Netflix was created in 1997 as a company to distribute rental movies. Currently, it is approaching 200 million subscribers worldwide. In recent months, their subscription figures have skyrocketed with the confinement of a large part of the world population. In the first quarter of this year alone, they have obtained almost 16 million new customers, the same number as in all of 2019. Their expansion outside the US continues to grow. The current ratio is close to two out of every three subscribers outside the United States. The television business has definitely become global.
Netflix has become the paradigm of the future of audiovisual entertainment. Its appearance and its impressive growth have revolutionized the entire way of understanding the third activity of the human being after the hours dedicated to sleep and work: sitting in front of a television screen. It is essential analyze a phenomenon of transcendental relevance.
1. The three A’s. “Attractive, affordable and accessible.” With this formula, he defines infoLibre Elena Neira, specialist in new audiovisual distribution models and author of the book Streaming Wars, a business model that has broken the mold. For Neira, “it is an attractive platform for content, affordable because it is cheap and accessible because it can be accessed from various media.”
2. Take advantage of technological advances. Originally, it was an online video store. The client requested online what movies he wanted to see and took it home. The next day they were going to pick it up. As simple as that. As digital compression advances and makes streaming services easier, they decide to offer the possibility of downloading movies and stop using physical media. After analyzing the average consumption of films per household, they decided to offer a flat rate ($ 7.99 a month) that allowed subscribers to see all the material they wanted for the same price. With no physical copy or shipping costs, it could be a good business strategy. And of course it was.
3. A mystical aura. “There is no self-respecting company that does not present itself with a story behind that reinforces its mystical aura”, understands the specialist in digital strategy and business development for audiovisual products Francisco Asensi, who remembers how there is a “legend that Marc Randolph , co-founder of the company with Reed Hastings, was a customer of a video store and one day he found a letter warning him that he had to pay for having passed the rental period for Apollo 13 and to his anger he founded Netflix. ” This “is actually narrative”, an epic that Randolph himself has now narrated in the book That Will Never Work, a work in which he unmasks the birth of the company. The true story was somewhat simpler: “He was fond of catalog sales and it occurred to him to create a way to rent movies through a catalog that would be online.” The mystique has been maintained thanks to the constant revolutions that have starred over the years.
4. A breakthrough binge. It was precisely this fondness for the seventh art that, according to Asensi, could lead to Netflix becoming “the first to release all the chapters of the series that it produces simultaneously breaking with the tradition of serialization, to wait week by week to the next chapter. ” As he explains, everything is associated with Binge TV “the binge-viewing, something he had learned from his times of movie rentals”: Many moviegoers rented a whole saga to see it at the same time “, today all of Star Wars, today those of 007 “, and he applied it to his business. Francisco Asensi recalls that “the creators of Netflix were software engineers, they were closely linked to the study of data, they did not come from the world of entertainment, and they had already studied the behavior of renting to binge eating in one day. Thanks to the analysis of these data the viewer reaches a point in the series where he is hooked and does not lose himself in the disinterest that a disappointing weekly chapter can generate “. Even more so in our days, where the here and now has acquired one more march. The objective: not to abandon the viewing.
5. The new culture of the algorithm. For this to happen, so that the user does not stop watching a series, the platform has developed “millions of algorithms” that make “the content adapt to you”. This is how Elena Neira simplifies what she considers to be “a very important part of Netflix architecture”. Because the line of suggestions that this platform recommends individually based on your tastes is of urban legend, but behind these titles there is much mathematics. “We know what time of day our client connects, how much time he spends on the platform, we know what he saw before and what after. We even know if he did it from the computer, a tablet or the mobile,” said Todd Yellin, vice president of product. of the company during the presentation of novelties of 2019. An act where he told the ins and outs of said algorithms: “Every person is different and this algorithm learns from consumption habits in order to determine what you like and thus differentiate the content that we have to show. ” Thanks to these data, an individual profile of each user is built in what they call a community. “Each community usually corresponds to the subgenres that the client usually sees”, from there they see what actions are identical or similar to make the recommendations, such as seeing a series based on the cover image that appears. Hence, it is different for each user and based on the tastes of each. Although to get to all this it had to go through a long process.
“Netflix called on all the data scientists in the world to improve their algorithm by 10%. This is how the Netflix Prize was developed in 2009,” a contest in which some 40,000 professionals participated that caused a cultural change led by algorithms, “recalls Asensi, who explains how “during the process, the participants concluded that the identifying data that had been valued up to then – demography, age, sex, socioeconomic level, etc. – were not so interesting to improve the technology that would allow developing a better recommendation” To do this, “they relied on pure mathematics, on the deviation of simple variables, and specifically on the score that had been given to films during all that time because users had assessed based on certain patterns.” They fulfilled the objective and ” Thanks to this they were able to improve it a lot.
6. Informed decisions. Through this study of data, they not only improved the recommendations of their catalog, but also delved into the production of their own content. The history of House of Cards is well known, the first original series of the platform created taking into account many factors studied that were going to have an impact on a series of guaranteed success. But there is more, many more. Francisco Asensi explains that “the Netflix data manager said that at all the content production tables they sit down providing data. This is called the informed decision, that is, when it comes to knowing what they are going to produce, they consult the entire information they have collected from their users. ” Although this does not detract from the fact that they finally work like any audiovisual company –through the hunch–, “they determine that the premise of the series they are evaluating will interest their users,” says Neira. And he concludes: “It is not a program tailored to the audience, but based on the preference of its customers.”
