BusinessDay 25 Oct 2017

Wednesday 25 October 2017
28 BUSINESS DAY
Leadership
SHAPING PEOPLE INTO A TEAM
Netflix and Why the Future of
Streaming Looks Like Old-School TV
JOSHUA GANS
Netflix hit the industry
with some
bombshell moves
this month. First, it
announced that it
plans to spend $8 billion on original
content next year (including on 80
new movies). This is far more than
any other online player. Obviously,
this is great news for Netflix’s 100
million-odd customers worldwide.
What isn’t so great for its customers
is the other news. Netflix
will raise the price of its standard
plan by $1 a month and its premium
plan by $2 a month. With these
increases the company is slowly
edging toward the $15-a-month
plan offered by its competitor HBO.
This means that Netflix isn’t just
your Blockbuster replacement anymore.
Makers of original content —
including the likes of Disney — are
moving away from Netflix. Instead,
Netflix looks like an old-school TV
network. If you had to predict what
the industry will look like in five
years, you might say that there will
be a set of online channels with the
expectation that consumers will
subscribe to all or most of them.
At $15 a month each, consumers
will likely sign up for four or five of
these channels instead of a normal
monthly cable bill. Netflix is investing
to be the “must subscribe”
channel in that world.
There are obvious differences
between the new TV industry and
the old. On-demand is one difference,
as is Netflix’s “born global”
approach. This makes it easier to
do what Netflix was built for: experiment
with the long tail rather
than go for mass-market hits. While
it might be inconceivable for an
old-style network to greenlight a
series that appeals to just 0.5% of
its viewers, for Netflix, if that series
is the reason that 0.5% choose to
subscribe, that’s enough to justify
the investment.
One great feature of subscriber
revenue is that it makes life very
comfortable. As Netflix contemplated
its $1-a-month rise, I would
guess board members had an easy
time calculating in their heads the
extra $100 million a month, or $1.2
billion a year, that would bring in.
And they had every reason to believe
that growth would continue,
as subscribers are quite sticky.
Netflix looks a lot less significant
on people’s credit card statements
than the traditional cable bill.
Small amounts like that can go
unnoticed for years. A little while
c
ago, a professor colleague of mine
recounted that in finally reviewing
a credit card statement, he noticed
a recurring AOL charge. He must
have signed up for it a decade or
more ago and forgotten to cancel!
Subscriber revenue is nice, but it
has a flip side. When your business
has reached its peak, letting it go
can be hard. This is precisely the
challenge that old networks and
cable TV are facing. To be sure,
every person and his dog can see
where the industry is going. But if
networks and cable were to jump
to online and on-demand right
now, that would only increase
the number of people cutting the
cord. The drive to hang on another
year or two and wring more from
those sticky customers is just too
tempting.
Netflix is banking on that happening.
And if Netflix is right, it
won’t end well for the old guard.
When the traditional players really
start to struggle, Netflix and others
will be able to scoop up all that old
content for a song.
That said, Netflix has its own
flip side to deal with. I have a kid
in college who still uses my Netflix
account. There’s certainly no
economic reason for me to cut the
parental cord now, but looking
ahead, I don’t see when it will ever
happen. I have vague hopes that at
some point my kid might be embarrassed
to still be on a parental account.
(Although my 30-something
editor informs me that he still uses
his parents’ account, too.)
You can see the issue for Netflix.
It doesn’t have the luxury that
internet providers have, that as
soon as a kid leaves home he has
to get his own subscription. So
its subscription business doesn’t
2017 Harvard Business School Publishing Corp. Distributed by The New York Times Syndicate
grow with the population. That is
perhaps why it raised the price of its
top plan by $2, which allows more
simultaneous streams — but that
increase hardly offsets the loss of a
new paying customer.
Without new customers being
born that Netflix has to compete
for, there may come a time when
the company runs out of subscriber
growth. Then the circle will come
back around for Netflix and, like
today’s TV incumbents, it won’t
be able to take advantage of new
channels without cannibalizing its
hard-won legacy customers.
(Joshua Gans is a professor of
strategic management at the
University of Toronto’s Rotman
School of Management and the
co-author of “Prediction Machines:
The Simple Economics
of Artificial Intelligence.”)