In February 2007, ten years after its founding date, Netflix delivered its billionth DVD. The company was extremely successful at that time, but decided to pivot, and moved away from its original core business model of mail-ordered DVDs, and introduced a new one — video on demand via the Internet.
This decision was the beginning of a new technological age that offered customers a comfortable way to watch movies legally without leaving home. High quality, fast and easily accessible content available from many different devices anytime, anywhere, and at low prices has already attracted more than 75 million subscribers around the world.
Even though the number mentioned above looks impressive, it appears that this is just the beginning. Cisco predicts that by 2019, 80% of all IP traffic will be video streaming — an increase of 16% compared to 64% in 2014. This year’s prediction for mobile-only video traffic is 20% growth for the next few years (from 55% in 2015 to 75% in 2020).
These numbers were truly astonishing, so we decided to identify (with a little help from the SWOT analysis) what kind of strengths and weaknesses Netflix has developed, which opportunities and threats it may face during the next few years, and, finally, how all four types of features relate to each other.
Netflix is in a tight spot. On one hand, the company needs to compete not only with other streaming services such as Amazon Prime or Hulu Plus, but also with cable television which is still very popular, easily accessible, and filled with live news and unique content. On the other hand, the company has another major rival — the vast and open Internet where anyone can find illegal but free content available to download.
Netflix has found the remedy for both types of competition in an affordable price. Netflix’s subscription costs vary from $7.99 up to $20 per month which, compared to $60-$100/month for cable is relatively cheap. These prices are also attractive enough to convince the average Internet user to switch from torrent networks and sites such as the Pirate Bay to Netflix. The American company claims not only to free its users from the legal risks associated with downloading illegal content, but also from moral issues connected with stealing content and intellectual property.
However, to keep prices competitively low, Netflix needs to find a balance between maintaining good relationships with the distributors and aggressively negotiating content licensing costs with them. This dependence on the primary asset of any video company — its content, results in a serious vulnerability.
This vulnerability can lead to rising costs, wars with the cable providers regarding content accessibility or even conflicts with content owners (such as Sony) who lean on Netflix for not cracking down hard enough on customers who circumvent geographic licensing restrictions.
Netflix has already discovered that being so dependent on external sources is a weakness and risk so great, that it needs a proper response — its own original proprietary content.
Netflix’s first big original series was the House of Cards, which debuted in 2013. The producer of the series was the famous director David Fincher (Seven, The Social Network), and the cast included Kevin Spacey (K-Pax) and Robin Wright.
The House of Cards was a game changer for Netflix. All episodes of the first season of the show were released at the same time, and the response of the critics was more than positive. The House of Cards not only attracted many new users but also proved that the key to their customers’ loyalty is a unique and abundant content library. In 2016, the show has already had four successful seasons behind it, and the contract has already been renewed for the next one in 2017.
But the House of Cards was only the beginning; later on, the company produced many other shows including high ranked productions such as Orange is the New Black, Marco Polo, Bloodline, Daredevil or The Narcos. Netflix has recently announced that it plans to have a total of 31 scripted shows by the end of 2016, which is almost two times more than it aired in 2015. Additionally, the company is also working on 30 kids’ shows, ten new feature films, 12 documentaries, and ten stand-up comedy specials.
In the long run, Netflix should strengthen its position by increasing the amount of available original content, new channels and video libraries with bonus features, TED conference videos, and new TV shows aired just after their initial broadcasts.
However, the competition does not sleep and is keeping up with the race. Therefore, it seems that the content and the size of the library will continue to be the subject of a fierce fight between streaming services.
Netflix has gained its popularity not only by increasing the amount of content but also by improving the development process of its product. Their applications stand out from the crowd by having intuitive user interfaces and cross-platform compatibility. These features make them widely appreciated by its users, considering that Netflix apps are frequently used as a synonym for a great User Experience.
Moreover, Netflix, in order to keep their users satisfied and facilitate navigation through thousands of movies and TV shows created the personalized recommendation system which suggests users what to watch next. Netflix gives its customers the possibility to create several profiles per account so that the recommendations can be used by all members of the household separately. Therefore, each and every family member can customize Netflix and receive its own tailored suggestions without paying extra, consequently making the family less likely to churn.
International challenges and expansion
In 2015, Netflix was available in 60 countries, but this was not enough. At the beginning of 2016, the company confirmed that it is broadening its range and would be now available in 130 new countries, including India, Russia, Poland, Saudi Arabia, Vietnam, Nigeria, Singapore, Turkey and South Korea. The announcement was great news for many users but didn’t solve all their problems.
On the one hand, Netflix is available globally, but still does not cover all of the Chinese market, and its popularity in some of the Asian, African and European countries is still insignificant.
Firstly, its low popularity may be connected directly with Netflix’s high dependence on the availability of fast internet connection. The US and Europe have very high levels of internet connectivity, but large parts of Africa are still mostly an ‘internet desert’, and Asia has much less internet connectivity than Europe or the US despite having very dense population centers in some areas. The future network upgrade and expansion may open the doors for new opportunities in Africa and Asia, but it won’t help in the case of strict regulations in China.
The company’s CEO, Reed Hastings, discussed Netflix’s ambitions to launch in China. China is an excellent market — it includes roughly 20 percent of the world’s population. However, any streaming company in the Middle Kingdom needs an explicit permission from the government to operate. This includes obeying strict rules that dictate what kind of content can be distributed and being subject to censorship before streaming of foreign TV shows. Entering the Chinese market also means facing fierce competition from domestic streaming services — many of which have close ties with, or even funded by the government.
Operating on local markets is difficult, and this not only applies to China. On the one hand, Netflix collects and makes the use of data from across the world and countries of all sizes. Therefore, it can create valuable suggestions for new or small markets, experiment with mixing in content recommendations from foreign markets and eventually satisfy the most demanding customers with unique content of highly specific or niche tastes.
On the other hand, domestic providers can produce series that are designed for and dedicated to viewers from their own countries, which results in giving a better match to the customers’ needs. This is true not only in China but also in countries where the content library is limited to videos that are licensed for viewing in that specific country.
Another issue is that even though Netflix is not available in China, it does not mean that Chinese are not using Netflix. For the time being, about 20 million users from China and millions from other countries access Netflix by using IP re-routing software through DNS proxies.
DNS proxies help to circumvent Netflix’s geographic limitations by pretending that the user is in another country. Such a practice is not welcomed warmly by content owners (such as Sony). This is a top priority issue, and Netflix, in order to avoid legal issues with local authorities and content providers will need to work harder to solve this problem, and eventually, find the right way to achieve the company’s goals in China.
Netflix already has a history of being the first to embrace the changing habits of consumers by successfully switching from DVD’s to online streaming. However, the company is not resting on its laurels. Netflix was the first company to resigned from making money off streaming ads between its movies and proved that the satisfaction and convenience of its users, who were tired of watching time-consuming ads, is once again more important than higher income.
And even though some say that Netflix has become too successful too quickly and is not ready to fight with the competition, I believe they have created enough strengths to win not only the battle but the entire war.
But who knows what the future will bring — whether the American company will flourish or fall apart like a house of cards? I guess we will find out in the subsequent seasons…
We have compiled a lot of information about Netflix and presented you with our vision of the American company, but now, it is your turn! Please, visit our website and feel free to modify the Netflix SWOT analysis we have prepared.