Who is leading the OTT race?

INT. LIVING ROOM – DAY 1

I wake up and walk over to the balcony. I see a solitary cargo ship sailing along the Hudson River and wonder about my long lost trip to Austria – canceled because of ‘rona. I was supposed to be taking a train from Munich to Kundl in Austria. It has been 8 weeks since I stepped out of the house. The entire world is at a standstill and no one is sure when things will go back to normal. The only thing that’s the same is the endless stream of shows and movies at my fingertips. Now and before, Netflix shines brightly on my television and my phone. How has it survived and thrived during this difficult period? I guess it’s time for me to reunite the “Hopkins Trio”’ i.e. Nick and Shreyas and me, and figure it out.

HBO’s new entry

AT&T’s WarnerMedia launched its brand new subscription video-on-demand streaming service ‘HBO Max’ on May 27, 2020. It will feature 10,000 hours of premium content bundling all of HBO together with even more movies, shows, and Max Originals for the whole family, including Friends, South Park, The Big Bang Theory, Wonder Woman, the Studio Ghibli collection and much more. HBO Max is the newest entry in the world of Over the top (OTT) players and it aims to quickly cement its place in the populous OTT race.

Who is leading the OTT race?

It was hard to imagine that Netflix would gain subscribers after the news that networks would be pulling their shows such as Friends and The Office. On top of that, the competition in the OTT space has been fierce with the entrance of Disney+, announcements of Peacock and HBOMax, and Amazon Prime acquiring films and making more original shows. So, it is indeed a testament to Netflix and its fundamentals that it has grown in the uncertain times of the pandemic.

Blessing on a blessing for Netflix:

- Netflix has gone to hit its highest stock price ever ($449.52).
- Netflix has added more than 15.7 million subscribers internationally over the first quarter of 2020. That’s 2.3 million from North America and 13.5 from international markets.
- It is the top SVOD player. In March, Nielsen reported Americans spent 29% of their total streaming minutes on Netflix. Nine of the top ten shows streamed in March were also on Netflix.

We thought about how this was all possible and realized that Netflix didn’t need to pivot for the pandemic. It was ready for this pandemic (or in hindsight any pandemic) from the beginning. Here is why:

Obsession with Customer Experience

Netflix has always believed in putting their customers first. Back in the days of Blockbuster, Netflix was the only company that did not charge late fees to customers. Leveraging the attitude of ‘customer first’, it soon started growing out of Blockbuster’s shadow and the rest is history. It was the same ‘customer first’ principle that Netflix adopted when it launched its streaming services.

Netflix has attracted new users by offering a one-month free trial and leveraged the stickiness of the customers by creating an intuitive user interface backed by its viewing analytics to create personalized content recommendations. Netflix’s platform has evolved with time. From the ‘skip intro’ button to ‘Top 10 in the U.S. Today’’, it would be fair to say that it has created a benchmark for all other streaming platforms.

With ‘stay at home’ order in place, we have witnessed a surge in the consumption of television. According to Nielsen, the total streaming time grew to 156.1 billion minutes per day in the United States (from March 9th to March 16th), compared to 127.6 billion minutes during the last week of February, per Nielsen. In March, streaming accounted for 23% of consumer TV viewing time, up from 21% in February and 14% a year ago.

It is said that the average amount of choices we make every single day is around 35,000. So after a long day of zoom calls, when someone sits down to watch television, they prefer not to spend time needlessly searching. People prefer to switch on the television and watch the show that matches their interests. Netflix has understood psychology and has set up 1,300 recommendation clusters based on users’ viewing preferences. Thus, when the customer visits the (intuitive) landing page, they are guided to the shows they are currently watching which makes their experience seamless. Netflix has gone above and beyond in simplifying the consumer experience. One example is the autoplay option of ‘watch next episode’ in which the platform automatically plays the next episode if it receives no human response for 5 seconds. It is no surprise that Netflix thinks its personalized recommendation engine is worth $1 billion per year.

No dependencies on theatres

As Netflix started producing its content, it decided to by-pass theaters. Theater revenue wasn’t a priority for the technology company. After all, theaters have been stagnating profit-wise for over a decade. Netflix did buy the historic ‘Paris theater‘ in New York to play its originals, but that was just to qualify for the Academy Awards. So when the theaters were closed down due to the pandemic, Netflix did not suffer.

Global distribution & diverse content offering

Reed Hastings decided to enter global markets in 2016 and as of today, Netflix has reached over 190 countries.

Now, let’s take a moment to understand how hard that was. For starters, there are operational challenges. One needs to have a robust infrastructure to set up the streaming content overseas but, trust us, that’s the easy part. The bigger challenge is to secure content deals (either by region or by country). If that’s not enough, they also have to comply with a diverse set of national regulatory restrictions to understand which content can be made available and which cannot. Once that is dealt with, the next challenge is understanding the preferences of international subscribers who prefer to watch content in their own language. And if all this is taken care of, the basic question stands – at what price point should Netflix be pricing its content? At the outset, it might be considered that dollar appreciation would be good news to Netflix as it would mean high revenue, but it also means that international subscribers would need to pay higher $ value to make up for the appreciation. Netflix has been able to successfully mitigate these challenges in over 190 countries. 190! And all its hard work is paying off.

What should Netflix focus on?

It is fair to say that Netflix has won the streaming battle in the pandemic, but will it win the war? Or Dinsey+ or HBO Max will be able to surpass Netflix once things come back to normal? Let us look at the four aspects that we think Netflix should focus on.

