Netflix (NFLX) is the dominant company in the on-demand media industry, with 167 million paying subscribers around the world.1 By creating compelling original programming, analyzing its user data to serve subscribers better, and above all by letting people consume content in the ways they prefer, Netflix disrupted the television industry and forced cable companies to change the way they do business.
It has certainly accelerated the trend towards cord-cutting. As of 2019, an estimated 21.9 million American households will have canceled their cable services. This was expected to reach 34.9 million by 2023.
- Netflix has about 167 million paying customers globally.
- It has disrupted the television programming model and, to a growing extent, is doing the same to the cable industry.
- Netflix faces increasingly fierce competition from rivals including Amazon, Google, and Disney.
In the long run, Netflix’s success may lead to the unbundling of cable. That is, cable customers may be allowed to pick and choose channels rather than pay for a whole batch to get what they want.
In the video clip below, from The New York Times-sponsored Dealbook conference in 2015. Netflix CEO Reed Hastings Reed discussed the company and its unique corporate culture: “Ultimately, flexibility is more important than efficiency over the long term,” he said.
Undercutting the Competition
Netflix is essentially a storehouse of content, including movies, documentaries, and television series, both pre-existing and its own. For a flat monthly fee, subscribers can consume any program at any time on whatever device they prefer.
As of early 2020, Netflix had three tiers of monthly subscription prices: $8.99 for the basic plan, $12.99 for its most popular HD-quality service, and $15.99 for a premium plan.3
The number of American households estimated to have cut the cord on cable in 2019.
The typical household pays $156.71 per month for a base cable television package, but with add-on fees and taxes they wind up paying $217.42 per month.4
How Netflix Got Started
It’s a far cry from the company’s humble beginnings. Netflix started in 1997 as a website that allowed people to rent DVDs online, get them delivered by mail, and return them the same way.5
From the beginning, it competed with the networks and cable for people entertainment time. But its real competition at that time was the established brick-and-mortar video rental business.
It was 2007 before internet speeds got fast enough, and personal computers got powerful enough. It was done to allow streaming services to take off commercially. Netflix came out with a streaming service that year.5
For the first time, customers could watch a TV show or movie on a computer, TV screen, tablet, phone, or gaming device. The consumers could watch what they wanted, when they wanted, and how they wanted it, without being limited to a schedule, interrupted by commercials, or even leaving home.
That last innovation pretty much killed the video rental business. Soon, cable companies and TV networks began offering on-demand content of their own.
The Move to Original Content
In 2013, Netflix began producing original content of its own, a risky and expensive proposition.5 At a time when the networks generally approved shows based on pilots that hit certain metrics, Netflix offered series producers and showrunners upfront contracts to create an entire season or two.6
Soon, many of the most critically acclaimed and talked-about new series came out on Netflix instead of from the established networks. This includes “House of Cards,” “Orange Is the New Black” and “The Crown.”7 By creating a loyal fan base, original content has been a key source of Netflix’s success and the appreciation of its stock price.
Birth of Binge-Watching
Around the same time, Netflix started uploading entire seasons of established TV series at once, essentially creating the binge-watching trend, in contrast to broadcast and cable TV’s once-a-week installment model.
Netflix’s production methods have forced TV networks to be more flexible and more aggressive in recruiting and retaining top talent.
Innovating to Stay on Top
Another innovation of Netflix has been to mine for user data aggressively. This data was initially sought to serve customers and help them find content that would appeal to them. However, Netflix now analyses this data to determine what genres and which talents it should pursue in response to real demand.8
Now, Netflix faces tough competition for programming and viewers from Amazon, Google, and Disney, among others. The price it paid for breaking the mold for how television is made and watched.