Netflix: Streaming a New Type of Series

Written by Jason Gosal and Emma Hristov

IBR Editorial Board
Ivey Business Review

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Content Heavy Wins the Race

Netflix is an American internet streaming-on-demand media and entertainment provider operating in over 190 countries. Netflix’s three different monthly plans each offer varying multi-screen capabilities and video playback quality. At the end of 2021, Netflix had over 221 million subscribers, of which 75 million originated from North America.

Licensed media from content providers and exclusive Netflix Originals comprise the platform’s over 15,000 titles. Netflix therefore must contend with licensing fees, contracts, and geographic restrictions to maintain its expansive catalogue of diverse content. This has limited the strength of Netflix’s offerings, and thus audience reach in certain markets. Consequently, Netflix is ramping up production of Originals to own their content and forgo the difficulties of content acquisition. This is evident as Netflix’s budget dedicated to Originals has risen from 6.8 percent of total spending in 2014 to 37.8 percent in 2020.

The Plot that won’t Thicken

Inspired by the success of Netflix, there have been an influx of new entrants into the streaming industry . These new entrants have challenged Netflix’s ability to attract new users and acquire new media at a reasonable cost. Netflix originally benefited from signing undervalued deals at a time when the potential of streaming was not recognized. However, increased competition in the streaming market has shown that this advantage is no longer attainable at the same scale.

An illustrative example of this is WarnerMedia’s cultural phenomenon Friends, which cost Netflix $100M to license in 2019 — a three-fold increase from the $30M annual fee it paid from 2014 to 2018.

The success of Netflix Original programming is heavily based on its ability to create a “hit show”; however, its recent releases indicate that such “hits” are few and far between. For example, while Netflix was able to strike a chord with “Bridgerton” and reach 82 million viewers in its first four weeks, its next 10 English Drama Originals have failed to attain similar popularity.

Netflix English Drama Original popularity, as measured by Google Trends

As Netflix’s key markets in North America approach saturation, Netflix’s subscriber growth has slowed: executives expect to add 2.5 million subscribers in Q1 2022, which is less than 17 percent of the subscriber growth recorded in Q1 2020. Consequently, Netflix must upsell to their existing base of subscribers while simultaneously appealing to emerging markets.

Hitting the Slipstream with Sports Streams

To maintain its historical growth and avoid market share erosion, Netflix should enter the sports streaming market by streaming events live on its platform.

In sports streaming, leagues and their athletes are the content creators that drive viewer interest. As long as the sport has an active viewer base, match streams will capture viewer traffic. This strikingly differs from Originals, where Netflix must face the challenge of tailoring single-season series to ever-changing pop culture. With sports streaming, Netflix can offer content that will never be outdated and relieve its pressure to create ‘sticky’ forms of entertainment that must organically attract and retain customers. This move would concentrate Netflix’s focus on their core technology business rather than entertainment production, significantly reducing the $18 billion of expenditures attributed to Originals production in 2022.

Entering this market is a proven strategy that many of Netflix’s competitors have used to improve viewership and subscriber growth. Following its acquisition by Disney, ESPN+ showed promising financial results by ending the fiscal year with 17 million subscribers — a 66 percent year-over-year increase. At a cost of $6.99 per month for the service, this translates to increased quarterly revenues of $119 million. More recently, “Friday Night Baseball” was launched through a partnership between Apple TV and MLB. This is planned to be a series of doubleheaders featuring pregame and postgame shows that will start this season and air exclusively on Apple TV+. ESPN+ and Apple TV+ demonstrate the growing trend of integrating sports into the entertainment streaming market.

The Netflix Effect

As a first entrant in entertainment streaming, Netflix largely benefits from its ability to influence and exploit consumer trends. Netflix has proven this on several occasions:

  • “Drive to Survive”: The Formula 1 (F1) Docuseries that boosted Formula 1 viewership by 18 percent in the year after its first season release. Four seasons later, F1 viewership was up 57 percent.
  • “The Last Dance”: Netflix’s first stab at sports-related docuseries which began with basketball, an already-popular sport. Although effects on NBA viewership could not be tracked due to COVID restrictions halting sporting events, the docuseries was immensely popular — becoming ESPN’s most-watched documentary of all time after it was licensed from Netflix.
  • Queen’s Gambit: A Netflix Original series revolving around a young chess prodigy prompted a 7-times increase in new Chess.com users in the 4-month window following its release.

Despite demonstrating its ability to influence consumer preferences in entertainment, Netflix did not profit from the demand surge. Moving forward, Netflix must ensure that it captures value attributable to the demand shifts driven by its content.

Unlocking a New Subscription

With these considerations in mind, Netflix should acquire DAZN, a global sports streaming company. DAZN operates in over 200 countries and holds 700 streaming rights for specific sports in certain countries. The platform achieved 956 million hours of stream time in 2021 alone. In Netflix’s main market, the United States, DAZN primarily offers boxing and MMA, while serving sports leagues such as the Premier League and the NFL in other countries.

DAZN should be rebranded into Netflix Sports and serve as an add-on to existing Netflix packages, enabling Originals and sports streaming to mutually benefit. Through effective advertisement of Originals during commercial breaks and the production of Originals like The Last Dance that showcase sports, Netflix can create a feedback loop of growth in viewership and revenue. DAZN’s large catalog of sports streaming rights is particularly attractive because Netflix can analyze popularity and prioritize those markets.

Offering Netflix Sports as an add-on will help drive revenue growth in markets like the US where subscriptions are plateauing because it allows the company to earn higher revenue per user, which can help reduce customer acquisition costs.

Netflix Sports, at an affordable price of $10 per month, would be cheaper than the existing DAZN subscription cost of $19.99. Users already subscribed to both Netflix and DAZN will immediately gain access to the add-on, giving it a sizable initial viewer base.

The Blockbuster of Today

Coined by American academic, Clayton Christensen, disruptive innovation is when new entrants overtake industry leaders by serving underappreciated markets. Netflix embodied disruptive innovation when it focused on streaming for a low-profit and largely-ignored customer segment, which eventually became the dominant target market.

With digital live sports viewership in the United States expected to grow by 25 million over the next 3 years, Netflix must avoid the mistakes that relegated Blockbuster to the history books. Netflix was not late to enter media streaming and they shouldn’t also be late to enter live sports streaming either. The clock is ticking, Reed Hastings.

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IBR Editorial Board
Ivey Business Review

IBR provides a forum for tomorrow’s business leaders to develop, voice and discuss their thoughts on today’s business strategies, threats and opportunities.