Whilst Netflix likes to keep our eyes focused on their Originals … the reality is that 92% of their library is sourced externally — and the majority of that from independents.
Remember this is an analysis done by an American organisation — and so on Netflix US. It would be fair to say Netflix’s International catalogues, which need to have a higher proportion of local and regionally produced content, will correspondingly have an even LOWER % of US sourced content.
Compounding this, some of Netflix’s current suppliers (eg Disney, Fox, Warner etc) will be taking their catalogues away from Netflix — in effort to launch/bolster their own streaming app and vertically integrate. The obvious implication of this, is that there is a great opportunity for independents to be successful in selling their content to Netflix to fill the gap left by the “Big Name” US Studios. This may end up being a huge strategic error for the Big Name US Studios as it leave the door or opportunity open for a new generation of content creators to monetise on Netflix and grow to be big enough to compete.
The holy grail both sides are chasing is vertical integration, from commissioning through to exhibiting to an audience. Netflix started first, acquired an audience first and is now “learning the ropes” of becoming a studio. Whilst the others, having started as Studios, have to learn how to & then execute, the acquisition of an audience.
This begs a set of questions:
Question 1 — Is vertical integration a successful strategy?
Question 2 — Will Netflix become successful as a studio?
Question 3 — Will Disney/Fox/Warner etc become successful at building an audience?
Whilst this is new ground, there are parallels we can draw from other industries to predict.
Question 1 — Is vertical integration a successful strategy?
Answer: I doubt it. Whilst commissioning/producing a few titles around which marketing can be built (as per at the moment) is a successful and brilliant strategy, it is hard to see how In-house developed content will become the majority share of what is on Netflix.
- Looking at the cost x risk equation; it is a much better business strategy to pick up titles that are showing early signs of success (and push their success with the “Netflix engine”), than to commission off-paper. Witness the high number of cancelations within the Netflix originals catalogue — few make it past Season 3. (as is the norm for the industry)
- It is hard to be a B2B business (the studio side) AND a B2C (Netflix the OTT) at the same time — differing cultures and agenda will lead to internal conflict.
- No other industry has done this successfully (otherwise we would have P&G Shops vs supermarkets, or be listening to music from Universal music streaming app vs Spotify, or booking rooms on a hotel website vs an aggregator like Expedia. The driver for this is consumer behaviour, we the consumer, like to have easy, cheap choice — and that, is the antithesis of what a vertically integrated business wants to provide.
Question 2 — Will Netflix become successful as a studio?
Answer: My bet is yes. They are already hiring the best talent away from the traditional Studios and giving that talent a bigger canvas to draw on. Will Netflix created content ever become the majority of titles (vs the 8% it is today), no, for the reasons highlighted above.
Question 3 — Will Disney/Fox/Warner etc become successful at building an audience
Answer: My bet is no. This is a HARD thing to do. And especially hard thing to do coming from where these guys are at the moment
- They are playing catch up — they have to persuade people to either switch or take additional subscriptions. Order of magnitude harder (and expensive) to do.
- Wrong culture. These guys are the 600lb gorilla’s of their B2B sector. And that brings a level of arrogance which is normal for the position. But this will be their downfall when they enter the battlefield and have to win subscriptions 1 by 1 from people they have no power over (consumers).
- The vertical integrations vs aggregation battle will work against them. As a consumer, I want diversity and choice presented to me in one convenient place & from one subscription. I DON’T want a Netflix Subscription AND a Disney subscription AND a Warner Subscription AND an Amazon subscription AND etc etc.
Barry Diller, the former CEO of Paramount and Fox, talks about the diminished power of movie studios and why “Netflix has won this game” on the latest ReCode interview and offers the cutting sound bite: