Can Netflix, the king of subscription video, be beaten?

Eric Feng
Eric Feng
Jun 27 · 16 min read

“The Wallfacers are undertaking the most difficult mission in human history.”

Liu Cixin, The Dark Forest

I’m very late to the game here but I recently read the masterful science fiction trilogy Remembrance of Earth’s Past from Chinese writer Liu Cixin, consisting of The Three-Body Problem, The Dark Forest, and Death’s End. First published in China in 2008, the trilogy was hugely popular in its home country, making Liu Cixin one of the best selling Chinese sci-fi authors of all time. When it was then translated to English beginning in 2014, it quickly became a critical and commercial smash hit internationally as well, winning the prestigious Hugo Award in 2005 (the first time a Chinese writer has ever won the award), joining the New York Times best seller list, and now in development for a billion dollar TV adaptation from Amazon.

Spoiler alert for those even more behind the times than me: some plot details are to follow. You have been warned.

In the first book, The Three-Body Problem, scientists discover that a technologically superior alien race called the Trisolarians are journeying to Earth with the goal of invading our planet and conquering all humankind. Because of the vast expanse of space, the invading alien fleet will still take more than 400 years to arrive which gives world leaders time to mount a defense, although one unlikely to succeed.

So in the second book, The Dark Forest, the United Nations creates a desperate plan called the Wallfacer Program where they select 4 different people and give them almost unlimited resources and authority (with minimal oversight) to formulate their own secret, unorthodox, Hail Mary battle strategies. The 4 Wallfacers end up creating wildly differing and truly crazy solutions over a 200 year period, before the most unlikely of the quartet surprisingly succeeds in stopping the invasion. Truly great science fiction.

Here’s a proposition that is as similarly farfetched. What if we had Wallfacers in the real world — individuals given unprecedented power and influence to implement whatever plans they wanted in order to battle a superior foe? Or more specifically, what if we had Wallfacers in my business world of technology innovation to do battle against one of the giant Internet corporations of today from the vaunted FAANG: Facebook, Amazon, Apple, Netflix, Google? We’ll start modest and target the smallest of the group, an enemy with “only” a $150 billion dollar market cap, $16 billion of annual revenue, and a global 150 million subscriber base: Netflix.

In many ways, Netflix feels so technologically and financially superior in its conquest of the media industry that it might as well be from another planet. A corporate Trisolarians if you will. What is it that makes Netflix so dominant? According to the company’s website: “Netflix is the world’s leading subscription service for watching TV episodes and movies on your favorite device”. But here’s another way to describe Netflix: it’s a direct to consumer content library. Historically, owning content and selling content were separate businesses within the media industry. Studios own the right to television shows and movies, but then it’s the networks and theaters that they partner with who sell that media product to consumers. For example, AMC owned the rights to the TV show Mad Men, but you never paid AMC to watch it. Instead you paid Comcast, and they in turn paid AMC, who sadly never had any direct interaction with the viewers who are the end customer of their product.

But that’s not the case for Netflix. For example, Netflix has the licensing rights to the show Stranger Things and you pay Netflix directly to watch it. There’s no other company sitting between Netflix’s content library and the customer who buys that content. Netflix has uniquely combined owning content rights with owning customer relationships. Unlike AMC who controls the content experience and Comcast who controls the customer experience, Netflix controls them both, which has unlocked billions of dollars in strategic value.

Netflix knows exactly who their customers are and what they are watching, and they can create the exact content to meet those viewing needs. The customer then develops a direct relationship and loyalty to Netflix by watching Netflix content that they purchased from Netflix directly. And Netflix captures all the economic value of that relationship without anyone else they have to share with. As analyst Loop Capital recently said: “There’s a ‘structural difference’ to Netflix’s advantage over cable networks or digital competitors. Netflix has a ‘combination of content production, aggregation and distribution’ that ‘should lead to a greater share of the value chain’”.

