Netflix is not infallible… (a cautionary tale for video streamers)

This week, Netflix (NFLX) reported that it lost 100,000 subscribers (in the United States) instead of gaining the 300,000 in the second quarter that Wall Street anticipated. The reaction to the news was swift and brutal as the stock took a 10% nosedive. In the days since the announcement, Netflix has been sending out “positive” advisories about their commitment to creating “value” for subscribers and stockholders. Some analysts on Wall Street do not see those lost subscribers coming back anytime soon. Very simply, many subscribers felt betrayed by the recent across the board price increase (Netflix’s 8th price increase since 2007).

Sometimes you need an ass kicking to get the message… but hopefully Netflix has learned some important lessons in the past few days that we in the music business have known for over 20 years:

  • Price matters. Netflix’s May 2019 price increase was a total disaster. Badly marketed and seemingly done as a reaction, they raised their basic service a $1 and $2 for the “premium” service. It doesn’t help that so many new platforms are going on-line very, very soon and have done a good job getting their audiences excited (Disney). Apple (AAPL) has said that its new Apple TV+ service will be “free” for a time. We’ll see…
  • No one can dominate or monopolize in a streaming environment. The beauty of video streaming is that it is an instantaneous resource that is not anchored to old fashioned television schedules nor is it finite. Streaming works on an infinite geometrical curve that confuses many businessmen who think that video streamers live conventional lives and watch video at conventional times (insert laughter here). Haven’t they heard of “binging” a series in a day? But beyond the technical “gee-whiz” factor, tastes and habits in a streaming world can change in a New York minute. Netflix has tried very hard to corner the market on the best content creators (Shonda Rhimes, Kenya Barris, Ryan Murphy, The Obamas, Jerry Seinfeld and others) by driving the price up for top producers to create their programming. While it has made a few people more wealthy, their strategy has not worked. Netflix should have looked to the days of the “old” studio system in Hollywood for how and why their multi-billion dollar scheme was doomed. Creativity and the ability to execute on creativity is not a quantifiable commodity. What was “hot” on television last year will probably not be popular this year or next year. Apple co-founder Steve Jobs understood that “putting a fence around an ocean of content” (ie: iTunes) is much more effective than trying to to own all the water. In that light, Amazon Prime’s model seems far smarter (in the long term) than Netflix. Amazon Prime (AMZN) makes reasonable license deals, makes a few great shows and markets to their own audience on their own very successful ecosystem. A word about Amazon: for the cost of Prime you get video content, e-books, audio books, streaming music and free shipping. Amazon understands the value conversation very clearly and how their customers live… More on that at the end.
  • If you create crappy content (no matter how much of it you have), people get turned off — fast. Netflix hasn’t had a new show, series or film “hit” in at least 6 months. All the Netflix shows you are still talking about came out in 2018 or before (ie: “Stranger Things”). Also, many Netflix series seem to be on an irregular timeframe for new seasons after their initial successful season. People get restless waiting 18 months or more to see a beloved show. Netflix says that they are “creative friendly” and they want to give their producers time to do their best work. The “big three” television networks have known the value of having predictable “seasons” when new shows would be coming and fulfilling on viewers expectations for over 70 years. Maybe streamers should try doing something similar?
  • Subscription churn rates are high, and consumers quickly cancel services that don’t deliver superior “end-to-end” experiences. Once Netflix cost more than $9.99/month, their service became a “luxury” for many people. This very, very important “value proposition” is what Netflix and their competition needs to learn right now. For example, even after last year’s price increase Amazon Prime’s service is still less than $9.99.
  • You must have superior content to retain your audience. It has been widely reported that many of Netflix’s staple of classic “re-run” series are leaving the platform in the next 6–9 months for the competition including: “Friends”, “Frasier”, “The Office” and “Parks and Recreation”. . America likes to rewatch and rewatch… This is to say nothing that Netflix will be losing the entire Disney catalog which includes: Pixar, Marvel, Lucasfilm, Disney Animation and more to the new Disney+ platform. Netflix created the streaming market for these shows in 2012, however, they might lose the ability to pay higher license fees from the companies who are creating their own streaming platforms.
  • The porn video industry ALWAYS shows the way. No, really. The porn video industry makes anywhere between 6 to 10 billion dollars a year just in the United States. Because most porn content companies are privately held, it’s impossible to get accurate numbers. That said, look at the innovations they have started: They were first to create and market “home videos”. First to agree on VHS videotape as the format (a decision that most economists say was the “knock-out” punch to Sony’s Betamax format). First to successfully market DVDs. First to “stream” video online and to charge monthly subscription. First to offer HD video streaming resolution. First to offer VR experiences as part of subscriptions. And most importantly, they were first to have a single platform (Pornhub) that consolidated dozens of independent platforms and brands into a single experience for their users. Pornhub reported they had 28.75 billion “views” in the United States alone in 2018. So, maybe in 2021 or 2022 will Netflix, Amazon, Hulu, Disney+, Apple TV+ and others be accessed through one united platform for one fee? Won’t America be happy? But it doesn’t take an active imagination to anticipate the streaming wars that are coming in the meantime. The war will be bloody and very, very expensive. Many Americans are experiencing “subscription fatigue”. McKinsey did a major research report on the state of the subscription industry and while it is growing very, very fast; Americans are tired of being cheated and having their expectations not fulfilled with their on-line subscriptions. Interestingly, in 60% of American homes a female made the final buying decisions on streaming subscriptions for video AND music. Said simply, video streamers need to to start marketing a value experience instead of creating promos for shows. By the Fall of 2019, multiple companies will be vying for America’s video streaming dollar with a glamorous sheen that is both fierce and brutal. The companies in the fight are titanic in size but they simply are not ready for the damage to come.

So, now that we’ve painted this dire picture — will Netflix “win” the streaming wars? I think before we try to figure this out we need to define what “winning” is in this environment. Is wining “surviving”? Is winning avoiding being taken over? Is winning having the largest marketshare? These are old markers for defining success and Wall Street will be circling the battlefield for the dead long before the war is over. Will Netflix’s success overseas help shield them for a time in the United States in the same way Spotify uses its EU dominance with music streaming as their backstop for its losing campaign in the United States?

What we’ve learned in the music business is that the key is having the content being used is making it an indispensable part of someone’s lifestyle. Function trumps everything. Content does not define how content is used. The user does. Hollywood is just learning this lesson now because they’ve been used to “captive” audiences in theaters and even on network television. Hollywood video streamers are just getting interested in their audiences and how and WHERE (mobile) streaming video is being consumed. Video streaming is in its infancy and what is yet to be determined is at what price point will a subscriber leave a platform because the financial cost has not justified that customers expectations? In business school, we learn in the absence of value - price matters. Netflix learned that lesson brutally this week. What’s worse is that once that subscriber has left no amount of Hollywood “magic” will induce that customer back until trust is restored. But there are simply too many options for any one customer to spend the time or interest in restoring trust with a video streamer. We haven’t even talked about the resurgence of YouTube and how they taught an entire generation of kids (under 25) how to surf a universe of content that Netflix simply cannot compete with — for free. For all these reasons, this is why Netflix will ultimately lose the streaming wars... IMHO. :-)

Michael Whalen

Written by

Emmy® Award-winning composer, copyright expert, coach, CrossFitter, urban hiker, author, father…

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