Improving the curation of Netflix originals –

Since 2013, Netflix has been trying to produce more and more original content and reduce its dependency on the licensed shows. Looking at this graphic just 8 months old, we realize that Netflix garners 2/3rd of its total viewing from its licensed shows vs 1/3rd from its originals.

Given the fact that this graphic is dated July 2019, one thing to note is that it still had much legacy license content such as Friends, Marvel movies, etc. Netflix even reportedly paid $100 million to keep Friends through 2019 vs. its previous licensing fee of $30 million. If you think about it, it makes sense for Netflix to pay three times the premium price for licensing content especially when it is investing billions of dollars towards producing its own content.

Independent research conducted by Business Insider found that only about a dozen Netflix originals have lasted beyond three seasons.

For a company that has taken pride in its data science over 5 years, how is it that not even one Netflix original has climbed the heights of Game of Thrones or Breaking Bad? Is Netflix collecting the right data and mining it correctly? What else might be the reason that Netflix decided to spend $120 million on a Baz Lurhmann’s show The Get Down only to cancel it after its first season? Many of Netflix’s originals have met the same fate – One day at a Time, Tuca & Bertie, Sense 8.

Focusing on the production quality of Netflix originals

–

Another thing Netflix will have to focus on is its curation. Take Netflix Originals for India as an example, none of the TV series have been extended beyond a second season. Moreover, the quality of Netflix Originals in India has been under severe criticism. So much so that one of its original ‘Mrs. Serial Killer’ has been touted as the worst film of the year. Also, Netflix’s production quality of its Indian content has been questionable. In one of the death scenes from its original ‘Hasmukh’, one could see the harnesses connected to the man when he falls to the ground. What might be the reason behind such an amateur mistake in the studio?

Keeping an eye on the balance sheet –

Looking at the above graph tells us that Netflix has aggressively taken on huge debt for its operations. On further inspection, we understand that Netflix has US$6.86b worth of liability accruing next year. On top of that, US$19.5b for the year after. Having cash of US$5.02b and $979.1m worth of receivables due within a year, Netflix will still fall short of approximately US$20b. Taking on debt might help with returns on equity, but we still feel a little nervous with such a high debt-to-equity ratio (166.4%). Given the tremendous growth in its subscription, Netflix might be able to gain the confidence of its shareholder and manage to take on another debt to offset its upcoming liability. But it will soon have to find a way to sustain itself without borrowing additional debt.

Conclusion

Netflix is the ultimate gangster when it comes to entertainment & OTT platforms. Its customers love the technology-rich experience and crush hard on its personalized content recommendations. Its brand architecture appeals to every generation (that has cut the cord) and has legs in every region of the world. It has loyal supply-side relationships with content creators who have much more freedom with their craft under Netflix (and there’s this). Netflix knows how to make the capital markets sing to its beat, giving its acquisition team the armory it needs to play the volume game against Disney.

But the one thing we’d argue that it hasn’t figured out just yet is how to use its treasure trove of first-party data to buy or produce the best content. For every Tiger King that makes its way into the cultural zeitgeist, ten more green-lit shows haven’t found any meaningful audience.

Netflix has undoubtedly figured out the “science” of content distribution but its algorithms aren’t great predictors of the “art” side of content creation. And it may very well be true that the “art” side of content can never be truly algorithm-ized, however, unlike HBO and Disney, so much of the Netflix stock price is predicted on this promise to be the one “tech” player that can crack the formula. After all, if it can’t make the best content, how different is it from YouTube or Facebook?
We’d argue that they are better at winning moments via documentaries or short-lived shows than winning generations via long-running TV shows. Netflix follows culture but does not lead it.

Do you disagree? Let us know your thoughts in the comments below on what you feel we are missing about Netflix in our argument

Co-authored by Nik Umnov, Shreyas Koti & Puneet Ruparel

Reference-

Alison Weissbrot // Thursday, A. (2020, April 08). Daytime Is Streaming Time: TV Viewing Habits In The Time Of COVID-19. Retrieved July 01, 2020, from https://www.adexchanger.com/tv-and-video/daytime-is-streaming-time-tv-viewing-habits-in-the-time-of-covid-19/

Feldman, D. (2020, January 28). This Is How Long It Will Take To Binge 20 Of Netflix’s Most-Watched Series. Retrieved July 01, 2020, from https://www.forbes.com/sites/danafeldman/2020/01/27/this-is-how-long-it-will-take-to-binge-20-of-netflixs-most-watched-series/

Lee, E. (2020, April 21). Everyone You Know Just Signed Up for Netflix. Retrieved July 01, 2020, from https://www.nytimes.com/2020/04/21/business/media/netflix-q1-2020-earnings-nflx.html

McAlone, N. (2016, June 14). Why Netflix thinks its personalized recommendation engine is worth $1 billion per year. Retrieved July 01, 2020, from https://www.businessinsider.com/netflix-recommendation-engine-worth-1-billion-per-year-2016-6

NFLX. (n.d.). Retrieved July 01, 2020, from https://money.cnn.com/quote/quote.html?symb=nflx

Rodriguez, A. (2019, October 08). We analyzed how many seasons Netflix gives its originals before canceling them and there’s a clear trend. Retrieved July 01, 2020, from https://www.businessinsider.com/netflixs-canceled-original-tv-series-number-of-seasons-analysis-2019-10

Trainer, D. (2019, July 22). Netflix’s Original Content Strategy Is Failing. Retrieved July 01, 2020, from https://www.forbes.com/sites/greatspeculations/2019/07/19/netflixs-original-content-strategy-is-failing/

Please follow and like us: