Netflix by Digitalis

“Netflix continues to shift its business model from aggregator to content producer”

Since its inception 19 years ago as a DVD sales and rental service, Netflix has come a long way in its quest for global dominance – it is now available in every major international market except China. Two weeks ago, the streaming service announced that its subscriber base now reached 100m; a triumphant milestone that was celebrated rather humbly by Netflix’s CEO Rees Hastings.

But a growing subscriber base is just one of several developments that have earned Netflix a place in recent headlines.

Last year, Netflix announced its intent to spend at least 50% of its content budget on original content in the next few years. Netflix estimates it will spend $7 to $8 billion on content in 2018 – more than Disney’s ESPN.

The more Netflix spends on owned, exclusive content, the more it builds up a catalogue of evergreen content that can continue to attract and retain audiences for years into the future. While much was made of Disney’s announcements to remove its content from Netflix after current agreements expire, Netflix is increasingly becoming self-reliant and no longer beholden to the content owners whose catalogues previously enabled it to grow.

Netflix unveils the Binge Racer:

Perhaps more intriguing than its continued growth story, Netflix also revealed a new type of viewer, the Binge Racer, defined as a fan who completes an entire season of a Netflix show within 24 hours of its release. Worldwide, Netflix identified over 8 million members who have Binge Raced.

Canada, the US and Denmark are the top three countries for Binge Racing, based on the percentage of members who are Binge Racers.

Netflix is becoming one of the biggest movie studios:

In 2018, Netflix plans to release 80 original movies. That would be significantly higher than many major movie studios released last year, such as Disney (13), Lionsgate (24), NBC Universal (33) and Sony (38).

Importantly, Netflix isn’t releasing its movies in theatres, despite the top-tier theatrical talent attached, such as Martin Scorsese and Will Smith. This gives Netflix much more freedom around release schedules and allows Netflix to avoid significant theatrical marketing spend.

Nielsen adds Netflix to its TV measurement in the US:

Nielsen announced its new Subscription Video On Demand Content Ratings in the US, which will purportedly give clients data about how shows on Netflix perform relative to broadcast TV shows. For example, this should allow clients to compare the latest Stranger Things episodes with the MLB playoffs or Game of Thrones.

Nielsen will collect this data via its panel of 44,000 households across the US, but will only capture connected TV viewing, which Adweek reports is around 75% of viewing, according to services like Hulu. Without mobile and tablet viewing, how confident should one be about these viewing figures?

Netflix, known for being secretive about its own viewing figures, has already disputed Nielsen’s ability to provide this data accurately, stating: “The data that Nielsen is reporting is not accurate, not even close, and does not reflect the viewing of these shows on Netflix.”

Nielsen has already signed up clients including A&E, Disney, NBCUniversal, Lionsgate and Warner Brothers, demonstrating that everyone wants to know as much as possible about how Netflix’s content performs, given their outsized investments.

Star ratings get a thumbs down

Finally, after testing an alternative rating method with hundreds of thousands of subscribers last year, Netflix has made a decision to overhaul its rating system by replacing stars with thumbs. According to Netflix’s vice president of product Todd Yellin, the star-rating system felt “very yesterday” and that a simple thumbs up/down binary rating will be much better at “bubbling up the stuff people actually want to watch”. Users will also now see a new percent match score against each show title, which Netflix claims is personalized for each subscriber and “is based on an individual member’s unique viewing patterns and habits”. The company also believes that the binary rating system will better reflect people’s true enjoyment of the show, whereas with the star system they would often try to assess the show’s objective worth rather than simply say how much they enjoyed it.

Netflix outperforming competitors

  “Well, there’s Netflix, and then there’s everybody else.”We find we’re increasingly hearing – and saying – these types of statements. This week, Netflix announced its third quarter earnings, including net subscriber growth that exceeded its projections by nearly 1 million subscribers, bringing its total to 104 million paying subscribers globally.

While it doesn’t release ratings, data suggesting that 13 Reasons Why is the most tweeted about programme of 2017 is a testament to the attention Netflix’s latest original series is generating. Pulitzer Prize-winning playwright Brian Yorkey, who adapted the series for Netflix, claimed that this lack of regulation gave him a unique platform to “look unflinchingly at some of the really difficult things that teenagers actually go through and show them a little bit more unvarnished than other shows have had the opportunity to do”.

 As Netflix writes in its Q3 shareholder letter, “Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes.”

Furthermore, as Ben Thompson also writes, when companies such as Disney offer their content direct to consumers, Netflix does not see that as competition; rather, that it can encourage cord-cutting, which can only help Netflix:

Netflix is arguing that companies like Disney going over-the-top are, in fact, helping Netflix. Sure, they are competitors if you only consider streaming, but if you back out to consider entertainment broadly, then more OTT services actually mean a higher likelihood of cutting the cord. And, if a customer cuts the cord, which service has the highest likelihood of being in the OTT basket they ultimately pay for? Netflix, of course. To that end, if Disney makes it easier to cut the cord, the better for Netflix.

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