
How Netflix became a billion-dollar titan - abhiminator
https://www.economist.com/graphic-detail/2018/07/04/how-netflix-became-a-billion-dollar-titan
======
krapsna
Netflix approached the Hollywood studios to license their content for
streaming, and Hollywood snickered and took the easy money. They expected it
to be a total failure on Netflix's end.

Then, when Netflix started growing like crazy and the studios panicked. If
Netflix was the only streaming service around, it would enable them to dictate
licensing contracts. Suddenly, streaming was a real thing and they wanted to
extract every cent possible from their content.

In order to slow Netflix down the studios pulled the majority of the "good"
content from Netflix, and kept licensing them their b-movies and
documentaries. To this day, you still don't see a whole lot of blockbusters or
theatrical releases available on Netflix.

Netflix knew that they couldn't remain at the mercy of the content owners. So
they leveraged their head start on content delivery by producing their OWN
content only available through themselves.

It was a brilliant strategy, and I'm sure it took a lot of cajones to go down
that path.

~~~
rainbowmverse
There's just enough content I like on Netflix now that I'd consider it worth
it without any non-Netflix produced/branded shows and movies.

Unfortunately, it's next to impossible to find what I want through Netflix's
interface. Somehow they have all this data on my watching habits and can't
even get close to showing me things I want to watch. I depend entirely on
review sites and recommendations from others.

~~~
pembrook
I have a strong suspicion the reason the interface is set up like this is to
prevent you from realizing how small their catalog actually is.

~~~
jesseb
I see comments similar to these on a lot of websites, and I don't understand
the sentiment; I feel like I'm missing something major here.

There are thousands of television series and movies available to Americans on
Netflix (less so in other countries, but the point still stands). Cable
television doesn't offer a fraction of what's available on Netflix. I'm not
aware of another streaming service that offers more titles.

What is Netflix's library "small" relative to? Again, just curious because
I've seen this mentioned plenty of times, and I personally find there's an
overwhelming amount of content on there.

~~~
gnicholas
With cable television, you get new content. Most of Netflix's catalog is old,
and much of it is really quite bad.

One of my pet peeves is that they don't indicate that a show is in a foreign
language with English subtitles. Why is there no way to set a flag to just
show English-language content?

~~~
exolymph
This drives me crazy too, since a lot of the time I want a background show,
and for that I need English audio.

------
ariehkovler
Back in the day, when Netflix was the most successful DVD rental company,
people used to point out that Netflix sent more Gigabytes of data every day as
DVDs in the mail than the whole Internet transmitted in a day. Netflix was
given as an example of how the Internet couldn't compete with physical
delivery. Ironic.

Interestingly, the old Netflix DVD business is still alive and still
profitable, though it's been rebranded as DVD.com - there's a piece about it
here: [http://fortune.com/2018/05/21/netflix-dvd-
business/](http://fortune.com/2018/05/21/netflix-dvd-business/)

~~~
petters
I don't live in the US, so I Don't know, but as far as I understand, DVD.com
can legally offer essentially every title that exists. This is because in the
US, if you own a disc, you can rent it to someone.

If true, this is awesome and so much better (for me) than any streaming
service.

~~~
Cthulhu_
Legal grey area; iirc MP3.com operated on a similar premise and got burned to
the ground. I believe there was also a company that had racks of video or dvd
players and would stream the movie over the internet, claiming similar
protections.

Of course, in a nutshell Netflix is doing the same, only legally. Those
companies were too early and too dodgy.

