Netflix (Part 1): Is the honeymoon over? Where is "on demand" media war heading next?

Dawn of the disruptor

Way back in 1997, starting out small like all great startup's do, the original Netflix was all about renting out movie CD's through mail catalogs, cutting out block and mortar stores (like Blockbuster) and delivering entertainment right at customers door steps which was inspired by how e-commerce sites like Amazon were getting this right.

But a big shift in Netflix's success strategy came from realizing early and betting on the potential of internet streamings' predicted growth of internet's bandwidth and affordability. This would get rid of any physical inventory & hardware (like CD/DVD) and physical service like direct mailing in lieu of streaming entirely. As we know, the bet paid off. Netflix is now the number 1 subscription-based media entertainment streaming service in the world.

David vs Goliath: Disruption by Netflix, brought giants like Blockbuster to it's knees

Internet has been rife with stories of how Netflix, as an underdog beat, giants like Blockbuster, the reigning movie rental company of it's time. Classic David vs Goliath story that we all love to hear over and over again. But that was then. Netflix won the first round of media consumption war by disrupting how and when a media is delivered & consumed therefore creating havoc for cable distributors and the famous cable cutter movement.

Being in the right place at the right time with forward thinking helped Netflix win the first round of media consumption war. But the game is still afoot.

Disruption in delivery of content, altered viewer experience & a forever growing appetite created a domino effects in the production side as well. Let's find out how.

What Netflix changed #1 : How we watch TV & the viewer experience

1) Made hardware obsolete: Relying solely on streaming and internet for content distribution implied no additional hardware requirement associated with cable or dish 2 home TV, which meant hassle free viewing.

No additional hardware = No additional fixture cost = Less user hassle

2) Streaming content pipeline: Building the service on the back of mental model of streaming which people were already doing via Youtube, FB and other sites. Opportunity for creating a legit service out of what others were already using, by uploading non-copyrighted content on torrent and piracy sites, seemed big.

Users were ripe for transitioning to streaming through years of mis/using torrents and public streaming sites like Youtube, Vimeo, Daily Motion etc.

The smartphone revolution ensured people will always have 2 things wherever they go: internet & their wallet.

3) "View all you want, when you want": Netflix boosted peoples desire to consume content & binge watch as and when they preferred. Unlike scheduled broadcasting, it is well know that viewers switch channels impatiently between breaks to land on something they would like to watch. Netflix got rid of that painful switching by curating best media content all in one place using powerful search and matching algorithms. It was like a having a hard drive with tons of content and Netflix provided an interface to quickly suggest, browse, match, find and consume that curated content.

Unlike the restricted drip feeding shepherding model of media content that TV provided, 'on demand' streaming services allow users to swim in a pool of content nudging them to navigate freely at will, on their own time.

Viewing by appointment got flushed down the drain. Where previously people had to schedule their time around TV listings, Now TV listings are scheduled around people's time.

4) "Always Accessible": Cross device accessibility, ability to access entertainment anywhere, anytime, was a big shift compared to waiting to get back home and turn on the idiot visual box.

Netflix: View on your own terms and on your own turf.

5) No Ads!: Ads have been a necessary evil for TV industry as they paid for the content itself, but arguably most viewers also found them to be the biggest pain point as they were forced to watch them if they wanted to see their favourite shows. Netflix got rid of these altogether for uninterrupted viewing pleasure.

But this change in Netflix's media distribution & consumption was not just a different business model, it was a fundamental shift in technology, that overpowers TV.

Broadcasting vs Broadband

Broadcasting: Traditional media distribution or television model is based on this technology. Broadcasting uses electromagnetic spectrum to send signals however these signals are technologically scarce and limited and require a single message be sent from one to many.

The signal scarcity required a “schedule” of programming or shepherding which led to the early emphasis on wait & watch with a linear television experience in which one bit flows into the next.

Broadband

Broadband: Refers to high speed internet content distribution using multiple frequencies. Most crucially, broadband distribution enables personalized delivery of content. It turns the old model of a single entity sending out one show to everyone on its head and allows viewers to select what and when to watch beyond the confines of a linear schedule.

Broadband turned the "one to many" model on it's head & opened the floodgates to a new era of utopian media consumption

What Netflix changed #2 : How content will be produced, insatiable viewer appetites

This disruption over time has led to increased binge watching and faster content burn down rates creating a giant insatiable appetite for media consumption and unrestricted access. An abundance of previously scarce films and TV series have created a big gaping hole hungry to be fed more, faster, than the rate at which media is being produced at the current rate.

On demand video consumption services are already popular with 7/10 internet users

Quality content burn down and the pace at which viewers are guzzling down (binge watching) unrestricted media marks the supplier of this content as the lord of future television.

Innovation in delivery platform is no more a novelty, it's becoming easier to clone the broadband delivery model as seen in the market today by services like HULU, HBO Now, Amazon Prime etc. The next wave of market share dominance now lies with controlling the supply pipeline as opposed to delivery pipeline.