This structural difference has allowed Netflix to outspend its competitors in the key asset of content. Netflix is projected to invest an eye popping $15 billion on new content this year, with the vast majority of that spend on unique, original content. And that proprietary content continues to attract record numbers of new subscribers around the world who subsidize the content spend, creating an enviable virtuous cycle. More content leads to more users leads to more content.

But what if you had a Wallfacer to stare down these insurmountable odds and take on this conquerer of media? What if you gave a person vast resources and control — billions of dollars at their disposal, influence over business and world leaders, the ability to implement strategies for corporations and directions for entire industries. All with minimal oversight and one clear goal: go beat Netflix. Could they even complete? And if so, what would they possibly do?

The Netflix Wallfacers

Battling Netflix isn’t a one person job. Like in The Dark Forest novel, we’ll need multiple Wallfacers to have a chance at success. All trying different tactics, but all still armed with vast resources and influence.

We’ve found 3 Wallfacers who will pursue the following 3 strategies:

  1. The Arms Race
  2. The Great Leap
  3. The Resignation

Wallfacer One: The Arms Race

“The modern media company must develop extensive direct-to-consumer relationships. We think pure wholesale business models for media companies will be really tough to sustain over time.”

Randall Stephenson, AT&T CEO

Netflix is successful at selling a content library directly to consumers because they have a great content library in the first place. So you could attempt to compete with Netflix head on and “out content” them — race to acquire even more compelling content than Netflix such that consumers would prefer to buy directly from you.

This is actually what’s been happening in the real world media industry. Between Hulu, Amazon Prime Video, CBS All Access, HBO Now, and the upcoming Apple TV+, Disney+, and NBCUniversal services, there is a cavalcade of media companies trying to develop an exclusive content library they can sell directly to consumers, exactly as Netflix has done. It’s a content arms race between the largest media superpowers to stockpile the best video war chest.

What’s particularly interesting is that the arms race has a double whammy effect for Netflix. As media companies build their own competing content libraries, they are also weakening Netflix’s library in the process. The majority of Netflix’s library — 92% in fact — is still made up of content licensed from other studios. And now many of those very studios are ending those licensing deals and reclaiming that content to compete with Netflix. The upcoming Disney+ and NBCUniversal subscription services will alone remove 20% of Netflix’s content library.

Netflix’s share of TV and movie content hours by production company

But is that enough to win the arms race? Probably not.

Take Disney+ for example, which is generally considered to have the best chance in a content arms race versus Netflix. Disney+ will launch with 7,500 TV episodes and 500 movies. That’s an impressive number, but it’s only 15% of Netflix’s content library. And while Disney’s kid friendly offering is sure to resonate with families, it will also sure to lack the mature, edgy content that adults enjoy. You’re just not going to see the equivalent of Altered Carbon, Black Mirror, or Dave Chappelle standup on any Disney branded service. No sex, no drugs, no rock and roll. That limitation will prevent Disney+ from being the universal content service that Netflix is, which has something for everyone. In the content arms race, the wholesome Disney brand will simply prevent Disney+ from having a comprehensive arsenal. At least not by themselves.

But what if Wallfacer One created a partnership between Disney and another media giant, one who can plug in the holes in Disney’s library? Who might that partner be? How about AT&T. Last June, AT&T completed an $85 billion dollar acquisition of Time Warner and took control of a rich media portfolio including Warner Bros., TBS, TNT, and most importantly HBO, the king of high quality, original content targeted at adults. Bringing together these two media giants, Disney and AT&T, might turn a content arms race into a dead heat.

