No chill? The Transformative Netflix Effect

Netflix, a one-stop entertainment empire.

"Netflix" by stockcatalog is licensed under CC BY 2.0

This critical web article explores the transformative impact of Netflix, analysing its role in redefining global media and television through its proliferation of media content distribution on the internet. When evaluating Netflix’s transformative effects, political, economic, social and cultural implications are considered.


Netflix Who?

Netflix is an American-owned digital company which has evolved and transformed with the internet, growing rapidly into a market leader of subscription-based video-on-demand media also known as over-the-top content (Lobato, 2019, p.x). Over-the-top content is content not typically distributed through cable-cellular networks but rather from services offered to viewers via the internet (Erman, Gerber, Ramakrishnan, Sen & Spatscheck, 2011).

Merging the spheres of internet and media, Netflix has redefined what we now know as internet television (Gomez-Uribe & Hunt, 2015). The company’s primary business stems from subscription-based streaming of video content including movies, television series and other films to its users (Pogue, 2007).

Streaming Netflix

“Netflix subscription-based streaming service” by stockcatalog is licensed under CC BY-NC 2.0

A Walk Down Memory Lane

In 1977, Netflix was originally founded in California by sales executive Marc Randolph and entrepreneur Reed Hastings (Lobato, 2019, p.12). Starting as a mail-out DVD business, Netflix began to build an impressive logistics chain to distribute DVD’s to their customers. By 2009, Netflix had gained over 10 million customers and mailed out over 100,000 DVD’s (Venkatraman, 2017).

Netflix envelope

“Netflix mail-out DVD” by Marit & Toomas Hinnosaar is licensed under CC BY 2.0

However, from 2006 Netflix began to recognise potential in the rising popularity of video streaming services like YouTube (Kyncl, 2017). In 2007, video-on-demand subscription-based streaming service was introduced signifying the start of their digital transformation and growth (Venkatraman, 2017). As a publicly offered company, Netflix has since grown into the largest digital media and entertainment platform globally now worth over $100 billion (La Monica, 2018). According to their FY2020 Q3 investor letter, Netflix has over 195 million paid subscriptions and counting worldwide, with an annual revenue of $6.44 billion and operating income of $1.32 billion (Netflix, 2020).

Revolutionary Business Model – The Netflix Effect

Digital transformation is defined as a process which significantly improves an organisation through triggering marked changes to its properties leveraging information, technology, and communication (Vial, 2019). Netflix’s transformative effects are largely a result of their revolutionary business model which ignited monumental disruption within the digital television landscape. In doing so, Netflix created a category of media that although has familiar structures to production, content broadcasting and television is also markedly distinct (Jenner, 2016).

Mobilising a hybrid business model, Netflix has gained increasing global presence by leveraging two separate value-creation pathways through exploitation and exploration (Vial, 2019). While exploiting their growing share within the DVD rental market, Netflix was also exploring new markets of subscription-based streaming services in 2006 (Margiono, 2020).

A contest named the ‘Netflix Prize’ was created in 2006 offering US $1million to the first developers who could redesign a video content recommendation system which could increase the accuracy of their existing algorithm by 10%. This contest offered unique insight into the details of a system that previously had been hidden from public gaze, catching the attention of scholars, innovators and media globally (Hallinan & Striphas, 2016).

Screenshot of Netflix homepage and personalised recommendations. Image: Screenshot taken by Jessie Ng.

Because internet television is about choice and capturing attention of users, companies like Netflix need to invest in algorithms to best maintain the attention of users (Gomez-Uribe & Hunt, 2015). This draws upon the notion ‘attention economy’ suggesting that although the internet has increased access to content and information, often there is too much to process and users do not have the capacity to filter through, generating need for attention to be allocated efficiently (Havalais, 2013). Netflix utilises its algorithm system within its strategy to capture consumer’s attention, offering a distinctively different form of media distribution (Jenner, 2016, p.261). Furthermore, leveraging the idea of binge-watching demanded by series with many episodes, Netflix is able to prolong attention of users (Jenner, 2019, p. 266).

Harnessing the power of data analytics, Netflix’s recommendation engine has been compared to the likes of tech giants Amazon, Facebook and Google (Gomez-Uribe & Hunt, 2015). Through a data-driven approach, their current algorithm system is able to accurately track, predict and recommend content to continue engaging its users utilising personalisation as its white knight for engaging with a diverse range of users globally (Venkatraman, 2017).

