Netflix Knows to Pivot

Pivoting is when a business decides to fundamentally change its course, function, or its business model. Businesses pivot when they think that their current line of business does not yield expected results anymore or a much bigger opportunity is spotted elsewhere, and they change their business strategy to adapt and accommodate the changes in the industry.

Many businesses face the need to pivot in industries that are evolving faster than ever, and how successfully the companies execute the pivot will decide if they can stay relevant and survive. A lot of the giant corporations have a history of pivoting from their initial business models: Twitter pivoted from being a platform for podcasts fearing competition from iTunes. Starbucks pivoted from selling espresso machines after they identified people on the go to be a larger market. We have also seen companies that have successfully pivoted multiple times like Nokia which started out in the paper business, moved to electronic devices in the 1950s, and later to mobile phones in 1992, and still become irrelevant when they failed to successfully pivot with the rise of smartphones. Netflix has now found itself at a similar juncture, attempting to pivot for the third time!

Netflix started out as a mail-order subscription DVD service, wherein people had to make a list of movies online which would be delivered in 2-3 days. Before Netflix’s entry, Blockbuster, a billion-dollar company, was the market leader in movie rentals, with over 6000 stores and close to $4 billion in revenue. The problem with Blockbuster which paved the way for Netflix was that 16% of Blockbuster’s revenue came from late fees. Netflix completely capitalized on this negative sentiment towards late fees being a huge burden among a large part of the customers, completely eliminated late fees, and eliminated the need to go to the brick and mortar store as well. As Blockbuster was reluctant to eliminate late fees and take a big hit on their revenue, Netflix grew tremendously to have a revenue of $500 million by 2004.

In 2004, Blockbuster also entered the mail-in DVD business in direct competition with Netflix. Even though it cost them close to $400 million in total to set up the mail-in service as well as losing out on the late fee revenue, its market share increased rapidly because of its extensive network of brick and mortar stores. They were able to deliver at a much faster pace due to this network. At the same time, Walmart started eating into the profits of both Blockbuster and Netflix. This is because Walmart was using a loss-leader pricing model wherein, they rented DVDs out at incredibly low prices with abysmal margins just to attract customers to their stores. They may not earn anything through the DVD rental business but were able to create traction in their stores and drive them towards their higher-margin products.

In 2007, as Blockbuster and Walmart started making huge dents in Netflix’s revenue and market share, Netflix made a key pivot into a different segment. This is when Netflix ventured into online streaming and invested heavily in data analytics to create a formidable and affordable streaming service platform. Blockbuster, on the other hand, was late to make the pivot and eventually went bankrupt. Netflix, in the next 10 years, went on to become one of the largest tech companies in the world.

After many years, Netflix faced a similar situation again. With the rise in popularity of such platforms, production houses such as HBO and Disney launched their own OTT platforms and have started pulling their streaming licenses from Netflix and Amazon Prime to release their content on their own platforms. Netflix did envision this problem years ago, and made a second successful pivot, and started producing its own content in 2011. After many hit shows such as ‘House of Cards’ and ‘Orange is the new Black’, Netflix invested heavily into becoming a quality production house by itself.

But, continuously producing quality content like this requires lots of capital expenditure and demands more revenue. But unlike other production houses, Netflix’s revenue stream is restricted to subscription fees alone. HBO and Disney can afford to provide the service at a cheaper rate and undercut Netflix, because they would’ve already made a lot of money with the content through their theatrical as well as television releases. OTT is just an additional revenue stream for them.

At the same time, Amazon Prime is also able to provide content at much lower prices, by using the same loss-leader pricing strategy as Walmart. Amazon Prime offers the service at a price that cannot be matched by Netflix, by making little to no money through the streaming service and content production, in order to keep the customers subscribed to the Amazon Prime membership and using it to drive customers to its high margin online shopping platform, where it earns most of its revenue. Hence, the lack of other revenue streams for Netflix has been capitalized by other competitors to undercut Netflix and squeeze its profits.

Netflix finds itself in a position similar to the one in 2007, with high market saturation and brutal competition. As the company maintains its value through innovative data-analytics-driven UI as well as its original content, it has kept venturing into new innovations such as interactive movies, multi-platform integration, etc. At this juncture, Netflix has recently announced its pivot into production and integrating video games into its streaming platform. The company has recruited a former Electronic Arts Inc. executive to join the game development team. It aims to make gaming the new content category for its service through licensing and producing its own video games.

One of the company’s recent statements that said “Netflix is competing for screen time with firms like YouTube, Epic Games, and TikTok”, describes Netflix’s persistent attempts to capture various market segments. Even after 2 successful pivots, which very few companies can manage to pull off, the company has had to reinvent itself continuously to stay relevant and stay ahead

- S Danush