Has the Netflix model peaked?

Adam Smith
Adam Smith Managing Director | Operations Team

As the Netflix content model redefines everything in its path, we question its longevity and shine the beacon of hope for the well-established traditional players in the market, currently suffering from unprecedented bidding wars for TVs best content.

Its rise to success has been rapid, and if we’re all honest, took us all a bit by surprise. Perhaps we were all a little slow to react to new consumer behaviours, ploughing far too much faith into traditional viewing habits that we thought were here to stay, because hey, binge-watching and a total lack of channel brand loyalty is probably just a phase, or at least only exciting to a select few of early adopters.


Disclaimer: This isn't another "don't be the next Blockbuster post".

We get it, Netflix is disruptive, and you don’t need to be Warren Buffet to understand what happened. What we want to highlight here is some growing evidence of market correction - and question whether the sustainability of today’s TV market is even possible. We all need to think about fresh ideas on how we sell and market TV shows, but we don’t all have to suffer in the wake of destruction either.

Netflix buys more than $6bn of content a year, consistently outbidding TV networks for the best scripts and formats. It paid off - 91 Emmy nominations, second only to HBO, the cable channel that is synonymous with TV awards. This, of course, raises the very valid question of sustainability - it’s cash flow deficit sits at $2bn, compared to $1.7bn last year. It did, however, add 3.7m non-US subscribers in the first quarter of 2017. This is a big gamble that’s rocking the whole market. Everyone else has to make a profit on their shows, Netflix is happy to run at a loss in the hope that subscriber churn remains low - investing now, throwing everything out of whack, to grow its brand.

The current model is akin to a new restaurant serving the best filet mignon for $10 per steak and watching happy patrons fill every seat

Michael Nathanson, an analyst with MoffettNathanson

But we are at the peak, earlier this month Netflix announced it’s hiking prices by a dollar to $10.99 a month for new users in Canada, then the same for existing users a few weeks later.

Disney has just said it would remove its content from Netflix, and then launch its own direct-to-consumer service. They’re not the first, and certainly won’t be the last. While these single subscription-based services are cheap compared to cable and satellite package subscriptions, Netflix will see competition as more mainstream media companies take to streaming.

By breaking it down, and realising it’s not just the content that’s part of its success, which we’ve just highlighted as unsustainable anyway, there’s still the threat that streaming services have totally redefined how audiences think about linear TV and advertising. There are three reasons, therefore, which if we look at separately, show the mammoth can be tamed.

  • High-quality content
  • Streaming on demand
  • No adverts

The first one isn’t sustainable for the current subscription price, consumers will either see a drop in quality or a hike in prices.The second two are replaceable, as we’re seeing with Disney.

ITV’s Hub has recently made a fantastic move and refuses to take it lying down. ITV Hub now offers an advert free option for £3.99 a month. That’s a fantastic amount of high-quality content, streaming on-demand, with no adverts.

desktop ITV hub

So this is where it’s going, TV is changing, but channel brands will still have a strong position, maximising on their heritage and loyalty.

Cable cutting is very much a thing, gone are the days where we pay £60 a month to watch 2% of the available content - paying for an inflexible bundle that viewers are simply no longer prepared to accept. We lived with it previously as the means in which the content arrived was via the provider of the bundle, be that a satellite or cable, but the internet removes our reliance on such technology and gives us more choice. While we still might spend £60 a month per household on TV, it’ll be made up of all our favourite subscriptions, Netflix, HBO, ITV Hub and Disney for example.

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