Episode #0050 - What is the pricing strategy of Netflix

In this episode - we discuss whether the business model and pricing strategy of Netflix will let it prosper in the long term. We look at the penetration pricing strategy currently in use - and ask if it is best for the long haul? So we were talking a bit before about the cinema and movie industry. And it sort of made us think about the prevalent, the dominant player in the market now Netflix. The value offers to the consumers and we're thinking, What value does it offer? Is it sustainable? Will it be long term? Will we value Netflix as much as we do today? Or, Is the lifecycle with Netflix? I suppose people say I've got Netflix, I have a subscription to Netflix. What is the value that Netflix provides? I'm one of those people who even remembers its original incarnation before it was a tech business where they email you CDs or DVDs or, through the post. You had to select the ones you wanted to watch. And in that context, the appeal was the obscure movies, the foreign movies, the war archives movies, that was the actual appeal of the business. In a weird way, it's gone completely the opposite. Now it's more generic, popcorn style movies, some the 80s classics and that sort of thing. That you can just consume whatever you want and you pay a flat fee depending on the territory you're in. Something like 15 to 20 bucks a month and you can watch the movies. What are they providing is the question? Are they providing you access to movies that you wouldn't otherwise have? Or, why even the studio's use Netflix? Because it's a market to some extent there are two sides to it. The consumer should watch the movie and the studios who choose to distribute through them. So we're going to dig into that a little bit in this podcast. When they are launched and still today one of the major value drivers have been the price they've been competing in the market based on price. I think they offer a tiered pricing model, it's very simple, it's very cheap, and it's easy to understand. I think it starts at like 9.99 it goes up to 13.99 and max 15 something like that. So, they have gone with a strategy of low price and looking at the pricing model, it's low price. Whatever you can watch on on their platform and sort of like good quality. So, there's those sort of segment price segment based on the quality of the actual movie. High Definition via streaming and that sort of thing. They've thought about the customers, what do they want? Customers want lots of sort of average stuff to consume in an instant. But they want it in high quality, high definition, so they want to watch it without interruption, even if they're streaming it. That seems to be a major value proposition that Netflix offers us today. I can understand if we look at their pricing strategy which has been you can argue a penetration pricing strategy to get people to try it. I suppose there is a question though, Is it a penetration pricing strategy with the expectation of increasing prices later? We covered this in a previous podcast. I personally don't believe that there's that large an opportunity to increase prices. I believe a couple of years ago they did increase prices. And saw a large drop off in their customer base, which we'll probably cover in a future episode. But one of the big things I'll say about Netflix is, there's a classic example of the British railway network. In many instances, there's a first-mover advantage but there's also a first-mover disadvantage. With Netflix, they have shown the way and they've built a streaming model which was very market-leading. But one of the big issues is in my view is there are very few buyers to enter into it. It doesn't build an ecosystem such as the iTunes and App Store. You're not built into an ecosystem surrounded by Netflix. In theory, there's nothing is locking you in. You can consume movies elsewhere, whether through YouTube, Stan in Australia. Or, different streaming platforms or directly with the studios which we're seeing increasingly. To some extent, it's almost as if his business has shown the way. But not locked in any network effects that would stop people shopping around. They're probably a bit feeling vulnerable about their position in the market too. Because they're more than willing to partner with people like Foxtel for instance. I suppose they're keen to keep customers like Disney. Because they literally give them the content even though they do produce their stuff. But I do feel now more than ever that they are more vulnerable to that feeling. And they're trying to create a more reliable ecosystem. Because they know the one that they have got is quite frail. It's very flexible and gives people options. But at the same time doesn't lock you in as much as they probably hoped. In 2020 Disney is going direct so they're withdrawing a lot of their content from these distribution platforms. In my mind, I don't understand why any major studio where there are movies that you want. It's not any easier typing something into Netflix and it is typing into Google. If you can just buy it or get it from this from the studio directly, why would you pick it from Netflix?  I can understand speaking of ecosystems a lot of modern smart TVs would have Netflix built-in. But we're a year or two away from where you'll just have whatever you want to build into them. If Netflix has built-in, Google is also on YouTube with different things. So I don't think Netflix will exist in its current format in 5 to 10 years. I just don't think that they have value-added. Fundamentally, the people who can produce the content are the Masters in this genre. They're distributing it all over the same mechanism which will be online. It'll be the cinemas or online. And they said the online mechanism will be like we might want to direct, why would you pay a margin or give it to a middleman? It doesn't to me make any sense at all. One other point I'd make is that Netflix has been trying to add a bit of AI and give you suggestions and these sorts of things. But basically to my mind all it does is suggest the same stuff that you watch previously, popcorn style movie and it's just good to kind of suggest another one to you.  Over time, if we still believe cinema is an art form we're going to be looking more deeply for the content that we spend our time watching. I think it started as a value proposition to have as much content as possible that it would be a platform that would enable the user to take control of the TV watching experience as opposed to being told what to watch or have any sort of guidance around that. They said, "oh for the first time, we'll put you in charge of that". And I think that's some people like that other people don't. As you get more and more content that sort of pretty much the same sort of thing. You kind of actually does need more guidance about what to watch. Netflix on another issue has been a great test case for movie producers like Disney. To see how well people would respond to watching films and content at home versus the cinema versus Foxtel sky and the whole bit. It's been a great test case almost like an agile sort of test. And learn for these bigger movie producers to see how their content, how people respond to and consume movies than ever before. In a way, it's helped people understand the entertainment industry. And think about micro-segmentation than ever before. In the previous podcast, we talk about the current blandness and sameness and stuff like that. We were talking about the Golden Age of Hollywood which was a bit more artistic. Movies were original and based on the director's vision. Then from the 80s, 90s onward has moved into a focus group. You produce something and you tailor the ending to what people want. It does become bland. It's like the rule of politics that the middle person is what decides the election. So people tend towards the middle but in entertainment, I'm not sure if that's the right way. Because when it tends towards the middle and the sameness and everything's the same. And you've seen this before, you lose interest. When you lose interest then you stop going to the movies. Your willingness to pay and differentiate decreases. Then basically convenience seems to be the only value driver that you have. That's what Netflix focuses on, convenience and lack of barriers. When we talk about barriers to entry, you want to watch a movie today, there is no barrier to entry. You sit on your sofa and click a button and infinite movies will come up. So yeah I think in 5 to 10 years Netflix will not exist in its current format. I think it would be something along the lines of a Yahoo or AOL, a business that's still big still. A lot of money capital but will be decreasing from its current height. I think so too, look it pivoted before from its older business model when it was a mail DVD and mail in the post business. Then it transitioned to this more platform business and has done very well. I'm sure that they're thinking about it now building their ecosystems which indicates that they're probably thinking about business model adaption, reinventing, innovating, something in the next 5 to 10 years.  There does seem to be a need to do that and things aren't moving quickly but it's shown us some great possibilities in the entertainment industry as well as some gaps in the market as well. It's showing the way but it's also created some big powerful enemies or competitors. When you look at amazon on who has infinite money from funding and also profitable who are also entering Amazon Prime. In a direct competitive system with Netflix, the real differentiator that Netflix has is likely to decrease. I can also imagine, you will see national champions designed around promoting national products will start coming on board. I think sometimes in a market when you do show the way all you're gonna do is breed competitors. So you have to make the money in the short term. It was a very brief penetration strategy. It will probably still grow as they get towards complete market dominance in many geographies but my guess is it's going to be just one of a number of competitors that people will consider in the future.