Boost in consumption habits = Boost in content creation. What this implies is a strong push to film and TV industry with billions of dollars flowing into the sector, creating never before seen opportunities. Proof lies in the figures:

* Netflix is estimated to spend 8 Billion dollars on content in 2018 with others following similar suite.

Will the budget of $8 billion alone be enough to fuel the ever growing content appetite?

The ripple effect of what Netflix did to viewer experience and viewing habits is changing how media is produced, licensed and more importantly their success criterion.

To fill the ever increasing gaping hole of content, benchmarking the good, the bad, what should be canned or green lighted is now also governed by a new kind of economics.

What Netflix changed #3 : Advertiser funded to Subscriber funded?

Traditional broadcast networks and cable channels make money by selling audiences to advertisers. Netflix (and many other portals, including Amazon Video and SeeSo) are subscriber-funded: Viewers pay a monthly fee for access to the library of content, with ads-free viewing.

To succeed, subscriber-funded services must offer enough programming that viewers find the service worthy of their monthly fee. Each show doesn’t need a mass audience – which is the measure of success for advertiser-funded television

What this implies is for green lighting or approving content, Netflix does not needs traditional measures like TRPs, time slots, ratings etc. Even if 0.5% of it's subscription base watch a series, it makes sense for Netflix to air it. As it is all about what their subscribers prefer to watch and the LTV of their subscribers.

The traditional measures long used to evaluate television – ratings, demographics, time slot – don’t matter to Netflix.

Traditional advertising focus on one thing only - reaching maximum number of users to gain the most from their dollars spent which implies that they would back and sponsor only shows which have high viewership or TRP's whilst discarding niche viewing over crowd pullers. With streaming services which are subscription based, viewers call the shot. Even a viewership rate of 0.5% is enough to keep the show in the infinite inventory space, ensuring long tail monetisation over short term volumetric, advertising gains.

'En masse' buffet is giving way to 'La carte' menu

Traditionally, television and film media industry have been mostly about promoting and nurturing 'hit driven' culture popular films, popular TV shows which racked up popularity votes with the masses. Critiques and advert dollars accounted strongly for what the viewers get to see.

Netflix has been recently accused of being a mecca for off-loading "toxic" assets by Hollywood studios for content they believe will not cut teeth with larger audience. What may be happening though is that the content void (Mentioned above) may be making Netflix too desperate to accept sub-par content?

A recent string of Hollywood flicks were lapped up by Netflix - like Arc, Bright, Spectral, Mute, Clover filed Paradox and more recently Annihilation. Big hollywood studios producing these movies did not believe these movies will meet the brief of generating millions of dollars with reasons cited including everything from bad production quality, glitchy storylines, to less commercial appeal for a broader audience. And if you go by ratings and watching these movies (excluding spectral), you will see that most of these movies do not meet the expectations of a AAA Hollywood blockbuster; they are not necessarily bad but may be more niche in appeal and leave more to be desired as the final product with mass appeal is needed for blockbuster success.

The end game for Netflix is not just to create award winning stellar media content 'en masse'. The end game is also building and optimising a sustainable content pipeline which can churn out content at a pace that matches niche viewing appetite 'a la carte.

And if you are wondering why would somebody do that! Answer lies in the "new" economics of long tail monetisation.

Economics of long tail monetisation: Can personalised UX be made profitable?

"Can the part be >= to the whole?"

Let's start by quickly comparing, how Netflix's personalised UX compares to dish TV's linear experience.

Dish connections with limited distribution and advertising restrictions can only serve a limited itinerary of "most popular" TRPs, backed by shepherded scheduling and programs (as explained previously due to broadcasting restrictions and advertising backed model).

I doesn't matter who (demographic) is watching, a cable connection shows only a standard itinerary to everyone where there is no room for personal preferences.

For Netflix, on the other hand, an unlimited inventory and analytical profiling ensures users on the same subscription can have a more personalised "niche" experience. Example from my own Netflix account below, we have 3 users on same subscription plan.

User 1: Viewing Guide

User 2: Viewing Guide

User 3: Viewing Guide

3 users using just one Netflix subscription are being served with suggestions and a viewing list based on their individual interests, viewing history & browsing pattern. A stark contrast to dish TV's itinerary.

Then of course there are a host of other personalised features we covered earlier: pick up from where you left, watch anywhere/anytime, switch devices (2 devices at any one time), auto suggestions etc.

Viewing guides for each of the users above are unique, niche and personalised. The TV shows targeted to these users need NOT be what majority of consumers are watching, but more niche in appeal just to them.

Question: This level of granular UX along with a wide variety of 'niche' shows may not be what a vast majority of consumers might be watching. Hence, how can their cost be justified?

This dramatic shift from 'mass hit' mentality to 'niche' driven mentality which drives personalised analytics and UX for the end user is not merely driven by the desire for better user experience alone but also the approach that needs to be rationalised & made cost effective by a business model that can make distribution of niche products profitable. And enter: Long tail effect.