Here’s how Wallfacer One, again wielding unprecedented authority and influence, could force Disney and AT&T to race together:

  • Establish swim lanes. Disney is the unparalleled leader in family entertainment, while AT&T’s newly acquired WarnerMedia has some of the best assets in more mature content. Wallfacer One would mandate these two media companies focus on those separate areas for their direct to consumer services and not compete with overlapping content. Disney+ would swim exclusively in the lane of family entertainment and sit out the arms race for content for mature audiences. WarnerMedia would swim exclusively in the lane of adult oriented fare and sit out the arms race for family entertainment.
  • Swap assets. To cement these swim lanes, Wallfacer One would force an asset swap between Disney and WarnerMedia. WarnerMedia would give Disney full control over two hugely popular family media franchises they own: Looney Toons and Harry Potter. In return, Disney would send back to WarnerMedia three equally valuable properties with strong resonance amongst adults: Fox Searchlight Pictures, FX Networks, and Hulu. You can debate how equal the trades are, but what’s important is this trade rebalances the content assets of the two companies around their core strengths. Disney builds an even stronger family entertainment fortress with Bugs Bunny and the Wizarding World. And WarnerMedia bolsters its adult oriented catalogue with hit movies and TV shows like Black Swan, It’s Always Sunny in Philadelphia, The Handmaid’s Tale, and a huge distribution asset in Hulu.
  • Cross promote. The battle here is a collective one versus Netflix, not Disney versus WarnerMedia. In fact, the ideal outcome is that users subscribe to both Disney for family entertainment and WarnerMedia for mature entertainment, at the expense of Netflix. To help that happen, Wallfacer One would require the two services support each other on distribution. Disney+ would be promoted whenever WarnerMedia subscribers were looking for family entertainment. Similarly WarnerMedia would be promoted whenever Disney+ subscribers wanted more adult fare. And the two services would be offered as a bundle to consumers, again at the expense of Netflix.

Who knows if a partnership between Disney+ and WarnerMedia could win the content arms race against Netflix, but I bet it would be a race worth watching.

Wallfacer Two: The Great Leap

“What you can’t do is take an hour-long TV show and chop it up… it has to be written and shot for this use case.”

Meg Whitman, CEO of Quibi

Over its long history, media has experienced transformative format changes, great leaps forward in the viewing experience, that have resulted in equally transformative business changes. The introduction of sound in film took Warner Brother’s from small studio to Hollywood juggernaut. Disney’s rise to prominence coincided with the introduction of technicolor. The new TV, cable, VHS, and DVD formats were all great leaps forward that changed customer behavior and created giant new media companies in the process. Similarly, Netflix has capitalized on another great leap in the media format: on demand, streaming video.

Streaming video has seen a meteoric rise over the past decade, with a global audience today of nearly 2.5 billion people. Amongst millennials in the US, streaming video is even more popular than traditional TV. As the streaming media format has changed viewing behaviors, Netflix has tailored their content strategy to match. To meet the expectations of content being available anytime users want it, Netflix launches new content continuously, not on a seasonal calendar like television. They release all available episodes at the same time to enable the growing popularity of binge viewing. By customizing their library for the new format of streaming video, Netflix has benefited more than any other media company from that great leap.

There’s another great leap happening now, a new format revolution: the rise of mobile video. This year, users will spend more time on mobile devices than TV for the first time ever. And a big chunk of that mobile time — almost an hour and a half each day — is spent watching video. As mobile leaps forward to become the king of media, new media rulers are sure to be crowned, and there’s a chance it may not be Netflix.

One media company getting in line to ascend during this mobile leap is Quibi, the high profile startup from Jeffrey Katzenberg and Meg Whitman that has raised a billion dollars to build a new format optimized for mobile consumption. The thesis behind Quibi is sound. Mobile media consumption is different than other platforms and so too will be the content, with the biggest change in the length. Most mobile video is short form (less than 10 minutes long), which is why Quibi is focused on breaking long form storytelling into multiple chapters that are each a few minutes long. But there’s a problem in the execution and it comes down to cash.

