$9\mathrm{.}5$

CASE STUDY

Netflix:

How Does This Movie End?

I n the Netflix online television comedy$-$drama series, Orange Is the New Black, the lead character is Piper Chapman $($Taylor Schilling$),$ a recently engaged blond New Yorker sent to a federal prison for a crime committed years before. Critically acclaimed, and widely followed, Orange Is the New Black follows in the footsteps of Netflix's earlier successful online TV series House of Cards, a political insider's tale of Washington politics. House of Cards was the first$-$ever online television series to win an Emmy award $($for best director$).$ Orange won three Emmy creative awards in $2014.$ In $2014,$ Netflix racked up $31$ nominations. Besides returning award$-$winning series from previous years, first$-$year dramas like Stranger Things and The Crown earned $32$ nominations alone. Netflix is quickly becoming the non$-$cable alternative to cable TV$.$ By producing its own content, Netflix is able to differentiate itself from cable TV shows and attract new sub$-$ scribers looking for new shows, not retreads from the cable networks. However, original productions are much more expensive to produce than licensing existing content. And there are plenty of other streaming services this year with very large budgets, among them Amazon and Hulu.

While Netflix does not release the number of viewers for any of its original TV shows, executives credit these shows with driving the streaming service to a record $103$ million worldwide subscribers by the fourth quarter of $2016(50$ million in the United States whereover $8,000\%$ since it first went public in $2002,$ and in $2017$ its shares have advanced $36\%.$ It is cur$-$ rently selling at over $200$ times its projected earnings, much more expensive than Google, Facebook, or other tech companies because it is still perceived as a growth company. In $2015$ investors were paying $300$ times earnings, so the estimates of future performance have declined. Revenues in $2016$ were $$8\mathrm{.}8$ billion, up $31\%$ from $2015,$ but profits were a paltry $$186$ million, less than half the previous year. Netflix's profit margin is $2\%,$ far less than a retailer like Walmart $(4\%$ margin$).$

Netflix got its start as a mail order company renting DVDs of older Hollywood movies using the postal system. Founded by two Silicon Valley entrepreneurs, Marc Randolph and Reed Hastings, in $1997,$ the company started by renting individual copies of $900$ DVD movie titles and delivering them to customers by postal mail. In $2000,$ it switched to a sub$-$ scription model where customers could receive DVDs on a regular basis for a monthly fee. By $2006,$ it had delivered its billionth DVD and became the largest subscription provider of DVDs$.$ In $2007,$ Netflix began a video$-$on$-$demand streaming service of movies although it still retains a DVD subscription business. In $2017,$ Netflix is the largest player in the TV series streaming market, and consumes over $35\%$ of the U$.$S$.$ Internet bandwidth to serve its customers.

Netflix is one of those Silicon Valley stories that might make a good movie, or even a television series, because of its potential for disrupting the American television and movie landscape $($or what's called premium video$).$ It's a dream$-$come$-$true story of accomplish$-$ ment, pluck, innovation, and Internet technology. In a few short years Netflix created the largest DVD rental business in the country, then created the largest streaming video service. Today Netflix accounts for $50\%$ of digital movie streaming revenues, while its chief streaming competitors, Apple $(19\%),$ Amazon $(14\%),$ and Hulu $(11\%),$ make up most of the remaining market. Netflix has created the largest database on consumer video preferences and built a recommendation system that encourages consumers to see more movies. Netflix is as much a technology company as a content company: it has developed its own proprietary video encoding system and distributes its video using over $1,000$ servers in the United States located close to its customers to ensure high speed and quality delivery. Netflix discovered that older TV series had strong niche followings and built a new model of "binge watching" where consumers could watch all the episodes of a series in several sittings. Netflix has entered the content creation business by developing original TV series. For this reason, Netflix is an example of convergence in the media industry where an Internet company becomes a media content producer. Other pure media companies have taken notice and begun to develop their own streaming services, but what they lack is a database of viewer preferences that Netflix has developed over a ten$-$year period and

which helps Netflix make recommendations to subscribers.

In the movie and TV business there are only two ways to make money: either own the content or own the pipes that deliver the content. All the better if you can do both. Netflix has become recognized as an important pipeline to a very large audience. For instance. Netflix has a deal with the Weinstein Company, a major American film studio and pro$-$

While Netflix does not release the number of viewers for any of its original TV shows, executives credit these shows with driving the streaming service to a record $103$ million worldwide subscribers by the fourth quarter of $2016(50$ million in the United States whereepreneurs can fly to Hollywood or New York with lots of cash and simply purchase new content. As one pundit noted, this might lead to a mugging, but not a successful TV series or movie. Silicon Valley is generally not the place to go if you're looking for story tellers, writers, producers, directors, talent agents, and cinematogra phers. Algorithms don't come up with new ideas for novels, plays, movies, or TV series, and they have not proven to be good at guessing what series will succeed in the future. Older series are proven series, and Netflix can identify which of its customers watched the series in previous years, and estimate the audience size, and whether new subscribers will be attracted by the re$-$plays. But when it comes to new TV series, Netflix has tried to use its algorithms to predict what new series its customers might be interested in with mixed results. Netflix has produced some real winners according to critics, but it has also produced some losers that did not get critical acclaim like Lillyhammer, Hemlock Grove. Bad Samaritans, Richie Rich, and Mitt. There has been only one tech company in history that was successful with content production for movies or television, and that is Pixar, which pioneered computer$-$generated animated feature$-$length movies. It is impossible to know how well Netflix's original content is performing because the company refuses to release this data. Nielsen has begun a rating service for Netflix shows. This service is paid for by the content producers who will base their charges in part on how many Netflix subscribers stream their shows.

