What is Netflix?
Netflix is a seminal online distributor, and the world’s sixth largest internet company (Scipioni, 2019). It has disrupted a 100-year-old industry, embodying a juggernaut that spans digital film and TV production and distribution (McDonald & Smith-Rowsey, 2016). Indeed, Netflix has not only transformed spectatorship, but has prompted technological shifts in production decisions, distribution deals and promotional strategies (Matrix, 2014). Netflix represents the pinnacle of the entertainment sharing economy, reinventing old DVD and TV sharing practices through its enabler of technology (John, 2018). However, to critics it laments Susan Sontag’s (1995) judgement of the “death of cinema,” as film is replaced by digital projection and we transition into a “virtual cinephilia” (McSweeney, 2018).
The Social and Cultural Shift of TV
With 197 million users worldwide (Mehta & Patti, 2019) it is undeniable Netflix has fostered economic, social and cultural shifts. Being the first company to use the internet to drive its entire business model, Netflix reshaped our use and understanding of the internet, but more specifically, content consumption. Viewers now have increased autonomy, fulfilling Jenkin’s (2006) “Convergence Culture” through user empowerment. We are no longer bound by commercials or forced to consume content we don’t want to.
In fact, Netflix personalises our experience. Their AI-powered algorithm analyses customer preferences, watch history and ratings to predict user patterns and offer recommendations (Mehta & Patti, 2019). According to Netflix, 80% of watched content comes from these recommendations (Morgan, 2020), depicting the accuracy of their algorithm and demand by consumers for convenience online. The below video discusses this process. From 2013, it depicts Netflix’s advancements from the outset, paving the way for competitors to follow.
However, while it appears to be a customer-focused approach, Elnahla (2019) sees this as a covert and subtle form of advertising, blurring the boundaries between content and marketing. Netflix recommends and trends its original content, questioning the legitimacy of personalisation. Elnahla argues that this surveillance controls the user, while informing Netflix’s own decision-making through tracking real demand (Elnahla, 2019).
Another way Netflix has transformed user behaviour is by releasing whole seasons, catalysing the “binge-watching” culture. On average, viewers watch four hours of content in one sitting (Matrix, 2014), and Netflix attempts to tap into the cultural zeitgeist to meet viewer demand. Tidying up with Marie Kondo is one example of how they attempt to depict everyday culture through relevant content.
The below advertisement depicts Netflix’s ability to transform not only the digital experience, but advertising as well. They use their own tropes to their favour, engaging viewers through a refreshing ad that bridges marketing with the world of content, breaking the fourth wall and creating a unity amongst the Netflix Originals.
Disrupting a Billion Dollar Industry, the Hastings Way
On an economic level, Netflix has disrupted the nature and economy of cable. They have become the impetus for accelerated cable cutting worldwide. In the US alone, 21.9 million households canceled cable services in 2019 (Morgan, 2019).
Netflix’s aggressive recruitment practices have transformed the economic system of the TV industry. Rather than securing rights to a show and earning money through reruns, Netflix offers upfront and exclusive deals (Sim, 2016). Shonda Rhimes and Ryan Murphy are two examples, each respectively signing a $150 and $300 million deal. In order to compete and retain talent, studios have been forced to do the same. Warner Bros offered Greg Berlanti a $400 million deal to stay with the company until 2024 (Spangler, 2020).
Traditional advertising has also been impacted, with advertisers choosing to invest in on-demand services. Despite the fact Netflix remains an ad-free platform, they have indirectly impacted this trend by paving the way for online streaming. Seven West Media reported a $444 million loss in soft advertising in 2018 (Chalmers, 2019). The below forecast was released by GroupM, depicting the substantial differentiation of ad spend between TV and digital media, expected to decline further by 19% in Australia (Wieser, 2020).
From Kibble to Netflix – a history of how it came to be
Netflix was founded by Reed Hastings and Marc Randolph in 1997 as a mail-order DVD company (Mehta & Patti, 2019). Formally known as “Kibble,” it now operates as an online subscription business.
As a publicly traded company, its largest individual shareholder is founder and CEO, Hastings, owning 2.5%. 83% of shareholders are institutional investors, Capital Research Group, Vanguard Group. and BlackRock Inc. holding the largest percentages (Johnston, 2020).
However, Netflix did not start out like this. In 1999, Amazon founder and CEO Jeff Bezos offered to purchase the company for the “lower-eight figures,” in an attempt to jump-start Amazon’s market entry into video (Mehta & Patti, 2019). Hastings and Randolph declined, and in 2000 offered to sell 49% of the company to Blockbuster in exchange for their online service (Sim, 2016). Blockbuster turned this down, ironically, and years later when personal computers became powerful enough, Netflix capitalised on this advancement by launching their streaming service.
For the first time, customers could consume entertainment on their technological devices. Video rental declined, and the TV industry was forced to innovate. In 2013, as new platforms entered the market, Netflix differentiated its product offering by producing original content. Rather than releasing a pilot and approving it based on metrics, they offered upfront contracts for entire seasons, “Orange is the New Black,” and “House of Cards” are namely two examples.
Today, 2 billion hours worth of Netflix content is streamed every week, and their investment in content has reached $17.3 billion, 85% going to original shows (Spangler, 2020).
Netflix and Australia, Friend or Foe?
When Netflix launched in Australia, its well-founded reputation put it on the competitive map immediately, proving its ability to sell itself. The below comedic advertisement with Ricky Gervais blurs the line between truth and ridicule, reinforcing this exact sentiment.