Quibi plans to have 7,000 new mobile native videos at launch, which would only be about 6% of Netflix’s content library. To create their catalog, Quibi is planning to pay creators around $100,000 per minute of content, which is the same high end cost of traditional Hollywood content that Netflix, Disney, WarnerMedia, and the like buy. But those companies all have 10 times more to spend on this content. So even after raising a billion dollars, Quibi is still significantly underfunded to make the great leap to mobile.

But Wallfacer Two has a different plan involving Quibi and others for how to beat Netflix in the great leap:

  • Raise $10 billion dollars for Quibi. Solving the limitation of being underfunded has an easy solution: find more money. Wallfacer Two will raise an additional $10 billion dollars for Quibi to spend producing mobile native content this year, giving it as big of a checkbook as any media buyer around.
  • Turn Quibi into a pure content studio. In addition to the challenge of building an original content library, the current Quibi strategy also involves acquiring a meaningful consumer audience which is an expensive undertaking. For example even with a successful consumer brand, Netflix still needs to spend $3 billion a year on marketing. Instead, Wallfacer Two will cut out this part of the Quibi roadmap and redirect them to only produce content, like a traditional media studio but one entirely dedicated to creating mobile native content. Where will this content then be watched? Somewhere that already has an audience.
  • Declare a single mobile native content platform. Wallfacer Two will funnel all this new content to a service that already has a large audience, particularly a large millennial audience that mobile native content is ideally suited for. YouTube is the obvious choice here given its massive audience of 2 billion monthly users. But YouTube has also struggled with gaining traction around original, premium content and pulled back on their ambitions with both YouTube Red and YouTube Premium. Instead, how about Snap, a massive distribution platform with a proven track record at creating original content that resonates with their mostly millennial audience: they already have 12 original shows with more than 10 million monthly viewers, and their show Endless Summer drew an impressive 28 million viewers. But most importantly, Snap has embraced the unique characteristics of mobile and built custom features and gestures to make media that feels truly native to the phone, not repurposed. Snap originals don’t look and feel like TV shows, or YouTube videos, or anything else you’ve watched elsewhere. They are trying to define a new format, and Wallfacer Two would accelerate this by declaring Snap the only content aggregator for all mobile native content. Quibi, Vertical Networks, Vice, and others would all be forced to create content exclusively for Snap. No YouTube, no Facebook, no IGTV, no one but Snap for mobile native content to live together, compete together, and improve together.

Snap can be the platform where mobile native content and its many creators (including Quibi) evolve. Think of vlogging evolving on YouTube, or game streaming evolving on Twitch, or meme culture evolving on TikTok and how those platforms have dominated their formats because of constant feedback and constant reinforcement between creator and audience. With help from Wallfacer Two, having that evolution happen on Snap may allow someone other than Netflix to make the great leap to mobile.

Wallfacer Three: The Resignation

“We may be entering a time of subscription fatigue.”

Kevin Westcott, Vice Chairman of Deloitte

The media industry has gone all-in on direct to consumer subscription services. In addition to all the examples mentioned above, there’s also MLB At Bat, Showtime, Starz, DC Universe, and 300 others to choose from. Discovery Channel itself will launch a half dozen or so new subscription video products in the coming years. Says Discovery CEO David Zaslav: “Why can’t we be the Netflix of golf? Why can’t we be the cycling Netflix? Why can’t we be the natural-history Netflix?”.

Well because maybe that’s not what consumers want. According to this year’s Deloitte Digital Media Trends survey, 47% of US consumers expressed frustration with there being too many subscription content services. From the report: “Consumers are tiring of the friction of managing multiple subscriptions and the hassles that come with it”. There may be upcoming headwinds to launching new subscription content services.

There’s also a real opportunity cost to launching a direct to consumer subscription service because media companies can’t earn licensing revenue elsewhere from that content. For example, Netflix pays WarnerMedia $100 million dollars per year to license the hit sitcom Friends — $100 million they wouldn’t receive if they decided to sell Friends directly. NBC will forego $90 million in licensing revenue for The Office as they’ve decided to end their Netflix partnership and put the show on their own subscription service instead.