~~~
icebraining
It's only gray because they were copying the content. Shipping out the
physical disc is fine, AFAIK.

~~~
cimmanom
Right. This presumably is also why library e-book collections contain a finite
number of "copies" (licenses) of each book, and if all those copies are
checked out, anyone else who wants the book is put on a waiting list. They're
allowed to loan the copies they've paid for already, but not to make
additional copies.

------
deepakkarki
For anyone interested in company histories I strongly recommend the "Business
wars" podcast by wondery.

[https://wondery.com/shows/business-wars/](https://wondery.com/shows/business-
wars/)

"Netflix vs. HBO. Nike vs. Adidas. Business is war. Sometimes the prize is
your wallet, or your attention. Sometimes, it’s just the fun of beating the
other guy. The outcome of these battles shapes what we buy and how we live.

Business Wars gives you the unauthorized, real story of what drives these
companies and their leaders, inventors, investors and executives to new
heights -- or to ruin. Hosted by David Brown, former anchor of Marketplace.
From Wondery, the network behind Dirty John and American History Tellers."

------
Reedx
It's going to be very interesting when Disney rolls out their service. They
could really do some damage to Netflix (and Amazon Video).

For those with kids, it's a no brainer. Millions of subscriptions right off
the bat.

Then imagine if Disney puts Star Wars exclusively on their service, same day
or even before theaters. Millions more subscriptions. They could do this with
all things Pixar, Marvel and other big Disney IP...

Now add on the merchandise. They'll have better data on exactly what people
are watching, how many times they're watching it and can create offers based
on that. The merchandising side is a huge advantage.

~~~
opportune
I highly doubt Disney is going to release one of their most flagship titles
online before or same day as theaters. That would just be cutting into their
own bottom line, makes no sense.

I'm starting to get a little worried about all of this vertical integration in
the streaming industry. It would be nice if there were just 2 or 3 streaming-
only services, preferably with heavily overlapping libraries, that licensed
content from content producers. The way it's going, it looks like you're going
to have start paying $50-60/month (Disney, Amazon, Netflix, Hulu, HBO) just to
have access to all your favorite shows... which is pretty much the reason
people ditched cable. At least it's on demand now, I guess

~~~
trocadero
That's how it was always going to end up. You can't reduce the money going
into TV from ~$60 a customer to $10 a customer and expect the same content
quality.

Netflix had a relatively brief moment in the sun where they could buy lots of
content cheap because streaming was add on revenue to the production
companies. That's not going to keep happening for much longer.

IMHO, I think we will end up back to a cable like situation. It doesn't make
sense to pay two middlemen for access to content. In other words, I don't want
to pay Comcast and Netflix to deliver Disney's content. Eventually, we will
end up with ISPs providing access to a handful of streaming services each with
their own exclusive content.

Packages will also come back because they make economic sense. Ultimately, the
NBA, NFL, MLB, NCAA, et al will get more money from a streaming sports package
than trying to sell individual streaming services.

------
RcouF1uZ4gsC
I think the two top CEO's at this time are Jeff Bezos and Reed Hastings. Both
jumped in to fill a need and then boldly pivoted into new areas. Amazon went
from online bookstore, to online everything store to cloud provider. Netflix
went from mail order DVD to online streaming to content producer. This is
somewhat reminiscent of Bill Gates and the transition of Microsoft from Basic
to DOS to Windows to Office.

This illustrates just how much a Founder CEO who has the right mix of smarts
and boldness can be absolutely vital for a company. I cannot imagine a generic
MBA CEO doing such bold and aggressive moves with Netflix, that the founder
CEO has been able to do.

~~~
icebraining
Isn't "generic MBA" vs "founder" a false dichotomy?

If you want a company that really pivoted, Nokia is a better example[1], yet
many of those changes only happened long after its founders were dead.

[1]
[https://en.wikipedia.org/wiki/History_of_Nokia](https://en.wikipedia.org/wiki/History_of_Nokia)

~~~
alt_f4
It usually is not, most MBAs have any creativity or original thought beaten
out of them at business school.

~~~
mathattack
It’s usually gone long before then!

------
dstick
Here's the direct link to the full article:
[https://www.economist.com/briefing/2018/06/30/netflix-is-
mov...](https://www.economist.com/briefing/2018/06/30/netflix-is-moving-
television-beyond-time-slots-and-national-markets)

The linked to one is a paragraph or 2 with the above link at the bottom.

------
dalbasal
Netflix is a business success and a product success. They played a difficult
game and won. I don't have anything disparaging to say about them as a
company, but as a type of company....

