Should Netflix Be Afraid Of Competition?
“Wait! Mom! One more EPISODE! PLEASE! COME ON! I did all my chores and gave your pet Begonia a pep talk for 30 minutes!”
Yes, we’ve all been there, maybe not as far as giving an Al Pacino, Any Given Sunday, type of inspirational speech to the plant part, but hooked on a show nonetheless.
For nearly the last two decades there has been only one real dominant pioneer in the game of streaming and sitting on that digital iron throne has been none other than Netflix. With nearly two decades of a head start, unencumbered by any real threat to it’s digital throne, it looks as if the kingdom of video streaming will be heating up in 2019 with players such as Disney, Apple and AT&T really getting into the mix of things with similar video services. Now that competition has entered the market, will it be that easy for the competition to garner up enough market share to pose a threat to Netflix?
Let’s take a look at the data and see if we can answer this question and a few more that way Mr. Reed Hastings can sleep easier at night. (Reed Hastings is the CEO/Co-Founder of Netflix)
With such a dominant market share, respectively, domestic subscribers topping roughly 61.8 million and international subscribers coming in at a whopping 93.6 million, you’d imagine that Netflix’s subscribers appeared overnight. Such a thought would make you presume that if Netflix can do it overnight, the competition will be able to as well. But let’s slow down on that train to crazy town. This isn’t a Rocky movie, where Sylvestor Stallone, the heavy underdog spends a few weeks training and becomes world champ. We are dealing with building a business, customer royalty and establishing a lasting relationship through positive feedback towards content.
Let’s delve into the subscriber net additions of Netflix to get a sense of what’s going on.
Let’s digest this graph here, focusing in on the green shaded area, we can see that every first quarter from 2002 until 2011 Net Subscriber Growth hadn’t cleared 500,000 subscribers. What does this data tell us? Well, it’s clear that the idea of an overnight success isn’t really valid. Netflix went through nearly 10 years of slow subscriber growth to reach the point where its clearing way for over 1 million net subscribers a quarter.
We should delve deeper into the Q2, Q3 and Q4 to see if this trend follows or this is clearly a seasonal sluggishness that encounters business cycles.
Channeling our focus towards the purple shaded area, which indicates the 500,000 net subscriber mark, we can notice that again Netflix doesn’t clear 500,000 net subscribers until year 2012. The feasibility case of Q1 being sluggish due to seasonality begins to erode as we can notice that it’s clearly not a seasonality effect but rather a true to form startup effect.
Netflix: The Startup
The startup effect indicates that it’ll take you roughly 10 years to become an overnight success. Sounds like a quote by a famous person doesn’t it? Or possibly a meme you’ve seen on Instagram? Well, in reality, the truth is building something sustainable takes time. Startups must build everything from scratch. The process of building a reliable product or service and establishing all the channels of which business will be done.
By observing the next two quarters, let’s see if this trend keeps true to form.
The form is true to what we hypothesized, that clearly it isn’t a seasonality effect but the startup effect.
You may begin to ponder, scratch your head and think how come the net subscriber growth spikes almost Bitcoin-price-esque or exponentially the following year? What could be leading to such a massive growth in subscribers? Did Netflix start handing out free iPads? What’s the deal?
“INVESTOR 1: NETFLIX IS MOONING!
INVESTOR 2: WHY?!
INVESTOR 1: WHO CARES! BUY! BUY! BUY! FOMO!”
Netflix, up until 2012, was offering up content that had already been produced from other studios. There didn’t exist a need for the service. Consumers would say “Why should I pay monthly for a video streaming service when I can watch the same content on TV or Youtube?”
Netflix needed to find a catalyst to push net subscriber growth up. In 2012, Netflix announced that it would be producing Netflix Original Content, exclusive content, only on Netflix. A game changer. The first Netflix Original show was none other than the addicting, captivating and surreal ‘House of Cards’, which debuted in 2013. An instant hit, taking the country’s breath away, including the Russian governments. (The Russian’s would watch House of Cards to become better acquainted with how our political system worked.)
As subscriber base continued to spiral upwards like an Elon Musk inspired SpaceX Falcon Heavy rocket ship, so did the stock price of Netflix.
The move towards producing Netflix Original content drove the subscriber growth, which directly correlated with the stock price shooting to new heights. The domestic net subscriber growth didn’t only begin to pile up exponentially, but international net subscriber growth moved nearly identical to the share price.
Another big catalyst that’s overlooked is clear in the data here, international streaming was nonexistent at Netflix until the global expansion announced occurred late 2010 in Canada. By 2011, Latin America, Central America and the Caribbean could sign up and lose sleep like the rest of us American’s to what Frank Underwood would do next! And in 2012 brought the introduction of Netflix into the European Union, the UK, Ireland and Scandinavia got the ability to subscribe. Needless to say the reach of Netflix began to spread faster and faster especially with no real threat or competition in the mix.
Let’s Take A Step Back and Watch The Throne
As we observed the data, we can conclude that even though fierce competition begins to enter the market behind powerful behemoths of companies like Disney, Apple and AT&T. The road to success isn’t paved with golden bricks initially, these companies will have to focus domestically to build a reliable service, numerous good quality content and build the trust of the consumer prior to even thinking of going into the international sphere.
The competition shouldn’t focus its salivating eyes on Netflix, but rather on the unforeseen video streaming king, Youtube.
The competition and Netflix included should try and figure out the ultimate dream of stealing market share from YouTube. The sleeping giant in this arena of video streaming. If Google, the parent company of YouTube decided on waking up this sleeping giant and enter the subscription video streaming business seriously, the competition and Netflix included are in for a real run for their money!
Put the melatonin down. Sleep easy Mr.Reed Hastings, the Disney’s and Apple’s of the world aren’t going to take away much in the near term.