7. Original production. In 2012 Netflix is facing a serious crisis. Its growth stopped and the negative impact on its stock market valuation was immediate. They needed to turn the company around and came up with the perfect solution. They remembered what HBO had done in the late 1980s. They suffered from a steady rise in the number of movies they bought from vendors. In addition, many of them were also offered by other competing payment operators. In 1990, HBO first released an exclusive original production series, Dream On. His story has since changed. More than twenty years later, Netflix was in a similar lockdown and decided to replicate the model already used by almost all cable channels: launch exclusive original productions to attract and retain new subscribers. In 2013, House of Cards was released.
Having original production means total independence from the big Hollywood studios that increasingly put a higher cost to transfer the rights to their films and catalog series. It also involved adding exclusive material, an essential element to attract new subscribers who would have to subscribe themselves to view the content. Finally, the value of the bookstore, that is, the ability to make profitable that drawer of series that would be available to customers for the future.
8. Opacity makes you stronger. So it could be summarized that on Netflix transparency does not shine excessively, as Francisco Asensi points out, because “the importance of the data is understood.” So they do not give audience figures. Furthermore, adds Neira, “you cannot measure the audience due to the type of unstructured consumption” that your business has. Netflix executives treasure the data of more than 180 million homes worldwide. It is valuable information that you are not willing to share with anyone. They usually group their viewers into different categories according to their level of consumption. This is how we meet Starters, those people who decided to watch at least two minutes of content; the Watchers, who watched up to 70% of a season; and the Completers, those who viewed up to 90% of the content.
“Before they gave the data of the Watchers and now those of the starters,” says Neira, who insists that on Netflix “there are things that have more weight than the audience when it comes to understanding engagement. [fidelidad] towards a content “. Because the model has changed. Although traditional television has traditionally always published its figures in full transparency, nowadays in the new market what prevails is obscurantism, the opacity of data that measures many more factors that in the past and that increasingly acquire more value.
9. A different model. For the author of the book Streaming Wars, the key lies in a kind of magic circle explained by Ted Sarandos, the head of content for the platform: “More content, more views; more views, more subscribers; more subscribers, more benefit ; more profit, more content “. Netflix, as a business, is understood from that discourse. “They look for efficiency in every dollar invested,” recalls Neira, who explains that “they are not going to spend money on making a second season of content if it is not profitable in hours of viewing.” The longer, the greater benefits in this wheel, this loop, which makes this platform so different from other competitors. So content is the key to your business. The more productions that attract the public and the more time they are loyalty on the platform, the more benefits they consider that will affect them in the long term. The consequence of investing in so much production is that they carry a long-term debt of 14,170 million dollars, that is, more than double that of a couple of years ago. Neira justifies these numbers in that “Netflix pays the productions in advance”, so “every time they start the fiscal year they are at a loss”. “It took Amazon more than ten years to stop being in the red,” recalls Asensi, who believes that “debt does not weaken Netflix at all.” His big handicap is the lack of alternatives. “Netflix does only one thing while Disney and Amazon have other outlets to live” such as the theme parks in the first case or the messaging of millions of products in the second.
The Netflix model of amortizing productions not at its premiere but over a long period of time relies on the economic model known as Long Tail Theory. Named after Chris Anderson, editor of Wired magazine, this concept is based on the fact that the new model of cultural consumption imposed by the internet makes it easier for products to extend their lives for much longer than before. The amortization of each series is not based on its viewing in the week of its premiere, but depends on its ability to continue to awaken the interest of subscribers over the years. Netflix applies it by including a large amount of content at a very low cost and with a strong user recommendation.
10. The doctrine of shock. “It is a brand that arouses people’s affection because it is different, its narrative is different from the rest,” says Asensi, who sees the classic HBO slogan in the 1980s (“It’s not television, it’s HBO”) a breakthrough technique. developed in “the way of communication of many leading companies so that everything is well packaged”. And Netflix has inherited it. The important thing is that “the packaging attracts attention, although the product may not be the best, but when the consumer sees the design they want it.” This same strategy is what Netflix used in 2018 for the premiere of The Cloverfield Paradox. “The night of the premiere it coincided with the Superbowl and got five million people to watch it,” recalls Asensi. What did? “Put a trailer for the movie in the sporting event announcements that read Available from Now.” The anxiety of immediacy, of being in the social conversation the day after, “created a shock in the audience that caused her to make a decision: see her.” A tactic, called the Shock Doctrine, which has also been used in Spain when the company soaked Madrid with giant posters reading Blanca Navidad, as a shocking play on words to promote the Narcos series. It caused controversy, but the end was fulfilled and the campaign was on the lips of many conversations.
A final thought. Netflix’s success worldwide, including Spain, poses some serious threats to the development of local industries. Netflix has discovered before any other television operator the great business of proposing a global offer. For any market such as the Spanish one, it is an obvious concern to think about the possibility that national operators cannot compete with the almighty companies that now invade our market and endanger their livelihood and, as a consequence, the growth of our audiovisual industry. You have to think about how to find an answer according to the dimension of the problem.
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