While Netflix stands out as a powerful Internet brand today, Netflix has many power$-$ ful competitors. Netflix does not have unique technology. In fact, streaming technology is widespread and well understood. The success of Netflix's streaming model has attracted Amazon, Apple, Yahoo, Google, and content producers like Hulu and HBO to the fray. In $2017$ Disney announced it was starting two of its own streaming services, and removing its content from Netflix. In $2015,$ Verizon announced a free, ad$-$supported mobile streaming service called go$,$ aimed at Millennials who routinely watch video on their smartphones. Some of these firms are tech firms with very large Internet audiences, strong brand names, and a good understanding of what their millions of online customers want.

SOURCES: "Disney Unveils New

Steaming Services, to End Natfix Deat," by Erich Schwartzel and ise Fine, Wall Street Joumal, August & $2017,$ "Neth is Winning the Streaming Race$-$But for How Long?" by Mathew Ingram, Fortune, March $10,2017,$ How YouTube TV WIT Stack Up in The OTT Market," by Trefis Team des March $7,2017$ Fuels a Surge in Sonoted TV Shows Some See a Glut," by John Kobilnaus, New Tes August $9,2016$: "Netflix and $20$m Century Fox Televisiontribution Announce First Global Agreement" Netflix Media Centec ec July $25,2016$ "Netflix Stack History Whar You Need to Know" by Dan Caplinger, Fool.com, Aly $11,2016$

"Netflix to Be Seclusive Global

Apple is the leader in downloaded movies where customers own or rent movies, and of course, it owns iTunes, the world's largest online media store for the purchase of music, videos, and TV series. HBO, founded in $1972,$ is the oldest and most successful pay televi$-$ sion service in the United States with over $140$ million cable TV subscribers worldwide. and the originator of a long list of highly successful original TV series and movies such as Sex and the City, The Sopranos, The Wire, Game of Thrones, and True Blood. If Netflix has a direct competitor on the creative front, it is HBO, a more traditional programmer that does not use computer algorithms to design its content, but instead relies on the hunches and gifts of editors, producers, and directors to produce its content.

Netflix's competitors have very deep pockets. This means Netflix also has competi$-$ tors for talent and the production of new content, and perhaps price pressure as well. Along with Hulu, Amazon has emerged as the biggest competitor to Netflix streaming. For instance, Amazon offers free streaming to its $60$ million Amazon Prime customers,

$4/5$

While Netflix does not release the number of viewers for any of its original TV shows, executives credit these shows with driving the streaming service to a record $103$ million worldwide subscribers by the fourth quarter of $2016(50$ million in the United States whereevely pursuing long$-$form content creators for its video channel program. There is no cost to Google users because the service is ad supported.

So another possible ending for the Netflix movie is that ultimately it can't compete with Apple, Google, Yahoo, Hulu, and Amazon, or the content producers like CBS and HBO Now, which have started their own streaming services. Generating a negative cash flow of $$1$ billion a year, Netflix may run out of investors who make up the difference. Netflix can be imitated by its competitors, and its profitability reduced to less than shareholders can tolerate. Apple's $2016$ revenue was a staggering $$215$ billion, $30$ times larger than Netflix, and it has a a cash reserve e of $$260$ billion in $2017.$ It is entirely within Apple's capabilities, or Amazon's or Google's, and others' to develop a competing streaming video service. Equally worrisome, major cable networks like CBS and NBC have started their own streaming networks for their original content. Netflix may have created a new world of streaming. bingeing, and content production, but it may not be able to survive the world it created. This show is not over until the last episode is finished. Stay tuned.

Sosaming Home of PC$\text{'}$s American Crime Story Franchise in $2017,$ Netflix Media Center, July $25,2016$: "Netflix Chews Up Less Bandwidth, as Amazon Video Smeaming Surges," by Tod Splanget, Variety, July $22,2016$ Amazon Prime Members low Outnumber Non$-$Prime Customers by Audrey Shi Fortune Aly $11,2018$ "Can Netflis Sunive the New World Created by Ise Nocers, New Yorkmes, June $16,2016$ Amazon Chalenges Netflix by Opening Prime to Monthly ben by Nix Winged Times, April $17\mathrm{.}2016$ "Verizon to Offer Free Mobile TV Servis Hoping to Draw Millen Times, September $8,2015$: "Netf Viewership Finally Gets a Tard stick," by Joe Filint and Bent wall Sheer Joumal August $26,$

$2013$

Case Study Questions

$1.$ What are three challenges that Netflix faces?

$2.$ What are the key elements of Netflix's strategy today?

$3.$ What are the implications of Netflix's new strategy for the cable television syste tems like Comcast?

$4.$ Why is Netflix in competition with Apple, Amazon, and Google, and what strengths does Netflix bring to the market?

While Netflix does not release the number of viewers for any of its original TV shows, executives credit these shows with driving the streaming service to a record $103$ million worldwide subscribers by the fourth quarter of $2016(50$ million in the United States whereeeeeeeeeeeeeeee whereeeeeeereeeeeeeeeewhereeeeeeeeeWhat are the key elements of Netflix's strategy today?