• In the beginning, there was Netflix.

    At the end of the last century, Netflix became well known for its DVD-containing red envelopes that made renting a movie as easy as getting your mail. Only the company’s name gave a hint that its real vision lay beyond mail, in movies streamed over the Internet.

    In recent years, Netflix’s streaming service of acquired and original content has been challenged by a swarm of competing services, including Amazon Prime and Hulu.

    Last fall, that increasingly crowded Over-the-Top (OTT) TV lane got some huge newcomers.

    Netflix CEO Reed Hastings told Variety last September that the competitive landscape for Subscription Video on Demand (SVOD) services in the U.S. would change in November, when Apple TV+ and Disney+ services launched, and the Amazon Prime Service ramped up. Also online or on the horizon are Comcast/NBCUniversal’s Peacock, HBO Max, and CBS All Access, to name a few others.

    What should Netflix do now?

    Q4 Subscriber Growth Down

    Last month, although Netflix’s Q4 earnings met its targets in international subscriber growth, its growth in U.S. subscribers was 30% below its guidance. Its U.S. subscriber base is more profitable than the international subscribers.

    This was the third consecutive quarter that Netflix didn’t achieve its U.S. growth target. It announced it will be cutting some jobs and reevaluating its marketing strategy. Reportedly, it will now emphasize the whole service, instead of individual shows and movies.

    The venerable streaming service’s new strategy, Needham & Company’s investor analyst Laura Martin told RampUp, needs to adapt to the fact that the competition is centered around “brands, bundles, and [the] balance sheet.”

    The brands it is now facing are some of the best known in the world, including Disney, NBCUniversal, Apple, and HBO. Netflix has also become a major brand, of course, but it’s not like Netflix is the incumbent facing upstarts. These brands are the big guys.

    Which means they have immediate credibility in the marketplace, and they can massively bundle their services just by walking into the hall outside their office doors. 

    Only launched in November, Disney+ had already acquired 26 million subscribers by December, in part by bundling three months free of its service with admission to its world-famous parks. 

    Apple is packaging a free year’s subscription to its Apple TV service for any purchaser of an Apple product. Amazon includes its Prime channel with subscriptions to the retailer’s Prime premium service. Peacock is free to Comcast subscribers.

    Balance Sheets, Strategy

    But being part of a large family of brands can mean more than credibility and bundling. 

    Disney, for instance, owns ESPN, Disney Parks, Lucas Film, Pixar, the ABC TV network, and others, which means it has access to all that programming. The new Peacock service is owned by NBCUniversal, which owns the NBC TV network, Universal movie and TV studios, CNBC, MSNBC, Telemundo, Bravo, E! Entertainment, Oxygen Media, Focus Features, USA Network, Universal Parks, Hulu, and others. 

    And then there are the respective balance sheets.

    Michael Nathanson, Senior Research Analyst with MoffettNathanson, calculated last November that Disney, Comcast, and AT&T (owner of WarnerMedia’s HBO Max) spend more on content than Netflix.

    But the Disney service, Martin noted, doesn’t have to borrow $3 billion a year from equity markets, as Netflix does. Disney, along with Apple and others, has huge cash reserves.

    Martin said this means Netflix has to modify its strategy, or it will lose an attrition war of subscribers to these behemoths.

    She projects that Netflix will lose about four million subscribers in the U.S. this year at its premium-priced tier of $9 to $16 per month–its most lucrative market–because competition includes $7/month for Disney+ ($70/year, free to Verizon Unlimited customers) or $5 for Apple+ (free if you buy a new Apple product).

    Lower Subscription Levels?

    She pointed out that Netflix subscribers in the U.S. are “about 3x more profitable than offshore subs,” although Netflix’s biggest growth area is in the lower-priced international subscriptions—mostly $3 mobile-only subscriptions.

    She advises that Netflix should offer a lower subscription level priced at $5 to $7 per month, possibly offer a discount for an annual subscription, and add a six- to eight-minute per hour ad load to make up the loss in revenue. CBS All Access and Hulu, for example, offer lower-priced tiers with ads.

