CEO Reed Hastings started Netflix in 1997 after becoming angry about paying Blockbuster Video $40 for a late return of Apollo 13. Hastings and Netflix struck back with flat monthly fees for unlimited DVD rentals, easy delivery and returns via prepaid postage envelopes, and no late fees, which let customers keep DVDs as long as they wanted. Blockbuster eventually went out of business. When high-speed internet reached consumers’ homes and became fast enough for video, Netflix became an internet streaming service just like it always planned – after all, it’s not named DVDFlix.
At first, Netflix grew because it paid huge amounts to license movies and popular network TV shows (ABC, CBS,
and NBC) like Friends and The Office. As it gained subscribers, it reinvested profits into developing its own hit shows,
like Stranger Things and The Crown. Stranger Things executive producer Shawn Levy who signed an exclusive agreement
with Netflix, said, “There is an empowerment of the creative process at Netflix that is genuinely unique in my
experience. Over the course of a dozen feature films and TV shows made for more traditional studios and networks, I’ve
never encountered such an absence of committee-think, so little bureaucratic interference.”
Despite amazing growth, Netflix eventually ran into limits with this business model. While “Netflix Originals” draw
in new subscribers, 8 of the top 10 shows watched by Netflix subscribers are network reruns like Parks and Recreation
(NBC) and Grey’s Anatomy (ABC). As NBC (NBCUniversal), ABC (Disney1), and CBS (CBS All Access) started
their own streaming services, TV networks and movie studios began to see it as a competitor rather than a customer.
Existing streaming service competitors became much more aggressive in bidding for content, dramatically increasing
licensing fees. For example, Netflix was paying $33 million a year for Friends, but lost Friends to WarnerMedia, which
paid $100 million a year for five years to stream Friends on its revamped HBO Max streaming service. Netflix also lost
The Office, its most watched show, to the new NBCUniversal, starting in 2021.
Netflix also finds itself in competition with several strong new streaming competitors. The most formidable,
Disney+, is just $6.99 a month, or $12.99 for Disney+, ESPN+, and Hulu combined, compared to Netflix for $12.99
a month. Disney+ not only streams decades of classic Disney movies and TV shows but also Pixar, Marvel Studios, Star
Wars, National Geographic, and 20th Century Fox (The Simpsons).
Within five months, Disney+ had signed up 50+ million subscribers, nearly one-third of Netflix’s 167 million
global subscribers. Despite substantial short-term hits to revenue, Disney did not renew licensing agreements with
Netflix, giving up an estimated $150 million a year in lost Netflix licensing fees. But, doing so takes Marvel and Pixar
movies, as well as ABC shows, off of Netflix. Apple launched Apple TV+ for $4.99 a month (free if you purchase an
iPhone or other Apple products) with limited all-new content but the power of Apple’s nearly unlimited balance sheet
to pay for development of new shows.
While Netflix still dominates streaming, the result of these changes is a significant slowdown in US subscriber
growth, down from 5 million new subscribers a year from 2012 to 2018 to 2.6 million in 2019, and a predicted 1 million
new subscribers a year hereafter. But, there is one huge remaining opportunity for Netflix, international growth and
expansion. Should it rely on subscribers’ favorites shows, meaning the popular network reruns that subscribers watch more than anything else, or should it focus on “Netflix Originals” to bring in new subscribers? To what extent should those Netflix Originals be created specifically for various countries and cultures around the world? Would that enhance or restrict Netflix’s growth in the long run? How fast can it expand – which is another way of
saying, how many markets can it enter at the same time and still be successful?
Question 1: As Netflix goes global, to what extent should it adapt its business to different cultures?
where should Netflix grow internationally? Or perhaps a better question, where should it first expand internationally,
and what makes those places good business climates?
Question 2: How should Netflix expand internationally? Should it license its streaming services to local or regional companies?
Should it form partnerships or strategic alliances with foreign business partners? Or should it follow its US model,
where it completely funds, controls, and runs its business?
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