Disney’s decision to funnel all their content through Disney+ will cost them $150 million in lost licensing revenue this year alone. Add in continued lost licensing revenue, additional content investments, marketing spend, and operational costs, Disney+ will require 60 million subscribers to reach profitability in 2024. That’s more than the current subscriber counts of Hulu, HBO Now, CBS All Access, Showtime, Starz, and MLB At Bat all combined. In other words, Disney+ will have to be the second most successful subscription content service ever in order to turn a profit. I’m actually betting they can do it, but there’s only one Disney. Other media companies will find it a lot harder, perhaps even impossible, to build a meaningful subscription audience and compete with Netflix.

So if you can’t compete with Netflix, what’s left to do? Wallfacer Three has a suggestion, and that’s to join Netflix, not in an attempt to win, but rather an attempt to survive. Here’s Wallfacer Three’s plan:

  • Create a media syndicate. The rush to move off of Netflix and launch competing subscription services has also created an interesting opportunity for media companies to reverse field. So instead of fighting Netflix, Wallfacer Three will direct media companies to run towards them with open arms. Wallfacer Three will first form a syndicate of all the media companies unlikely to ever get to meaningful scale with their own direct to consumer initiative. These are media companies like Discovery, CBS, Viacom, Starz / Lionsgate, and more.
  • Go exclusive with Netflix. Wallfacer Three will then take this syndicate to Netflix and strike an exclusive perpetual digital licensing agreement for the entire content catalog. Every show and every movie forever on Netflix. The syndicate companies will permanently give up on building their own subscription video service. They will give up on trying to acquire a standalone audience, and instead acquire the attention of Netflix’s captive audience. Discovery and Viacom can still keep building the “Netflix of natural history” and the “Netflix of R&B”. They’ll just do that on Netflix itself.
  • Extract equity from Netflix. But in exchange for this huge content influx for Netflix (and using the threat of taking that content elsewhere), Wallfacer Three will extract a concession from Netflix: equity. Instead of just licensing fees, Netflix will also provide equity ownership to the syndicate. Why? Because Netflix stock trades at about a 120 P/E ratio whereas Discovery stock trades at 20 P/E, Viacom stock at 8 P/E, and CBS stock at a 6 P/E. This will allow media companies to benefit from the huge earnings multiple that Netflix gets from their content because Netflix is a successful direct to consumer tech and media company, instead of only a successful media company.

There will clearly be some number of breakout direct to consumer subscription content services, with dominant subscriber counts measured in the tens if not hundreds of millions. If you can’t build one of these yourself (and most media companies can’t), you may be better off aligning yourself with one of the winners. And there’s no bigger winner currently than Netflix.

Faith in Victory

“We must establish faith in victory.”

Liu Cixin, The Dark Forest

Since its 2002 IPO, Netflix stock has soared more than 30,000% making it one of the best performing public companies ever. They’ve benefited more than anyone else from the rise of streaming video, and created the best direct to consumer video content service. The question now is will that run continue? Will Netflix continue to grow their subscriber base at record levels? Will they continue to have the world’s largest subscription content library? Will they continue their conquest of the media industry?

Probably so. Netflix’s huge lead in the market, and their virtuous cycle of more content leading to more users leading to more content are just too formidable to derail. But that’s not stopping people from trying. And somewhere out there, someone does have a brilliant, unorthodox plan for toppling Netflix. They won’t be a Wallfacer. They won’t have the near limitless resources, influence, and autonomy that we had in this blog, or the original 4 Wallfacers received in The Dark Forest novel because this is reality, not science fiction. But as they say: truth is stranger than fiction. So who knows what can happen with some luck and a lot of faith.

    Eric Feng

    Written by

    Eric Feng

    Co-founder of Packagd and former Partner at Kleiner Perkins. Previously writing sloppy code at Hulu, Flipboard, Erly, and Microsoft.