Primary partners: Netflix has become much more self-sufficient in that most of their content is now self-created. Previously, they were far more reliant on favourable terms on licensing (and purchasing) content. This dependency has reduced quite a bit. Nevertheless, these should be considered primary partners.
- Content/IP owners (studios / distributors): shows and movies that Netflix acquires or licenses from 3rd parties
- IP holders: such as Marvel and others who can license their IP to Netflix for their own content creation. Some of this content has done very well. Even where Netflix creates their own content based on this IP, they are depended on getting acceptable terms with these partners . In addition, Netflix is entering into this space themselves with the acquisition of Millarworld.
- Investors: Oddly enough, Netflix is still somewhat dependent on investors. Not so much on stock investors (though of course they dont mind a bump in their share price). But stock issuance is a negligible way to get cash in the door. But bonds still play a huge role. Sure enough, Netflix can always get cash in the door by issuing bonds. But it the interest rate (also called coupon rate) of the bonds play a role for the ongoing interest expense. This cash then is used to create content.
There is a fascinating financial lifecycle involved in Netflix' key assets (being content) that we are explaining in great depth in the course. What's more you will get a insight into the three major reports of public companies (Statement of Operations, Balance Sheet, Cashflow statement).
Content delivery partners: Need to also be considered as primary partners given the outsized importance and the strangely fickle nature of it. Ordinarily, one would think that these are infrastructure partners and thus of lower significance. Netflix consumed 15% of internet traffic in 2019 and close to 20% in the US. These are pretty staggering figures for just a single company. But they are and will be coming down with the emergence of many other streaming services. It shows however the importance of this infrastructure layer. You also note the difference to the Uber Business Model where we didnt include tech (or infrastructure partners) in the primary partners.
- Internet Service Providers (ISPs): are essential to the delivery of the content in “real-time” to the end customer (and simultaneously to millions worldwide in case of new launches) via Netflix Open Connect standard. But there are tectonic shifts happening (in the US market) that may pose a threat to Netflix (note, the described Comcast and 21st Century Fox merger didn’t happen, rather Disney who are not an ISP bought major Fox assets. The described threats, however, are still simmering)
- Regulators: Policies of the Federal Communications Commission (FCC), esp on the topic of net neutrality can have a crucial influence on Netflix (and the entire industries) trajectory, including swaying M&A (dis)approvals / anti-trust dealings of the FTC (here is one opinion piece – note the emphasis on opinion). We wouldn't refer to them as "partners" but they are an important stakeholder. This area is - and always was - a heavily-lobbied space.
- Amazon Web Services (AWS): Almost all of Netflix IT is hosted on AWS (from a functionality perspective but not from a content perspective). They also use Amazon’s Content Delivery Networks (CDNs). We wouldnt include AWS as a primary partner but it's listed here for completeness sake.
Secondary partners: There is a micro cosmos of wider "partners" (stretching the limits of this term) and influencers whose opinion on individual titles can play a role (though nowhere as much as many of them may think of their "esteemed" views). The whole space is literally a vanity fair in which Netflix has fared surprisingly well for a tech company led by an engineer (a lot of the success in this field is probably to be credited to Ted Sarantos and others).
- Prizes and film festivals: Strong promoters and influences in the industry can help get the word out, e.g. Film Academy (Oscars), Cannes Film Festival, etc. Netflix titles ran at the Academy Awards and won some prices anyway
- Influencers: Magazines, TV shows and others covering the film industry can give free promotion (or criticism)
- Filmmaker “guilds” and individuals: Directors, actors, writers and their guilds/unions are some of the most powerful players in the (US) film industry
- Cinemas, Theatres: E.g. the ban on Netflix films at the Cannes film festival was a consequence of French cinema owner’s protest against Netflix practice not to show their content on theatre screens (but Netflix has recently made an interesting move in acquiring one of the title winners of Cannes)
- Content creation: Then from 2013 onwards, Netflix started creating their own content. It requires a whole set of new activities to be added to the business. Content licensing, acquisition and creation consume the largest amount of cash in the business (equally content amortisation is the largest cost element on the income statement)
- Content licensing and acquisition: Licensing and acquisition of content have been the main ways to add content in the first years after Netflix started streaming
- Marketing: advertising via paid channels, esp promotion of their new show/movies
- Influencing: via various channels, such as social media, TV, film festivals, magazines, etc. Being nominated - let alone winning - any prizes don't come by themselves. There are different ways of influence-building in this space.