Long tail effect: First made famous by Chris Anderson, talks about shifting away from a focus on a relatively small number of "hits" (mainstream products and markets) at the head of the demand curve (red) and toward a huge number of "niches" (Yellow) in the tail. As the costs of production and distribution fall, especially online, there is now less need to lump products and consumers into one-size-fits-all containers.

Traditionally, sales were driven by 20% of the products which were most "popular" or "hits' that lie in the head of the demand curve (figure above), also known as the Pareto Principle or the 80/20 law. While the law has many applications:

In business terms, Pareto Principle (or the 80/20 law) implies that 80% of all sales originate from 20% of products, customers or clients etc.

Following Pareto, most sellers would focus their resources only on selling items that were popular as characterised by the head (red) of the demand curve below due to the following two reasons:

1) Cost of inventory/shelf space: Traditional brick & mortar stores had the problem of limited inventory or shelf space which implied there was a cost for displaying the item on the shelf. For example, a music CD on a shelf in store costs the seller 50c/month to display implying the seller should be able to sell at least four copies of that CD a quarter to recover the rent. Sellers would be more inclined to place an album where they believe is likely to sell more units - aka is "popular" - to recover their costs. This implies that a seller may never stock or sell less popular 'niche" music CD's alone.

But with digital goods and platforms like Spotify, App store, Amazon and Netflix, the cost of storing items digitally or in the cloud is relatively negligible. Also taking into consideration is the fact that the shelf space can be extended almost infinitely. Lifting of this restriction helps less popular "niche" items to be stored and placed on display to the consumers.

It was estimated even in 2005 that more than a quarter of Netflix, Amazon & Rhapsody's revenue originates form niche items compared to mainstream hits.

*Source The Wired Blog

"Niche" items may sell less but when they are clumped together, they form an formidable market of considerable size for revenue and profits alongside the "hits".

2) Cost of marketing & distribution: Second factor after cost of limited inventory was cost of distribution or marketing to the potential consumers. Traditional marketing focus more on advertising and hence make only those products visible to the customers which they feel would sell high volumes, hence "popular"(as this would ensure maximum dollar return for their advertising costs).

With traditional marketing, it costs more to reach the tail customers than the revenue or profits that would be generated by them. For example:

If a marketer spends $10 on advertising a popular item costing $3 a pack which 10 people on average will buy after seeing the advertisement (3x10 = $30), it is more profitable than spending the same on a less popular "niche" item that might average only 2 people (3x2 = $6) resulting in negligible recovery of advertising expenditure.

As a result, most marketing organisations settle on targeting just a small number. As you can see above, the cost line is only targeting and promoting items in the head of the demand curve.

However with big data & analytics and personalised ads, digital platforms can now do more targeted profiling of users making advertising more personalised for the viewer. This implies marketing costs are dramatically lowered and can now reach customers quicker, while advertising them "niche" products in the tail of the demand curve.

These two factors combined ensure Netflix, Amazon and other similar platforms can do personalised recommendations based on user purchase, browsing and viewing history, selling them products customised to their personal "niche" preferences rather than "hit" based one-size-fits-all approach.

Due to these reasons, while TV channel guides will look the same for all viewers, Netflix's guide won't.

The reason Netflix's "niche" driven personalised UX exists is because it is made cost effective by changing macro-economic forces of demand distribution curve.

This may very well be the very reason why Netflix is all for publishing movies, shows, documentaries which may not become overnight blockbusters by traditional measures but they believe will serve enough people in niche tail-driven market of it's user base, keeping them engaged over long periods of time.

Despite the heavy critique, Bright drew in 11 million viewers in first 3 days, which shows the aggregate power of tail-end niche market. This does not even includes future views which the movie will avail down the line as customers discover the movie in Netflix's curated inventory. This justifies the cost of airing an asset considered untouchable by big hollywood studios.

This is how economics of long tail monetisation makes personalised UX economically viable and is changing how media content will be produced, endorsed and distributed.

Parallel with Games Industry:

Netflix as a digital platform has the opportunity to leverage leanings from games industry using:

1. Time limited Shows: Which can appear for a short duration there by creating scarcity and boosting viewership, the way games run time limited events.
2. Interactive Shows: Netflix can possibly create shows that can have alternate endings based on input or player choice taking cue from now popular interactive fiction games on app store, which use soap opera format.

Conclusion

• Netflix and other "on demand" video services have dramatically changed viewer experiences and video content consumption habits.
• Surge in consumption habits and "binge watching" is creating a big chasm between production and consumption of media content thereby creating an ever increasing content burn down rate.
• The next chapter of media entertainment dominance will be production driven while suppliers of this content will become the Lord of future television. Billions of dollars will flow into TV and Film industry for content wars.
• Focus is shifting from "hit" driven to "niche" driven content mentality math behind what is green-lighted and what is canned.
• Thanks to Economics of long tail monetisation which can foot the bill of personalised UX, personalisation & niche marketing will continue to grow & evolve.

Part 2 of this series will focus on what this means for UX of personalisation; parallels that can be drawn between "on demand" media and other industries like games, app stores and what they can learn from each other. Stay tuned!

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