The term “binge viewing” has been newly added into the pop culture lexicon. It is a term that is almost synonymous with Netflix. “Binge viewing” simply refers to the way in which programming can now be consumed, mostly in large quantities. More importantly, it is a term that correlates to the ease and convenience of consuming content where you want, whenever you want. With clever and convenient distribution strategies, Netflix is a company that is, quite arguably, one of the highest ranked over-the-top streaming companies in the world.
Company Management and Background
In 1997, Reed Hastings and software executive, Marc Randolph, co-found Netflix. The original intent behind the company was to offer online movie rentals sent directly to the consumer. In 1998, Netflix launched a DVD rental and sales website. Nearly 20 years later, the company has expanded into a direct digital streaming service. Currently, Netflix is headquartered in Los Gatos, California. It employs almost 2,500 people (Forbes.com, 2015). It is available on almost every digital device (with internet connection), and it has become one of the largest digital distribution channels in the world; curating and distributing both original and licensed programming.
Company Assets
When it comes to exactly what Netflix distributes, there are a few different types of content. Netflix produces original content for distribution through its streaming service. It also curates a library of existing content, which the company acquires through licensing and distributes. Globally, people consume more than 125 million hours of television and film on Netflix everyday (Media.Netflix.com, 2016). The most relevant asset that Netflix possesses is the talent that it exclusively acquires.
In 2014, Adam Sandler signed a four-picture deal with Netflix to produce and distribute original content. The first film produced from the deal, The Ridiculous Six, has proved to be quite a success. Ted Sarandos, CEO of content at Netflix, commented on the success by saying, “[The Ridiculous Six] has been seen more times in 30 days than any other movie in Netflix history,” he added, “its also enjoyed a spot at #1 in every territory we operate in” (Lenker, 2016).
The company also has many other valuable assets in the talent department. Netflix also has original development deals with Chelsea Handler (Chelsea Does), Marvel (Jessica Jones), and Tina Fey (Unbreakable Kimmy Schmidt). The company is also home to originally produced and critically acclaimed programming such as House of Cards and Orange is the New Black (Chan, 2016). It is also known for reviving old programming, by producing and distributing new seasons of previously cancelled shows, such as, Arrested Development, Full House, and Gilmore Girls.
Business Model
The main element in Netflix’s business model is to provide over-the-top programming to the consumers. Netflix is a subscription based content channel that employs what is called a “three-pronged” approach. In licensing agreements with large media companies, such as, Disney, CBS, Lionsgate, and Fox, the company acquires large amounts of cheap content to build a stronger and larger library. It also acquires popular programming to attract the mainstream audience. Lastly, the company uses this attraction to produce and distribute original content, offered exclusively on Netflix. This approach is reminiscent to that of the early cable television channels that largely relied on syndicated rerun TV shows and older films to bring in new viewers (Lawler, 2011).
With over 75 million subscribers, watching in over 190 countries globally, Netflix is the largest streaming service in the world (Media.Netflix.com, 2016). The major competitors in over-the-top streaming services include, Hulu, Amazon Prime, and HBO NOW. In terms of content offered and international reach, the management at Netflix stated that it considers HBO NOW to be a major global competitor (Pelts, 2016). However, it is relevant to note that in comparison to its competitors, Netflix has the highest number of subscribers among all over-the-top services (McColl, 2015).
Revenue Model
Without the aid of advertising, Netflix runs on a subscription-based revenue model. There are two types of subscriptions that a consumer can have with Netflix. The price of a DVD subscription (only available in the U.S.) ranges from $4.99 to $52.99 per month. This price varies depending on the amount of DVDs that you order. The second plan is for digital streaming. The consumer can pay $7.99 or $11.99 per month, depending on how many screens their account is registered to (Saito, 2015).
As of May 2015, Netflix had a market cap of $25.5 billion (Forbes.com, 2015). Over 56% of revenue was spent on the licensing and producing of content for the site (Hirschhorn, 2015). The cost that Netflix will spend on licensing a program varies on a case-to-case basis. Netflix will typically invest anywhere from 120%-130% of a project’s budget to buy all the rights (Jaafar, 2015). As for the remaining revenue, 15% was spent on delivery, distribution, and customer service; while 26% was spent on marketing, and technology development (Hirschhorn, 2015).
Looking Ahead
As we make our way into 2016, it is projected that Netflix is planning to spend over $5 billion on content. This figure includes licensing costs and budgets for its original programming (Heisler, 2015). In March, the company plans to expand its services to the sky, by making Netflix available to users on Virgin America flights (Holmes, 2015).
The company is also looking to change up its traditional distribution model. Currently, Netflix’s distribution strategy involves releasing an entire television season simultaneously. The company is going to deviate from its typical strategy by releasing its new original 12 episode series, The Get Down, in two separate six-episode blocks (Eng, 2016). Netflix has not only managed to change the way we consume content, but it will continue to innovate the definition of television for years to come.
References
Chan, M. (2016, January 18). Netflix announces 2016 premiere dates for 11 original shows. Retrieved February 8, 2016, from http://time.com/4184481/netflixannounces-2016-premiere-dates/
Eng, J. (2016, January 17). Netflix boss blasts NBC over “inaccurate” ratings reveal, teases Gilmore Girls revival. Retrieved February 7, 2016, from http://www.tvguide.com/news/netflix-blasts-nbc-inaccurate-ratings-gilmore-girls-revival/
Forbes.com. (2015, May 5). Retrieved February 7, 2016, from http://www.forbes.com/companies/netflix/
Heisler, Y. (2015, November 14). Can HBO keep up? Netflix will spend $5 billion on content in 2016. Retrieved February 6, 2016, from http://bgr.com/2015/11/14/netflix-vs-hbo-original-content-2/
Hirschhorn, J. (2015, August 10). The state and future of Netflix v. HBO in 2015: A REDEF original. Retrieved February 7, 2016, from https://www.linkedin.com/pulse/state-future-netflix-v-hbo-2015-jason-hirschhorn
Holmes, B. (2015, September 29). Now streaming: Netflix at 35,000 feet on virgin America. Retrieved February 8, 2016, from https://media.netflix.com/en/company-blog/now-streaming-netflix-at-35-000-feet-on-virgin-america
Jaafar, A. (2015, July 8). Netflix expands its indie strategy with slate of new acquisitions. Retrieved February 6, 2016, from http://deadline.com/2015/07/netflix-indie-strategy-slate-elizabeth-banks-sarah-hyland-duplass-brothers-1201472048/
Lawler, R. (2011, April 6). Netflix’s three-pronged approach to content acquisition. Retrieved February 7, 2016, from https://gigaom.com/2011/04/06/netflix-content-acquisition/
Lenker, M. (2016, January 6). Adam Sandler’s ‘Ridiculous Six’ is making history for Netflix. Retrieved February 6, 2016, from http://variety.com/2016/film/news/adam-sandlers-ridiculous-six-is-making-history-for-netflix-1201673572/
McColl, B. (2015, April 16). Netflix’s business model: it’s no house of cards. Retrieved February 8, 2016, from http://finance.yahoo.com/news/netflix-s-business-model–-it-s-no-house-of-cards-173628471.html
Media.Netflix.com. (n.d.). Retrieved February 7, 2016, from https://media.netflix.com/en/about-netflix
Pelts, S. (2016, January 25). The competitive landscape is evolving for Netflix. Retrieved February 5, 2016, from http://marketrealist.com/2016/01/competitive-landscape-evolving-netflix/
Saito, G. (2015, August 7). How much does Netflix cost a month? Retrieved February 7, 2016, from https://www.quora.com/How-much-does-Netflix-cost-a-month