Ownership is overrated
A treatise on Netflix and the streaming of everything
Cutting the cord
Picture this. You’re home alone on a Friday night with no plans. You consider going out, but the end of the month is coming and your rent payment is due. Besides, you’ve had a tough week at work and you’re too tired to do anything overly involved. So, with some small amount guilt, you flip open your laptop and click on that little red “N” at the top of your browser. Then, as the page starts to load, you ask yourself, “what’s on Netflix?”
Last week, Netflix announced its Q3 earnings. Aside from some lower-than-expected subscriber growth, the announcement was not especially noteworthy except for the timing. This was Netflix’s last earnings announcement before a wave of new, well-capitalized streaming services hit the market. As mentioned in my previous article, Netflix, through its own success, has enticed a number of content distributors to chase after streaming revenue by building their own platforms.
While industry pundits have been quick to declare an end of “the golden age of streaming” and the beginning of the “streaming wars,” it may be premature to assess the outcome of these new entrants. There are still many open questions. How will Disney+, HBO Max, Apple TV+, and Peacock be received by the market? What is Netflix’s long-term strategy for countering these new rivals? Rather than divine the unknowable, I’d prefer to dissect Netflix’s path towards achieving juggernaut status and try to understand how its services have impacted consumer behavior beyond the realm of the streaming industry.
Bring entertainment home
In order to understand how Netflix was able to grow into the dominant force of the streaming industry, we must first go back to its humble beginnings. When Netflix was founded in 1997, the internet was still in its infancy. The Dotcom Bubble had yet to peak or pop. Yahoo, arguably the first internet giant, had scarcely been around for two years. VHS was still the dominant format. As far as video rentals were concerned, Blockbuster was the indisputable king and Netflix was a fledgling upstart that seemed more like a neat idea than a sustainable business.
It’s hard to remember today, but Netflix’s original business was more akin to old print media subscriptions than that of a high-tech company. Users subscribed for a membership online with many preferring to mail in their monthly subscription fee rather than pay online. Members would set up a queue of DVDs that Netflix would mail out via envelope. Members could then hold onto those DVDs for as long as they liked and ship them back when they wanted their next DVD sent out.
Although prehistoric by today’s standards, this model had a few advantages against the incumbent video store rental model. For one, members avoided the dreaded late fees that were extremely profitable to Blockbuster, but exceptionally annoying to consumers. In fact, it was the primary selling point for Netflix’s service over Blockbuster’s. Additionally, Netflix members had access to a much more diverse library of DVDs where supply was more clearly communicated. Blockbuster faced perpetual shortages of the hottest content, often sending members home empty-handed. Even so, none of these advantages prevented Netflix executives from getting laughed out of a meeting with Blockbuster in 2000 when Netflix tried to sell itself for a paltry $50 million.
However the value Netflix offered was undeniable. Compare the value proposition of renting via Blockbuster versus Netflix. Blockbuster charged on a per-rental basis. That meant that costs quickly started to accumulate when renting multiple VHS tapes or DVDs. Moreover, members that failed to return their videos within a specific time frame would incur a hefty late fee. That nominal fee could balloon into a cost more expensive than that of purchasing the video outright. How did Netflix work? Pay one low monthly fee to have a rotating door of DVDs shipped directly to your home. The best part? No late fees.
A (brief) history of streaming
The early goodwill that Netflix established paid dividends. Netflix managed to weather the Dotcom Bubble crash of the early 2000's. In 2002, Walmart announced a new service that was designed to take on Netflix. By 2005, Walmart had shuttered the service and was directing former members to Netflix. In Netflix’s biggest coup, Blockbuster finally capitulated and introduced its own competitor to Netflix’s online rental business in 2007. Netflix was now a real player in the video rental space, but it’s biggest play was yet to come.
When Netflix introduced its streaming platform in 2007, then called Netflix Watch Now, the response was tepid. Netflix streaming was received as an interesting concept, but nothing game-changing. Even CEO and co-founder of Netflix, Reed Hastings, downplayed its impact at the time stating that “The market is microscopic [for streaming]. DVD is going to be a very big market for a very long time.” Yet in some ways, this inauspicious launch was a blessing. Low expectations gave Netflix the opportunity to grow its content library and stabilize the platform. However, few could have predicted what came next. Netflix had debuted its streaming platform right on the cusp of the worst financial crisis since the Great Depression. The Netflix streaming model, like many Americans, came of age in the shadow of the Great Recession.
The Great Recession shook the US to its core. From 2007 to 2016, 7.7 million US homes went into foreclosure. Coinciding with the Great Recession was a nationwide rise in student debt. With the growth in university costs far outstripping inflation and more Americans getting higher education, a growing percentage of Americans graduated with a significant student debt load. In 2008, Americans owed a collective $671 billion in student debt. Coupled with the Great Recession, an entire generation of Americans were hit with the one-two punch of suppressed earning potential and crippling debt — a recipe for price sensitivity. Suddenly those Blockbuster late fees seemed a lot more onerous.
Netflix’s unique business composition also provided it with a way to monetize its technology platform — a feat that few of Netflix’s technology industry contemporaries managed to achieve. The DVD shipping model that Netflix had introduced ten years prior served as a Trojan horse. Netflix had already trained its user base on the subscription model, so it didn’t have to worry about alienating members. It had maintained the same business model since day one.
