Netflix’s announcement last week that more than 45 million viewers had watched its newest movie release Birdbox seems to be a turning point of the company’s intention to take on the movie industry. But if things follow Netflix’s normal course of action, the company won’t just take on the movie industry, they are going to transform it.
While Netflix has shown success in creating its own content since it launched House of Cards in 2013, its annual investment is content development is at $13 billion and it is paying off. More than 85% of Netflix viewers are watching Netflix-developed content, an astounding number given its vast library.
More than anything Netflix is good at transforming industries, making old industry frameworks, dynamics, and ways of creating value obsolete. While many look at Netflix as the company that killed Blockbuster Video and late fees, the reality is they won by providing something much different than Blockbuster. Netflix produced a new customer outcome by not by focusing on a different way to provide what Blockbuster provided, the newest movie releases, but something much different and more valuable. In Reed Hasting’s words from years back,
“It’s possible to totally misunderstand Netflix. Some people think of us as just a DVD-rental service. But the real problem we are trying to solve is, ‘How do you transform movie selection so that consumers can find a steady stream of movies they love?”
What Netflix 1.0 the DVD company did was provide a vast library of DVDs to new the owners of new DVD players on a subscription basis. Instead of renting just blockbuster movies or buying a collection of DVDs, Netflix has access to a vast library of 50,000 DVDs that were curated for them with using an analytics-based recommendation engine. That was a much different outcome than the slog to a corner video store to fight lines and overpay to watch the latest blockbuster movie release (sound familiar?). They used that library plus convenience, friction reduction, and personalization to produce something entirely different that changed the way customers consumed media. Then, by wrapping that entirely new customer outcome in a new business model and supported by their unique capabilities, Netflix made it hard for Blockbuster or anyone else to compete.
For an industry that thrives on big blockbusters, Birdbox was a strong showing. To put its 45 million view in perspective, big opening in the industry may get 20 to 25 million views in the opening weekend. Of course, the response by the film industry has been more negative. Derision from incumbents is always a positive sign when you are about to transform an industry. One incumbent with the National Association of Theatre Owners, who has interest in the preservation of the status quo commented, “Netflix’s model can’t disrupt theatrical if it’s not playing on 99.7% of screens.”
Actually, Netflix can disrupt without big screens and not playing in theatres is exactly what should cause worry in the industry. Netflix has a lot of things going in their favor, and screens is one of them. As more consumers are willing to watch on small screens, and the price of large home screens is decreasing, anywhere outside the theater is looking like a good option.
Netflix has no vested interest in maintaining the current dynamics and structure of the industry, screens or otherwise, and is only interested in what gives the customer the best experience. And there are plenty of things that they can improve upon, including convenience, personalization, and business model.
Netfix’s number one asset is its ability to understand what its customers want to consume, which it has proven to consistently use to its advantage. With its direct customer relationship and deep analytics expertise, it has something that the film industry struggles with: an ability to produce content with a high confidence of success. So, while the movie industry supports itself with formulaic blockbuster movies, sequels, and remakes, Netflix can create content with consistent wins.
Maybe the most important element in Netflix’s favor is business model. It has many options to choose from and any of them will be a win, even staying with distributing new movies under its current subscription model. To really compete in the movie industry, it may not need to change a thing. It’s the film studio’s market to defend.
Back at the beginning of Netflix 1.0, one of the early indicators of potential success for CEO Reed Hasting was that the economics of distributing DVDs by mail worked in his favor. With $20 DVDs and inexpensive shipping, he knew he had a model that would work. Before entering the market he wanted to confirm that the DVDs would survive shipping so he went about testing them by mailing similarly durable CDs to himself to see if they would survive postal handling. One gets the impression that with Birdbox, the company’s first big opener with big star power, he once again sees a new customer outcome and business model, and may just be running a few tests on the market before the real launch.