We (as consumers & residents of an economy) need to pay attention to what
Peter Thiel called "monopoly" when he (playing provocateur) said that
"competition is for losers."

The reason Netflix became so successful, and managed to play with the
entertainment oligopolies is that they built and control a bottleneck. They
are the biggest streaming company, one of a handful in any given market.

Terrestrial TV came with frequency band issues. Broadcasting had to be
licensed so everyone wouldn't step all over eachothers' signals. This resulted
in a structural oligopoly, where only a handful of licencees could broadcast.

Then cable came. This came with physical infrastructure, and structural
tendencies to local monopoly. They also developed an oligopolistic industry
structure, where licensing and content acquisition is only really possible if
you are fairly big.

Now internet. Online, Netflix and other streaming companies have built their
companies specifically around the goal of owning a bottleneck.

This time, there is no tangible reason for it. It's just a tendency of digital
services that one service "wins" a race to monopolize a sector.

There are a ton of inefficiencies in an oligopolistic market. I pay for house
of cards by subscribing to Netflix. You pay for American gods by subscribing
to Amazon. Why can't we both watch both shows? It wouldn't defund the shows,
since we both keep paying the same. It wouldn't be skin off either of our
noses either. Show creators would prefer universal availability and so would
consumers. The reason Amazon and Netflix want this situation to exist, is
because it maintains their respective "moats." There is no string underlying
economic (pertaining to resource allocation and scarcity) reason for it.

Basically, we need to watch out for these intermediaries. They are very
innovative and consumer friendly in their first decade or two. That's how they
succeed at first. Later, they succeed by maintaining their monopolies any way
they can.

~~~
dpark
> _Basically, we need to watch out for these intermediaries._

In what sense is the company that plans, funds, creates, and delivers a show
an "intermediary"?

> _Why can 't we both watch both shows? It wouldn't defund the shows, since we
> both keep paying the same. It wouldn't be skin off either of our noses
> either. Show creators would prefer universal availability and so would
> consumers._

You are proposing that all content should be free. You just don't realize
that's what you're saying. You believe you should get Amazon content for free
because you pay for Netflix. You argue this doesn't de-fund, but it does,
because if I can watch Amazon content for free, _I 'll cancel my subscription
to Amazon_. I'll pay for the cheapest streaming service that exists if it
somehow grants me access to the entire world of content. Universal access
would mean a race to $0/month.

~~~
dalbasal
To your first point, "delivers" is the key term. Netflix' "moat" is built
around being the deliverer of content. It does other things too, but they are
optional. I'm not saying Netflix suck. They don't.

 _You believe you should get Amazon content for free because you pay for
Netflix._

It's impolite to tell people what they believe, or what they said, so I'll
take these as conversational questions. In any case, I do not. I am pointing
out an inefficiency, a suboptimal economic resolution of the kind a more
competitive market dynamic would tend to minimise. The primary reason
intermediaries pay extra for exclusivity is exclusivity, cutting out their
competition. This doesn't generally happen in markets with enough buyers and
sellers.

If there were only two or three retailers in a market, they'd be cutting
exclusivity deals with wholesalers or manufacturers of goods.

~~~
dpark
> _I am pointing out an inefficiency, a suboptimal economic resolution of the
> kind a more competitive market dynamic would tend to minimise. The primary
> reason intermediaries pay extra for exclusivity is exclusivity, cutting out
> their competition. This doesn 't generally happen in markets with enough
> buyers and sellers._

I am pointing out that your claim is fundamentally contradictory. You assert
that universal access would not "defund", but your universal access idea is
predicated on a free market driving down the cost of access across the board.
It realistically cannot be both. You can't have Netflix bundle Amazon content
and _vice versa_ and not expect a drop in total revenue. Sure, you'd expect
some additional subscribers, but you'd also expect current dual-subscribers to
cancel one of their subscriptions[1], and you'd also expect Netflix and Amazon
to be reduced to competing primarily on price, driving revenue down.
Exclusives drive an increase in funding because they encourage the market to
pay for more than one option.

> _If there were only two or three retailers in a market, they 'd be cutting
> exclusivity deals with wholesalers or manufacturers of goods._

It happens all the time. Crate and Barrel sells exclusive furniture designs.
So does every other furniture store. It's not hurting the market and in fact
increases choice because most retailers actively pursue the creation of new
exclusives.

[1] There aren't a lot of people paying for HBO Go _and_ HBO Now. Once you've
got access to the content, you don't pay for it in other ways as well.

------
gourou
< Amazon, Apple, Facebook, YouTube and Instagram are all developing
programming efforts of their own.

If this competition is about catalogue, I don't understand why they didn't try
to purchase Time Warner or 21st Century Fox like Disney or AT&T did. Are they
betting they'll get a better chance by producing their own content or teaming
up with Disney?

