestingly, the volume of content being offered in its international markets is significantly less than in the US (about one-third) as Netflix shifts its focus to quality (as opposed to quantity of content)
Netflix’s early content deals were typically library rights and non-exclusive. Over time that mix has shifted as Netflix increasingly looks to have a component of exclusivity with the aim of shifting from a “nice to have” to a “must have” service
- Netflix is investing in original production of a limited number of high profile, high end drama series (such as House of Cards, Orange is the only Black and the recently announced Crouching Tiger Hidden Dragon sequel). For these Netflix can retain its exclusive rights indefinitely.
- In addition, Netflix is bidding aggressively for exclusive windows for high end content (such as the recently announced deal for exclusive VOD rights in all territories for Gotham and first window rights in several territories for Penny Dreadful).
Figure 6: Netflix’s Evolving Content Proposition
Source: STL Partners & Prospero analysis
Effective consumer interface on multiple devices
Netflix has evolved a highly effective consumer interface, enabling personalisation by individual members in the household, with an easy to manage and visually effective selection mechanism.
- Since 2008 Netflix has rolled out its proposition across multiple connected devices, with the most recent development being access on mobile devices and partnership with 4G operators such as Vodafone. Cross device functionality gives users a consistent experience.
- The consumer is able to choose when and where to consume Netflix content – leading to a new dynamic of series “bingeing” analogous to box set consumption. In addition, Netflix’s deals with Smart TV providers gives consumers the ability to by-pass traditional pay TV gatekeepers.
Figure 7: Netflix’s user interface
Source: Netflix & SNL Kagan
- Underlying a huge part of their success is Netflix’s control of its data. This includes knowledge of individuals within households (who will have their own profiles), detailed insight into viewing behaviour (not just what, but when and how much), knowledge that no linear channel can match.
- In all markets (regardless of its distribution partners) Netflix retains its customer data and does not share it. This informs its rights negotiations and new programme investments.
- Netflix continues to refine its customer understanding using sophisticated A/B testing where small sub groups are given slightly different user experiences to see how this changes behaviour
- Executive Summary
- Overview of Netflix
- Consumer Proposition and USPs
- Netflix International Expansion
- Netflix Financials
- Attitude of the Financial Markets
- Impact of Netflix on the Market
- Impact on Rights Owners and Producers
- Impact on Channels
- Impact on Pay Platforms
- Impact on Broadband Operators
- Summary impacts on players along the value chain
- Responses to Netflix
- Case Study: HBO
- Case Study: BSkyB
- Case Study: Broadband Operators
- Case Study: New Competitors
- Figure 1: Selected Media Companies Market Capitalisation, 1st Sept. 2014 (left) & 1st Jan. 2015 (right), USD billion
- Figure 2: Netflix’s subscriber targets for 2020 (announced launches only) in USD million
- Figure 3: Summary of Netflix’s Impacts along the Value Chain
- Figure 4: Netflix subscribers 1999 – 2014 in 000s
- Figure 5: Reasons Netflix streamers subscribe to the Service
- Figure 6: Netflix’s Evolving Content Proposition
- Figure 7: Netflix’s user interface
- Figure 8: Netflix geography and timeline
- Figure 9: Netflix’s Market Penetration over time to Dec 2013 (% households)
- Figure 10: Netflix revenue per service area, 1999 – 2014, USD million
- Figure 11: Netflix’s revenues & costs per business line, 2011–2014, USD million
- Figure 12: Netflix’s net income and free cash flow, 2009 – 2014, USD million
- Figure 13: Netflix’s streaming content obligations, 2010 – 2013, USD million
- Figure 14: Selected Media Companies Market Capitalisation, 1st Sept. 2014 (left) & 1st Jan. 2015 (right), USD billion
- Table 1: Comparison of Key Value Ratios
- Figure 15: Netflix’s share price (USD), Jan 2010 – Jan 2015
- Figure 16: Players along the Value Chain
- Figure 17: Subscribers to premium channels in the US (%of TV households)
- Figure 18: Changes in US Pay TV Penetration
- Figure 19: Percentage of Households that are “cord-cutters”
- Figure 20: Real Time Entertainment Share of Downstream Traffic
- Figure 21: Share of Traffic of Downstream Peak Time Applications
- Figure 22: Summary of Impacts along the Value Chain
- Figure 23: Overview of Sky Expanded Offering
- Figure 24: Sky’s offering across All Windows
- Figure 25: Vodafone / Spotify and Sky Sport deals – Impact on mobile broadband usage
- Figure 26: Netflix Broadband Partners
- Figure 27: Netflix Competitor Set