Reed Hastings, co-founder and CEO of Netflix Inc., at the Milken Institute Global Conference in Beverly Hills, California, USA, on Monday, October 18, 2021.
Kyle Grilot Bloomberg | Getty Images
In the preface to Hamilton Helmer’s “7 Powers: The Basics of Business Strategy,” published in 2016, Netflix co-founder and CEO Reed Hastings describes what happens when market leaders don’t adapt to new competitive forces.
“Throughout my business career, I’ve often seen powerful holders, once praised for their business acumen, fail to adapt to the new competitive reality,” Hastings wrote. “The result is always a stunning drop of grace.”
Six years later, Hastings finds himself in the role of a starter who has so far experienced a stunning fall from grace. Shares of Netflix have fallen more than 70% so far. The company announced in April that it expects to lose 2 million subscribers in the second quarter. Investors have been selling en masse as they question the size of the total addressable streaming market – a number Netflix previously said could reach 800 million. According to the latest census, Netflix has about 222 million subscribers worldwide.
Netflix executives are now pondering how they failed to adapt to a new competitive reality that was masked by huge subscriber profits during the Covid pandemic, when billions of people around the world stayed at home. Although the company is constantly producing big hits such as “Stranger Things” and “Squid Game”, Netflix is rethinking many of the philosophies that destroyed the industry more than a decade ago.
The change in strategy, even on margins, is surprising for a company best known for destroying two industries – first video rental and then cable TV. Instead of inventing new ways to change what has become a crowded video streaming industry, Netflix is reviewing almost every way it stands out from legacy media companies in the first place.
In other words, Hastings has decided that his best strategy now is not to break.
“It’s remarkable that Netflix is looking for growth by rethinking many of its entrenched beliefs,” said Joel Mier, Netflix’s marketing director from 1999 to 2006 and a professor of marketing at the University of Richmond. “These decisions will clearly help revenue and subscriber growth in the short and medium term. The bigger question is how they will affect the company’s brand in the long run.”
Netflix declined to comment.
Embrace the ad
Hastings has long said that Netflix’s aversion to advertising is due to the added complexity of the business.
“Advertising seems easy until you get into it,” Hastings said in 2020. “Then you realize you have to take that revenue from other places because the overall advertising market isn’t growing, it’s actually shrinking right now.” It’s a hand-to-hand fight to get people to spend less on, you know, ABC and spend more on Netflix. Twenty years ago, we went public for about a dollar a share, and now we are [more than] $ 500. So I would say that our subscription-focused strategy works pretty well. “
Netflix is no longer more than $ 500 per share. It closed at $ 169.69 on Monday.
Since making that comment in 2020, Hastings has been monitoring other streaming services, including Warner Bros.’s HBO Max. Discovery, NBCUniversal’s Peacock and Paramount Global’s Paramount + offer lower-priced services with unresponsive advertising. Disney plans to introduce cheaper ad-supported Disney + later this year.
A sign was placed in front of the Netflix headquarters on April 20, 2022 in Los Gatos, California.
Justin Sullivan Getty Images
In April, Hastings announced that he had changed his mind. Supported by Netflix ads “makes a lot of sense” for “users who would like to have a lower price and are tolerant of advertising,” he said.
Netflix has previously claimed to have found a void in the market without worrying about advertising. Niche shows that wouldn’t play well with advertisers who want scale could be valuable to Netflix if they bring enough subscribers to production budgets.
It remains to be seen whether Netflix will offer its full list of ad-supported content or whether certain broadcasts will be blocked only for non-ad subscribers.
Developing shows
Part of Netflix’s idea is to order content creators “straight to the series” instead of making traditional pilot episodes of shows and evaluating them based on a solid product. Other streamers followed suit after seeing Netflix attract A-list talent by skipping pilots.
“If you’re a typical studio, raising money for a pilot, and if it’s tested well, pick up the show, maybe do a few more episodes and wait for the ratings,” said Barry Enderwick, who worked in Netflix’s marketing department from 2001 to 2012. director of global marketing and customer acquisition, told CNBC in 2018.
“At Netflix, our data took our decisions for us, so we were just going to order two seasons. The creators of the show will ask us “Do you want to see notes? Don’t you want to see a pilot? We would say, “If you want from us.” The creators were overwhelmed. “
Ordering projects directly to series has given writers and producers security and often more money. The downside, Netflix found, is that it also led to series that didn’t turn out very well. Deadline noted 47 different examples of ordering Netflix live in series in 2020-2021 and 20 in 2022. While some are notable, such as “The Witcher: Blood Origin” and “This Show from the 90’s,” most are generated some noise.
Netflix plans to start hiring more pilots and slow down the series development process, according to people familiar with the matter. The hope is that the end result will lead to better programming and less fluff.