Despite its global success and prompt user adoption amongst Australian homes, Netflix has been criticised for shrinking the local film and television industry. A search of “Australian TV and Movies” on Netflix presents 42 search results, yet the platform has over 5,329 titles. This proves problematic, especially given the vulnerable and mature nature of our industry.
Since TV’s introduction in 1956, the Australian government has controlled commercial access to the market by privileging local production and protecting free-to-air content (Turner, 2018). Yet, Netflix has not been subject to formal regulation.
In 2018, hundreds of Australian actors, directors and producers wrote a letter to the federal government to introduce content rules and tax incentives (Turner, 2018). While Netflix has argued these regulations are ineffective in promoting local work, as they lead to low-quality shows (McDuling, 2018), the truth of the matter is that Netflix contributes little to the domestic economy.
While the Morrison government has considered implementing regulation to harmonise streaming and free-to-air-networks, under the Broadcasting Services Act, little has been done to implement this. Indeed, rather than regulating streaming services, the government recently proposed a Broadcasting Services Amendment Bill (2020) to “relax” content obligations of commercial radio and television broadcast due to “significant crisis in Australian media.”
Australia’s screen sector contributes $5.34B in value-add to the economy, and employs more than 30,000 people (Media Entertainment & Arts Alliance, 2018). Netflix, on the other hand, launched its Sydney Headquarters last year and only employs 10 staff (Lobato & Cunningham, 2019). It is up to the country in which Netflix resides to monitor its existence.
- The Netherlands implemented a 15% local content quota (McDuling, 2018).
- India’s broadcasting legislation now governs digital platforms.
- Turkey censors Netflix content, and programming cannot contradict “national and moral values of the society.”
These are just a few examples of regulation implemented to govern the platform. Despite the fact Australian users span over 14.5 million, with our Australian-owned Foxtel reaching just 5.2 (Williams, 2020), our government fails to mirror global regulatory counterparts.
With this huge reach, Netflix represents the potential to support the local industry and promote Australian entertainment. While the release of Tidelands, their first Australian original, depicts a step in the right direction, more work needs to be done!
The Netflix Ecology
The Netflix ecology engages a broad range of industries. While the paying subscriber is its sole user, Netflix continues to be impacted by organisations worldwide, whether this be regulatory bodies, institutional investors or partners. Despite its ever-changing influences, Netflix continues to prevail as the world’s largest subscription streaming service.
Imitation: The Greatest Form of Flattery, Right?
Netflix faces competition from streaming services and traditional TV enterprises entering the digital market, a price they are paying for shattering the boundaries of TV and reaping the benefits. Their three main competitors are as follows:
- Amazon. Their biggest competitive threat is Amazon, with over 150 million subscribers, a $119 yearly membership, and original content to compete (Spangler, 2020).
- Disney+. Housing the entire Disney suite, retracting their content from Netflix, and offering packaged subscriptions to Hulu and Disney+.
- Apple TV+. Undercutting the market with a monthly subscription fee of $4.99. Consequently, Netflix and Disney stocks dropped by 2.16% and 2.19% respectively (Spangler, 2020).
Competitor or Partner? Blurring the Lines for Dual Gain
Despite direct competition, Netflix has strategically developed a two-pronged partnership approach to combat the threat to their existing position.
Carriage Deals with Pay-TV Operators
Netflix has signed carriage deals with pay-TV operators to extend their global reach, including Sky Italia and Canal+ in France. This depicts a shift in the industry as direct competitors attempt to benefit through onboarding deals.
Consequently, Netflix has access to more than 300 million pay-TV households worldwide, almost double the company’s current global subscriber base (Broughton, 2017). This depicts the strategic nature of Netflix’s partnership approach as a mechanism for growth.
Netflix’s suppliers are content providers who license their streaming rights. These agreements vary between content owners, determining length, specified geographies, and exclusivity (Beers, 2020). Netflix’s unpredictable archives prompt questions regarding the agency of online distributors, attaching cinephilia to the corporate realm (McSweeney, 2018). Their largest content providers are as follows.
Comcast and Netflix first worked together in 2012, signing a deal for 300 hours of television programming. In 2015, this extended to 1,600 television episodes (Best, 2020). Its most recent deal gives Netflix rights to the entire suite of DreamWorks Animation films. Comcast recently launched their streaming service, Peacock, highlighting the swift reality that sees a supplier turned into a competitor.
In 2012, Starz Inc., acquired by Lionsgate in 2016, ended a distribution agreement with Netflix over fears it was disrupting the television ecosystem. In 2015, this deal was re-established, and Netflix was licensed to stream more than 2,500 movies, TV shows and concerts (Best, 2020).
RTL, a German-based multimedia company, licenses programs to Netflix for European subscribers while it aims to develop its own streaming service.
The Netflix Effect
Netflix has undoubtedly transformed our use and understanding of the internet, transforming viewer spectatorship and disrupting traditional scheduling, ratings, advertising and cable subscriptions (Matrix, 2014). As the first company to use the internet to drive its entire business model, Netflix paved the way for a movement towards the digital market.
They continually innovate and improve, leveraging AI advancements to track viewership and personalise the online experience. They force their competitors to do the same, prompting a rethink of existing business models as a mechanism for success in the digital market. Netflix has completely reinvented the television industry, both domestically and globally, prompting a decline in both customers and advertising within our local ecosystem.
With new streaming services and traditional TV platforms launching into the online realm, the future of Netflix remains unclear. But one thing is for certain. The “Netflix Effect” is an all-you-can-eat buffet, and everyone’s invited for the tasting.
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