Netflix ultimately provides its viewers with an immersive experience appealing to a broader range of demographics (Gomez-Uribe & Hunt, 2015). To capitalise on content ownership and rights, Netflix innovated, shifting its focus from streaming television to creating it, investing heavily in production of original content (Jenner, 2016, p.258). Evidently, there is a widening the gap between Netflix and other producers of content, with tables turning as many now partner with Netflix to serve and create new media (La Monica, 2018). Netflix’s business model therefore leverages simplicity and scalability, incorporating a mass market approach through content-based categorisation and widespread accessibility (Venkatraman, 2017).

The YouTube video below by CNN highlights how Netflix’s revolutionary strategy hinges on providing content for ‘everyone’, attracting diverse audiences worldwide through its vast content library and continued investment in adapting to consumer’s tastes. Furthermore, by attracting key high-profile figures within film production signing huge deals with producers like Shonda Rimes and stars like Brad Pitt, Netflix has become a one-stop empire for all entertaining needs.

Netflix’s Internet Ecology

Demonstrated in the ecology map below, to operate Netflix relies upon a number of platforms including Amazon Web Services (AWS) to store content and Internet Service Providers to stream content, creating a widespread ecosystem (Wieringa, 2019).

The YouTube video below by AWS exemplifies the dependent relationship Netflix has with Amazon cloud services to manage their data.

The ecology of Netflix is highly interconnected and complex as hybrid platforms like YouTube often adapt to trends and innovations including advertiser-funded content, original content, live sharing and user uploaded content (Lobato, 2019, p.9). Netflix alone accounts for one-third of all internet traffic, just after YouTube the second largest source of all internet traffic globally (Winseck, 2017, p.249).

While Netflix’s direct competitors include other subscription-based video-on-demand services including Hulu, Amazon Prime, HBO and Hayu offering a collection of content where users pay a monthly subscription fees, other indirect competitors include hybrid portals like YouTube, transactional video-on-demand services like iTunes and online TV portals like ACB iView (Lobato, 2019, p.8). Netflix draws on branding strategies used in television, differentiating themselves from other streaming services who may appear as more disconnected from television experience (Jenner, 2016, p. 262).

Additionally, Netflix is incorporated into a wide range of consoles and set-top box services including Foxtel and Apple TV, media players and Smart TV’s that make its content conveniently available and accessible to users (Lobato, 2019, p.9).

Netflix Ecology. Image: Created by Jessie Ng.

 

Netflix’s Digital Transformation – But What About the Implications?

The penetration of Netflix into households and every day culture is evident through its use as a verb in day-to-day interactions, for example phrases like “let’s Netflix it” or “Netflix and chill” (Lobato, 2019, p.13). The arrival of a mature internet-distributed television service has been significant in disrupting film and production industries that were unmatched for many decades. Proliferation of online content distribution has meant that circulation of media content is no longer solely determined by traditional avenues like broadcast and satellite. Internet-distributed television has made content more accessible to international markets and redefined the core assumptions underlying the understandings of television (Lobato, 2019, p.5).

2016 marked a turning point for Netflix when CEO Reed Hastings announced that Netflix would be made available as a global television service, accessible to over 130 countries which it was not previously available in including India, Saudi Arabia and Indonesia (Lobato, 2019, p.2). This meant Netflix gained one of the furthest reaches in the world amongst streaming services with the exception of China, Syria and North Korea which Netflix was unable to do business with owning to trade sanctions imposed by the US government.

The tweet below shows a clip of CEO Reed Hastings sharing insights into Netflix’s global innovation through a ‘no rules’ policy.

The transformative global influence of Netflix supports the idea that American digital giants have taken over to dominate the internet, popular in academic literature and in everyday understanding (Winseck, 2017, p.229). Netflix is considered amongst digital giants like Amazon, Facebook and Google and often is referred to by scholarship through acronyms like FANG (Facebook, Amazon, Netflix, Google) to highlight the power of these digital forces. However, this is a paradoxical concept, as Netflix is a private network built on top of and is completely reliant upon a public network (Lobato, 2019, p. 97).

While these American giants hold significant power over certain layers of the internet like search engines, social media and in Netflix’s case over-the-top television, their businesses depend on core global internet infrastructures whereby all daily internet activities and functions rely upon (Winseck, 2017, p.229). As these infrastructure networks are built across and rely on multiple countries, this suggests that the distribution of power may be less monopolistic than it once seemed (Winseck, 2017, p.230).

In Australia, the introduction of Netflix sparked fears that Australian broadband infrastructure was insufficient to handle the influx of users streaming media online (Lobato, 2019, p.3). The impact of Netflix was immediate and immense, attracting thousands of Australians, who accessed the service through US VPN’s, even before it was officially available (Lobato, 2019, p.xi).