Netflix has no plans to reduce its overall content budget. However, he intends to redistribute the money to focus on quality after years of adding quantity to replenish his library, people said. Executives have added more original programming in recent years to avoid relying on licensed content – much of which has been downloaded by media companies that own it to complete their own streaming services.
Watch an appointment
Another feature of Netflix is its long-standing decision to release full seasons of series at once, allowing users to watch episodes at their own pace.
“There’s no reason to play it every week,” said co-CEO Ted Sarandos in 2016. Getting away from TV for appointments is huge. Then why are you pulling people back to something they’re abandoning in huge quantities?
Netflix co-CEO Ted Sarandos attended the Allen & Company Sun Valley conference on July 8, 2021 in Sun Valley, Idaho.
Kevin Ditch Getty Images
However, in recent years, Netflix has been experimenting with weekly releases for some reality shows instead of mass releases. So far, this has not extended to streaming with scripts.
“We fundamentally believe we want to give our members a choice of how to watch,” said Peter Friedlander, Netflix’s screenwriting director for the United States and Canada, earlier this month. “So giving them that option in these scripted series to watch as much as they want to watch when they watch it is still fundamental to what we want to provide.”
But people familiar with the matter said Netflix will continue to play with weekly releases for certain types of series, such as reality TV and other competition-based shows.
Netflix’s opposition to weekly scripting may be the next thing you need to go for.
Live sports
Netflix has always rejected bidding for live sports, a major part of legacy media companies.
“To follow a competitor, never, never, never,” Hastings said in 2018. We have so much to do in our field, so we don’t try to copy others, whether it’s a linear cable, there are many things we don’t. We don’t do (live) news, we don’t do (live) sports. But what we do, we try to do really well. “
Yet last year, Hastings said Netflix would consider bidding for live Formula One rights to match the success of its Drive to Survive documentary series, which airs every race season.
Max Verstappen from the Netherlands drove (1) Oracle Red Bull Racing RB18 to the grid before the F1 Grand Prix of Emilia Romagna at Autodromo Enzo e Dino Ferrari on April 24, 2022 in Imola, Italy.
Dan Istitene – Formula 1 Formula 1 | Getty Images
“Several years ago, the rights to Formula One were sold,” Hastings told German magazine Der Spiegel in September. “We weren’t among the bidders then, we would think about it today.”
This month, Business Insider announced that Netflix has been negotiating Formula One for months for broadcasting rights in the United States.
Adding live sports could give Netflix a new audience, but that’s in the face of Netflix’s recent aversion to spending big money on licensed programming.
Restrict password sharing
For many years, Netflix has dismissed password sharing as a strange side issue that simply demonstrates the popularity of its product. In 2017, the Netflix corporate account tweeted “Love shares a password.”
But as Netflix’s growth has slowed, executives see the crackdown on password-sharing as a new engine to boost revenue growth. “We are working on how to earn revenue from sharing. We’ve been thinking about this for several years, “Hastings said during a conference call on the company’s profits in April. “But when we were growing fast, it wasn’t a high priority for work. And now we’re working very hard on it.”
Next year, Netflix plans to charge additional fees for accounts that are clearly shared with users outside the home.
“We’re not trying to stop this sharing, but we’re going to ask you to pay a little more so you can share with her so she can benefit and value the service, but we’re also getting the revenue from this viewing,” he said. Chief Operating Officer Greg Peters during the same call, adding that this “will allow us to bring revenue to everyone who watches and who gets value from the entertainment we offer.”
CNBC reported earlier on how the crackdown on password-sharing is likely to work.
There is no more streaming of pure playback
Netflix became famous for its cultural presentation in 2009, which set out the company’s values. One of the main principles of the company is innovation. “You keep us agile by minimizing complexity and finding time for simplification.”
Netflix has taken advantage of being a pure gaming streaming company for years. While other media companies, such as Disney, are lagging behind due to conglomerate discounts and slow-growing or declining legacy assets, investors have liked one Netflix pony: streaming growth.
But that is slowly changing. Netflix announced last year that it was involved in video games. Netflix currently has 22 video games on its platform and aims to have 50 by the end of the year.
Adding a new vertical to streaming video could help Netflix give investors a new reason to bet on the company’s future growth. But it also potentially diminishes Hastings’ longstanding principle: that focusing on movies and TV shows is what sets Netflix apart.
“What we need to do is be a special play,” Hastings told CNBC in 2017. “We are focusing on how to really be the epitome of fun, joy, movies and TV shows.”
WATCH: Netflix is probably best positioned among streamers in a recession, say retailers
– CNBC’s Sarah Wheaton contributed to this story.
Disclosure: NBCUniversal is the parent company of NBC and CNBC.