    Another competitive factor: when a new series becomes available on Netflix, every episode on that series becomes available at the same time. This means that subscribers can join, binge-watch, and leave. 

    But, Martin pointed out, Disney rolls out a new series over weeks, just like old-fashioned network TV. As a result, if you want to see it when it comes out, you have to stay a subscriber during the entire season–unless you wait till it’s over, join, and then watch it on demand.

    It’s not easy to add new premium channel layers to a cable subscription, but it is relatively easy with streaming services, and Martin contends that making all episodes of a new series available immediately adds an incentive to flip in and out of streaming services. When viewers do so, she pointed out, “your customer acquisition costs [go] through the roof.”

    ‘Content isn’t King’

    But streaming services aren’t widgets. One question is whether these competing services have unique identities that make a minor price differential worthwhile.  

    For instance, if I love “The Marvelous Mrs. Maisel” on Amazon or “Stranger Things” on Netflix, does it really matter if one is a few dollars more each month? By emphasizing the entire service instead of just an individual series, Netflix is betting that a streaming service can have a quality differential that justifies a higher subscription rate.

    Martin responded that most viewers wouldn’t know “Mrs. Maisel” is great unless they were introduced to the series through great marketing, whether it’s a free trial period to the service, ads, PR buzz, word of mouth, or social media.

    Contrary to an early common wisdom about the internet, she said, “content isn’t king, marketing is.” 

    Disney, Apple, and the other major new players are marketing powerhouses, able to leverage their footprint over their brand empires in ways that Netflix cannot. So Netflix has to adapt, Martin argues, in part by providing a lower price tier to remove that differentiator.

    But Gartner Research Director and Analyst Eric Schmitt disagrees that Netflix has to modify its identity with pre-roll and mid-roll ads, because it already has advertising–in the form of product placement sponsorships. 

    ‘Water Down the Soup’

    The best example–a now-classic caseof modern product placement sponsor—is Netflix’ popular “Stranger Things” series. Set in the 1980s, it prominently features brands and products from that era as part of its style, an ideal setting for placement.

    Schmitt also pointed out that, in the age of everything on-demand, the streaming services’ program catalog is playing a larger and larger role, acting as a “growth engine of the biz.” Netflix, having produced 1,500 hours of original content last year, is strong on that front, and Schmitt estimates about 75-80% of that original content contained sponsored content or product placement.

    The service should take product placement to its limit before moving to interruption ads, Schmitt told RampUp, adding that “they can water down the soup some more.”  

    Although Disney, Apple, Comcast, and others can run in the red for several years, he described Netflix as “still the streaming leader.” It currently has about 65 million subscribers in the U.S., and about 90 million around the world.

    “It’s not yet a price-sensitive market,” he told RampUp. “I would not give ground on price.”

    The Settling of the Wild West

    Schmitt added that Netflix has done an “outstanding” job of marketing, creating a “machine to retain subscribers.”

    They’ve made some mistakes, he said, but added that it still has a variety of “levers and dials” to tweak its offers.

    For example, they can easily decide to “drip” the content on a weekly basis for new series, as Needham’s Martin recommends. They can also begin to more tightly regulate the maximum number of devices that can share a login. Netflix login-sharing is common among families and friends, as the service now allows as many as ten devices to share the same subscription.

    And Schmitt pointed to one major advantage Netflix has over its competitors, at least in the short-term. It has a data repository–going back nearly a quarter of a century– that understands the behaviors and preferences of a massive number of subscribers. That understanding can tailor content and offers to its subscribers, and to potential subscribers with similar profiles.

    Over the long run, he said, Netflix also needs to find major strategic partners for content, marketing leverage, and subscriber growth to counter the massive families of companies that boost Disney, Apple, NBCUniversal/Comcast, and other services.

    Whatever its strategic choices, the pioneering Netflix has shown that the streaming services frontier—a new landscape where its name finally makes sense—is open for business.

    Its popularity has led to the bigger settlers moving in, and now Netflix needs to figure out how this new version of the wild west will be won.

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