Have you already watched the new Designated Survivor-episodes? The new season of Orange is the New Black? All six seasons of House of Cards, and probably even Stranger Things? Over 103.95 million people have subscribed to Netflix, the popular streaming and video-on-demand (VOD) service which accounts for 125 million hours of streamed movies and series per day. With a business model that focuses on binge-watching, it has become impossible to imagine a relaxed night on the couch without your favourite series on the screen. The original series that Netflix produce are widely known and well respected. This year, the Californian company received 93 nominations for the Emmy Awards: a reflection of the leading role that the company is playing within the television industry. Although it is often said that in Hollywood ‘nobody knows anything’, Netflix is producing one success after another. These successes are the results of an interesting combination of data, creativity, a well-defined business model and a little bit of luck. Whathas defined Netflix’s success and what will be the consequences?
It was in 2013 that Netflix brought their streaming services to any device of their customers’ choice. Shortly after, they expanded the number of originally created content, led by Chief Content Officer Ted Sarandos. As Sarandos revealed in several interviews, these two developments are closely connected. As an increasing number of people have become able to stream films and series, the company namely has created their competitive advantage over other television producers: data. Every episode that is watched, paused, repeated or ended is being tracked, so that Netflix can adjust new content to the customers’ preferences. Since many creative industries are characterized by unstable and unpredictable demand, including film-making , television producers do not receive direct signals from their audience. The online traces that Netflix uses to analyse the market partly explain the success of the originally created series, of which there are so many examples. Sarandos and his department thus spend a lot of time analysing their user data in order to determine the audience for new series. House of Cards is a very good example of this practice. At Netflix, they noticed that the demand for political television series was relatively large, that a significant amount of people who watched this kind of series also liked films starring Kevin Spacey, and that many out of this particular group also watched dramas directed by David Fincher. Even before the release of the first season of House of Cards, Sarandos had already bought the second season of the political drama series, starring Kevin Spacey, and directed by David Fincher.
Netflix is definitely making use of the tools they have at hand, which leads to a good guess of what their target audience might want to watch. But as usual in the creative industries: it is still a guess. Some series do not become as great successes as the examples that are mentioned earlier due to the ever-changing preferences of the customers. The algorithm used to predict the customers’ taste is determined by past experiences, which can of course change over time. This uncertainty has led to unsuccessful productions in the past few years, but did not result in severe losses. The business model, that is built upon subscriptions, provides the company with the possibility to experiment with content. As long as they keep making a few series that appeal to their audience, they can incur the costs of a failing one. An example is The Get Down. Of this series that displays the origins of the hip hop scene in the Bronx, New York, and which should have been extremely appealing to the target audience, was made only one season. Although many subscribers might have been disappointed by this drama series, they did not immediately withdraw their monthly subscription. Why not? Probably because (1) the cost of the subscription is relatively low (although last Thursday the company announced to increase the monthly price from $9.99 to $10.99), (2) Netflix is popular among many people, and (3) people are binge-watching a lot.
The price of the online streaming service is relatively low compared to regular television, and the quality of the content is relatively good compared to the free piracy-driven alternative. That is most likely the explanation to why people are willing to pay for the service.. But what further keeps the customers away from withdrawing is that Netflix is such a widespread phenomenon. Due to the so-called network effect, people want to keep their subscriptions in order to talk about the same series as others in their direct environment. Before the rise of the internet, people used to watch the same television shows. They could share their thoughts and opinions about the television shows and series, because there was hardly another option than watching the same shows and series. Nowadays, it is pretty convenient to talk about the same successful series as everyone else. The successes of House of Cards, Narcos, Orange is the New Black, Breaking Bed, and Pretty Little Liars has thus created a network of subscribers that will continue watching series on Netflix and are rather loyal.
However, probably the best step of Netflix has been the initial idea behind the brand: watching video on demand. Being able to watch an entire season at once, also known as binge-watching or bingeing, has contributed to the big success that companies, such as Netflix, but also Amazon and HBO, have become. The series and films have almost become an addiction to its audience, which leads to a very stable customer base. Pleasing this customer base by creating series tailored to their preferences thus is logical step in expanding the brand loyalty.
The increasing popularity of Netflix, however, goes at the cost of linear television. With the possibility to watch your favourite series, about which all of your friends are talking, at any moment on any device, linear television has become less and less popular. Especially the fact that linear television does not adhere to the schedule of the customer is disadvantageous to television producers. The audience ratings have dropped since the rise of more on-demand services, which can certainly be characterized as a threat for the established broadcasting companies. As John de Mol (the biggest television producer in the Netherlands, and producer of The Voice and Big Brother) said when he visited Room for Discussion this September: the other broadcasting companies are not the biggest threat, but the internet, YouTube, Netflix, and other on-demand services are. Linear television is at stake due to the rising popularity of Netflix, but will it eventually disappear entirely? It might, because let’s be honest: do you still watch linear television?
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