Although not an instant hit, consumers eventually began warming up to Netflix’s new streaming platform. In 2010, three years after they launched streaming, Netflix’s subscriber base grew over 63% in a single year. Compare this to the 36% year-over-year growth it had experienced the prior five years. Consumers weren’t the only ones to take notice of what Netflix had done. Spotify, a Sweden-based music streaming service, debuted in US in 2008 and Amazon began offering video streaming services to its Amazon Prime members in 2011. With Blockbuster’s bankruptcy in 2010, Netflix had proven that it was here to stay. The era of the Netflix streaming model had begun.
To stream or not to stream
Much of the success of the Netflix streaming model lies in how innocuous it may seem. Even at the time of its introduction, Netflix’s DVD shipping model didn’t seem so revolutionary. Gyms had been offering monthly memberships for decades and print media had been implementing monthly subscriptions since time immemorial. Not to mention that Blockbuster had established itself as a cultural fixture by consolidating brick-and-mortar video rental stores. Yet, while it’s easy to dismiss Netflix as a mere usurper to Blockbuster’s throne, to do so would be to dramatically undersell the impact of the Netflix streaming model.
Most discussions around Netflix tend to fixate on the company’s pioneering of the streaming industry and the technology associated with it. Although Netflix certainly deserves credit for bringing streaming into the mainstream, the technological foundation for streaming had already been laid. By the time Netflix had launched its streaming service in 2007, Apple had already established and popularized a digital platform for music and video distribution in iTunes. iTunes itself had been preceded by the ubiquitous (and illegal) file-sharing platform Napster. Netflix wasn’t even the first to market with a streaming platform. By 2006, YouTube had already been founded and acquired by Google.
Netflix’s primary contribution to streaming was a simple value proposition — pay a nominal monthly membership fee and get access to vast library of content. Unlike YouTube, which at the time was largely unmonetized, Netflix’s streaming model enabled Netflix to keep itself completely ad-free. Perhaps even more crucially, unlike iTunes or Napster, where users ostensibly still owned the content they downloaded (albeit in a digital format), Netflix offered such a great value that users were comfortable leasing content from Netflix for this monthly fee. While Napster, iTunes, and YouTube may have changed content consumption and distribution, Netflix changed the concept of content ownership.
Under Blockbuster, video rental was merely a supplement to video ownership. In 2000, at the height of Blockbuster’s powers, revenues generated by video rentals was a little under that of the $8 billion generated by movie stores. Most adults who grew up in the 1990’s and early 2000’s can attest to living among a small library’s worth of VHS tapes. In 2018, subscription-based spending on home entertainment outstripped home entertainment purchases for the first-time at $13 billion versus $10 billion spent. Meanwhile, the gap subscription-based and transactional spending continues to widen year-over-year. Netflix has achieved what Blockbuster never did. Netflix made video rental more appealing than video ownership.
Netflix may have created the modern model for accessible, affordable video rental, but video rental is just of small part of what Netflix pioneered. Netflix opened consumers up to the possibility to leasing and renting just about anything. Take the videogame industry as an example. The gaming industry functions much like the one Netflix disrupted (buy physical media that is played on format-specific machines). Incumbents such as Microsoft and Sony have introduced (or plan to introduce) cloud-driven subscription services while newcomer Google is launching Stadia, a streaming platform for games intended to disrupt traditional console ownership. Content-driven industries can no longer afford to follow the status quo when Netflix has shown consumers that a better way exists.
Beyond content-driven industries, the transformative impact of the Netflix streaming model becomes even more apparent. Consider the fashion industry for a moment. Clothing is specific to the individual based upon size, style, and even mood. Moreover, the “fast fashion” trend led by companies such as Zara and H&M has made it easy to buy and own clothes much more affordably. And yet, consumer sentiment is shifting away from clothing ownership. Rent the Runway has built a $1 billion business on the basis that consumers pay a monthly subscription for access to a library of clothing. Even industries that have historically had a rental or leasing model, are evolving those businesses to be true ownership alternatives in response to the Netflix streaming model. In 2017 Cadillac introduced BOOK, a subscription services for cars that allows members to choose from a selection of cars to drive with the option to switch cars much more freely than with a lease. Streaming everything has never been easier.
The revolution will not be televised
So how did we get here where we’re not only streaming movie and music, but also clothing and cars? The Great Recession and the student debt crisis may have dealt a fatal blow to traditionally-held notions about ownership, but Netflix put the final nail in the coffin. In the same way that consumers were trained to expect two-day shipping by Amazon and smart, intuitive search by Google, consumers now have been trained by Netflix to expect, nay demand, access to an array of products and services for a single monthly fee. As the socioeconomic climate has shifted a generation of US consumers away from the American dogma of ownership, Netflix and companies inspired by the Netflix streaming model have provided consumers with true ownership alternatives.
Now we find ourselves in a transitory phase. A new generation of companies have arisen in response to the Netflix streaming model. While they don’t strictly adhere to the monthly fee streaming model that Netflix pioneered, companies operating in the “sharing” space such as Airbnb, Uber, and Lyft have continued to offer compelling alternatives to ownership. In 2017, 9% of car owners who sold their cars decided against buying another car, opting instead to replace their cars with ride sharing apps such as Uber and Lyft. Ownership, at least the traditional concept of ownership, may soon be thing of the past. So the next time you flip open your laptop and ask yourself, “what’s on Netflix?” You already know the answer. Everything.