- Technology & development: Technology still pays a role though not as much as in the early days. Their Open Connect standard that defines the interfaces and protocols, its pre-positioning of content locally outside of peak traffic, etc is crucial and made the Netflix experience along with myriads of other technological innovations that they have come up with
- Analytics: Most technological improvements are being analytically tested for their impact. Analytics permeates the whole company and is the key to customer segmentation. Customer preferences are being divided into 2,000 taste clusters based on their viewing behaviours rather than traditional macro segments
Key Resources / Assets
- The Netflix brand: while Netflix primarily promotes their new shows, they still build a brand through this type of promotion. They rank within the global top 100 brands
- Content library – Netflix-owned content: (created or acquired) can have a more extended life cycle in that they can re-run after being fully amortised (i.e. generate revenues at no costs – any firm’s dream). They can also be licensed out to other content distributors and generate revenues that way
- Content library – licensed content: licensed content still plays a big role, esp those evergreen series that are already well-known. A number of other streaming content providers, however, have announced they will stop their licensing to Netflix. Larger studios have their own plans to build streaming libraries. Reducing their dependency on others is one of the reasons why Netflix is pouring so much money into acquisition and creation of content
- The app / website: the key resource to deliver the experience and content
- Algorithms: constant analysis of data based on algorithms and improvement of the business, app, features, etc
- Recommendations: falls under algorithms but is such an integral part of Netflix’s success that I call it out separately
- Data: Captured data, such as behavioural data, preferences used e.g. for micro-segmentation into 2,000 taste communities and used for future investment decisions into content among other
- Technology staff: technology is what made Netflix a streaming provider (they started as a DVD-mailing company) and you can see they are valuing their tech staff by their stock compensation schemes that go into this
- Actors, writers, filmmakers: Netflix often uses indie and newcomers across these activities and gives them more creative freedom. With many other streaming providers ramping up their content creation it will be interesting to observe the supply/demand shift in this area
- Prices: winning revered film prices is one of the best ways to promote their movies and platform, esp because this is exclusive content that people can only watch when they have access
- Studios: Netflix has started acquiring their own studios and hiring staff in support of content creation
- Content library: a huge content library ("Unlimited Movies, TV shows")
- Exclusive content: the most important category of content is exclusive content. All content platforms aim to have highly-desired exclusive content. It is also the category that they will make the most advertising for. (The countervailing risk is that some customers will come only for one show, binge-watch and unsubscribe until new seasons are available.)
- Convenience and mobility: ability to watch anywhere and on "any" device. One of the advantages that Netflix has over many other (esp emerging streaming) competitors is their "installed--base" on a wide range of devices, such as "Smart TVs, PlayStation, Xbox, Chromecast, Apple TV, Blu-ray players and more."
- No ads: no ad interruption just when it gets interesting
- On-demand consumption: Unlike TV, one does not have to wait for a week for the next episode. Users can watch anytime
- Ability to binge watch: They can also binge watch. All episodes of one season of a series become available at the same time. This is a great stimulus for customer advocacy and word-of-mouth
- Simple pricing: Using a flat fee (3 plans to choose from) with unlimited access, no tiers, no premium content at additional charges, no pay-on-demand, etc
- High-quality connection: the Netflix ISP speed index has become a benchmark for measuring connection speed. Netflix uses pre-positioning of content during non-peak hours, CDNs and other ways to get their content to geographically close to their consumers
- Freemium: Free month to trial – in this period everything can be accessed (no premium content, features, etc that are excluded)
- Easy cancellation: "Cancel at any time."
- Personalisation: through a recommendation system that takes into account what each individual has watched and liked before (rather than a static “if you liked this, you may like that”)
- Localisation: Increasing amount of localisation through translation (subtitles) not taking into account the fact it needs to ensure the meaning is translated (not just the words). Creation of international content (not just pumping out US shows)
- Micro segmentation into 2,000 taste clusters determined by viewing history
- Macro segments used for ad targeting (non-users), e.g.:
- Demographic: family, individual, etc
- Age bracket, gender, etc
- Geo-demographic: country, city vs rural, etc
- Language spoken, proficiency
- and many others
- User segmentation based on usage parameters:
- Device type TV, laptop, Tablet
- Screen size
- Connection type/speed
- Viewing behaviours, e.g. home, on-the-go, weekend/weekday patterns, binge watcher, etc
- First show/movie watched after subscribing
- Browsing behaviours: repeat watcher vs explorative
Netflix uses (like many other digital tech companies) thousands of channels directly and indirectly with more or less control for customer acquisition, retention and value delivery:
- Their value delivery channels include many types of smart consumer electronics:
- Those with a screen, connection and computing capabilities: Smart TVs, smartphones, laptops, tablets and more
- And those with connection and computing capabilities, such as game consoles, set top boxes and more
- Customer acquisition channels include:
- Social media for customer relations / promotion of upcoming shows/movies
- Media outlets to spread the word (magazines
- Film festivals for promotion
- Customer retention mainly occurs through new content and therefore includes also the various channels via which the word is spread about new and upcoming content
- Help and support channels include their app, web pages, phone
We are looking at this from the perspective of underlying needs that Netflix satisfies and the way that they do so
- Ability to watch anything on demand and all episodes available at once gives a sense of self-control
- The exclusion of ads reduces frustration and enhances loyalty
- The recommendation system: provides personaisation
- The whole theme, voice and style: entertaining, relaxed, light-touch, friendly
- Self-service through App: basically all interactions are managed through the app and website, including help system
- User support: via live chat, call or call through the app
- Social media: Facebook and other for trailers and interactions
The far majority of their revenues come from subscription fees at this stage. There are opportunities for other types of future revenues (incl tiers, premium content, licensing out their owned content, etc).
- Subscription fees:
- International streaming (Europe/EMEA: 32% in 2022, LATAM: ~12% in 2022; APAC: ~11% in 2022)
- US streaming (43% in 2022)
- US DVD (insignificant)
- 3 different plans
- In future:
- Licensing revenues for Netflix-owned content
The remarkable thing about Netflix's cost structure is how large their cost of revenue is in relation to all other costs. It consumes 58% of their revenues (!) and is about 3-times as high as all other cost combined in 2022.
- Costs of revenue:
- Content amortisation (biggest cost in the business)
- Payment processing fees
- Customer service
- Streaming delivery costs (e.g. open connect costs, payroll)
- Operations costs (incl cloud computing)
- Technology and development
- General & admin