However, the global roll-out of Netflix has not been without challenges as its successful introduction has not mirrored in every market. This is largely due to differing social and cultural practices in different countries. Within European markets, long-standing cultural policies ensure Hollywood’s influence does not dominate, achieved by having a planning for a minimum amount of European content to be included on Netflix (Lobato, 2019, p.3). Further, the YouTube video below by CNBC shows how Netflix did not consider factors like pricing and cultural practices in India, hindering its success in the second largest internet market in the world.

Netflix’s conquest in markets like Indonesia have highlighted their lack of consideration into social, cultural and regulatory factors within their entrance strategy. Social and political challenges were evident when access to Netflix was restricted by government-owned telecommunications company Telekom Indonesia because of censorship issues, considering certain content not ‘healthy’ for society (Elder & Gallagher, 2018). Furthermore in Indonesia, regulatory challenges were demonstrated when Netflix needed to establish as a locally operated company requiring them to adapt to local regulations and corporate tax rates of 25% impacting their economic profit margins (Elder & Gallagher, 2018).

“Telkom Indonesia” by Ya, saya inBaliTimur is licensed under CC BY-ND 2.0

Similarly in Kenya, the arrival of Netflix led their national Film Classification Board threatening to block the streaming service on the basis of inappropriate and explicit content deemed not morally suitable for children and threats of compromising national security (Barnes, 2016). This demonstrating a need for careful consideration into social, cultural and regulatory practices when entering international markets.

A Raging Success or a Short-lived Win?

Netflix has undoubtedly played a fundamental role in redefining not only media and television, but also transforming the internet by becoming a one-stop empire for entertaining needs shaping the digital cultures of binge-watching. Its proliferation extends further into everyday culture as one of the most well-known household names in video-on-demand (Lobato, 2019).

However, it is clear based on its global expansion, that adapting its business strategy to consider social, cultural and regulatory factors in varying markets is essential for Netflix’s continued global success. Although Netflix has been highly successful in Australia thus far, continued innovation and adaptation to changing consumer preferences is necessary for Netflix to continue its reign over the consumption of media content online.

Word Count: 1978 (10% leeway applied)


References

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Aversa, P., Haefliger, S., & Reza, D. G. (2017). Building a winning business model portfolio. MIT Sloan Management Review58(4), 49-54. https://openaccess.city.ac.uk/id/eprint/17978

Barnes, H. (2016, January 22). Kenya’s film censor: Netflix a threat to ‘moral values and national security’. The Guardian. https://www.theguardian.com/film/2016/jan/21/netflix-threat-kenya-film-classification-board-censor-moral-values-terrorism

CNBC. (2018, December 11). Why Netflix Is Struggling In India. [Video]. YouTube. https://www.youtube.com/watch?v=BO0FlrveCts

CNN Business. (2018, June 29). How Netflix is everything to everyone. [Video]. YouTube. https://www.youtube.com/watch?v=PAwREs7snJk

Elder, R., & Gallagher, K. (2017, April 18). Netflix in talks with Indonesian telco. Business Insider. https://www.businessinsider.com/netflix-in-talks-with-indonesian-telco-2017-4?r=AU&IR=T

Erman, J., Gerber, A., Ramadrishnan, K. K., Sen, S., & Spatscheck, O. (2011, November). Over the top video: the gorilla in cellular networks. In Proceedings of the 2011 ACM SIGCOMM conference on Internet measurement conference, 127-136. https://doi.org/10.1145/2068816.2068829

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Kyncl, R. (2017, September 13). The inside story of how Netflix transitioned to digital video after seeing the power of YouTube. Vox Recode. https://www.vox.com/2017/9/13/16288364/streampunks-book-excerpt-youtube-netflix-pivot-video

La Monica, P.R. (2018, January 23). Netflix joins the exclusive $100 billion club. CNN Business. https://money.cnn.com/2018/01/23/investing/netflix-100-billion-market-value/index.html

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Margiono, A. (2020). Digital transformation: setting the pace. Journal of Business Strategy. https://doi.org/10.1108/JBS-11-2019-0215

Netflix. (2020). Q3 2020 Shareholder Letter. https://s22.q4cdn.com/959853165/files/doc_financials/2020/q3/FINAL-Q3-20-Shareholder-Letter.pdf

Pogue, D. (2007, January 25). A Stream of Movies, Sort of Free. The New York Times. https://www.nytimes.com/2007/01/25/technology/25pogue.html

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About Jessie Ng 2 Articles
Jessie is completing a Bachelor of Commerce (Liberal Studies) at the University of Sydney, interested in exploring how internet transformations have influenced the way users interact, share and interpret content online.