Has Netflix become another Blockbuster?
Reading yet another report recently about Netflix’s business troubles, the irony of the possibility arose quite spontaneously in my mind. Twelve years after Blockbuster filed for bankruptcy, its nemesis Netflix is looking warily over its shoulder at some disturbing developments.
During its last earnings call, Netflix announced it lost another 1.3 million subscribers in the United States and Canada, and its stock has dropped precipitately this year. The FAANG quintet (the technology stock elite comprising Facebook, Amazon, Apple, Netflix, and Google) might soon become a quartet.
The rise of Netflix, the fall of Blockbuster
Netflix has been characterized as the tech industry’s David, laying waste to the massive Blockbuster, which boasted 9,000 locations and $6 billion in annual revenue at the height of its powers.
The origins of the company have become the stuff of startup legend. Just as the inspiration for Uber supposedly came on a snowy evening in Paris when Travis Kalanick was unable to find a taxi and asked himself, “What if you could request a ride simply by tapping your phone?” Netflix founder, Reed Hastings, had a similar epiphany when confronted with a $40 late fee by Blockbuster.
In that customer-unfriendly and irritating late-fee policy, he saw an opportunity for a better way, a subscription-based DVD-by-mail rental service, where a person could navigate a clean interface from the convenience of a couch at home and order movies. And NO late fees.
It certainly appealed to me. No more driving to the nearest store to spend endless hours in unattractive, smelly rooms browsing through dusty shelves in search of a movie for an evening’s entertainment or to keep the kids quiet on a rainy afternoon. And no more frustration because the one movie you wanted was not available.
The business proposition found a ready market and the Netflix brand soon began to chip away at the mighty Blockbuster. Maybe by luck, or in an act of immaculate foresight, they avoided the “DVDs by mail” descriptive naming trap and endowed the brand with a name that would provide a bridge to a digital streaming future (Netflix is a combination of Internet + flicks).
Netflix rode on an unstoppable tide with its DVD business and then its digital streaming platform. Blockbuster, behind its ivory tower, passed on an opportunity to buy Netflix for $50 million and terminated an Enron-backed partnership to create a video-on-demand services for consumers at home.
Netflix went on to become the powerful global brand it is today, celebrated for its culture, its firm commitment to remain faithful to the ideas that inspired its creation, and its ability to deliver high returns to investors, along with a few other elite companies.
Netflix stands firm against advertising
Unlike every other media company venturing into streaming entertainment, Netflix stood firm against advertising. As founder Reed Hastings once said, “We want to be the safe respite where you can explore; you can get stimulated, have fun, enjoy, relax and have none of the controversy around exploiting users with advertising.”
It worked. People appreciated the absence of intrusive ads and rewarded Netflix by joining the streaming platform in droves.
And unlike every other entertainment company, Netflix allowed password sharing between accounts. “We love people sharing Netflix,” Reed Hastings said in 2016, “that’s a positive thing, not a negative thing.” People around the world continued to flock to the streaming platform. By 2021 Netflix had 221 million subscribers.
Netflix’s keen understanding of customer data led the company to develop its own shows and enhance the value delivered: House of Cards, the first big Netflix Original, was followed by a string of successes and billions of dollars of investment. To accommodate the growing pipeline of local productions, Netflix has significantly expanded its studio presence in Hollywood since 2016, securing long-term leases for more than 30 soundstages.
The Netflix brand growth mantra continued to propel the company steadily into the stratosphere – until it didn’t.
Subscribers are leaving. Netflix’s shares plunged more than 60 percent since the beginning of 2022, and its stock is now the worst performing in the S&P 500.
Gripped by something closely resembling panic, Netflix is going against everything its brand stood for. The company has been steadily increasing its prices for the last few years, and at the beginning of 2022, it executed a substantial increase. Social media had a field day with that news.
Then Netflix revealed its plans to stop password sharing between accounts. And after having emphatically affirmed its disdain about advertising, Netflix has done a 180 and hired Microsoft as the company’s global technology partner to help roll out its new ad-supported offering later this year.
The game has changed
Video streaming is not a novelty anymore. The industry is maturing, and the market is saturated with choice. Big media brands are offering great content and user experiences, including Disney+, Hulu, Paramount+, HBO Max, and Apple TV+. Meanwhile, the behemoth Amazon watches from the sidelines with 200 million Prime members worldwide in its pocket.
Not surprisingly, economic pressures are forcing consolidation. HBO Max recently announced merging with Discovery+ to launch their own streaming service and push their content directly rather than licensing it to Netflix.
The abundance of streaming choices heightened consumer price sensitivity, and Netflix’s subscription increases were received negatively by consumers: A discretionary $5.45 for a double mocha at Starbucks? Yes, and maybe several times a day. A $4 increase in a monthly subscription contract? No way.
And while Netflix’s investment in original content has produced many great shows and movies and aligned with viewers’ desire for quality entertainment, it also substantially changed the cost structure, which subscription alone might not be enough to cover.
Investors have been vocal about this for some time, pushing the company towards the advertising model.
So here we are: The Netflix brand, built on being the opposite of traditional media companies as it had loudly proclaimed for 25 years, is suddenly acting and behaving like one, making choices that benefit its own pockets and interests, not those of its customers.
Netflix is now, essentially, like every other media company. In its search to find new sources of revenue, it will also have to carefully manage the Netflix brand and transition its positioning from feisty challenger and customer champion and become newly relevant and attractive to customers in the market it helped to create.