~~~
foota
You can make a lot of content for the price of a large media company.

~~~
shanghaiaway
They're probably underestimating how difficult it is. I predict both Amazon
and Apple will fail at building content libraries.

~~~
quakenul
Interestingly, Reed Hastings (Netflix CEO) disagrees with you. At Recode 2017
he said looking forward they are "never going to be as good at what [Amazon]
are trying to be [regarding the media sector]" (spectrum, library size), but
instead "can be the emotional connection brand like HBO [that is] super
focused on one thing that people are very passionate about"

What a refreshingly sober perspective (probably why I kept it in mind).

[https://www.youtube.com/watch?v=tCn4hdTI2jc&feature=youtu.be...](https://www.youtube.com/watch?v=tCn4hdTI2jc&feature=youtu.be&t=994)

~~~
shanghaiaway
My point is that Apple,Amazon will not be able to build up valuable IP. They
don't get culture. Content is not about quantity.

~~~
harveynick
I can't say about Apple (though they really haven't made a start), but Amazon
already have some really good stuff. American Gods, Preacher, now The Expanse,
and I'm really enjoying Patriot.

~~~
donarb
Of those that you listed only Patriot is produced by Amazon. American Gods
comes from Starz, Preacher is from AMC and The Expanse comes from the SyFy
channel.

~~~
harveynick
Ah true, they're just billed as Amazon Originals in the UK. I think The
Expanse is going to be Amazon all the way down from season 4, though.

------
gourou
< In September 2017 Netflix streams were taking up 20% of the world’s
downstream bandwidth, according to Sandvine, a network-equipment firm

I doubt this is real, at best it's US only.

~~~
Cthulhu_
You're underestimating how big Netflix is internationally, I think.

~~~
AznHisoka
Netflix is pretty much exploding in popularity in Brazil and Latin America
right now.

They are slowly becoming popular in India and Japan as well. So their US
growth might be slowing down but definitely not international.

------
kelukelugames
I have a job offer with HBO about three years ago. They told me they wanted to
become Netflix faster than Netflix became HBO.

------
utopcell
Netflix is nowadays more of an original content creator rather than a
distributor. In this context, I don't know how big of a company they truly
are. Their 2017 profit was $245 million. Compare this to, say, the $1 billion
Warner Bros makes a year just from syndication for 'Friends' (a show that's
been off the air for close to 20 years.)

------
alexbeloi
It seems to me that Netflix used to have better recommendations. It's unclear
why/how/when it went bad, my suspicion is that they changed their metric and
it's having bad side effects, or their old models didn't scale as their user
base grew quickly.

I've built deep learning recommendation systems in production for clients with
millions of users and it's sometimes surprisingly difficult to beat the "most
trending <products>" baseline if all you care about is views/purchases. It
will in the short term to meet business goals, but it hurts the user
experience over time and will inevitably increase churn.

~~~
giarc
I wonder if it coincides with their change to a simple thumbs up/thumbs down
rating system. I never rate titles anymore unless it's really good, or really
bad. The in between I just can't pick.

------
radoslawc
In my opinion, besides own shows, Netflix's success is also due to mobile
devices availability and no commercials. I don't know if it's only me, but I
find watching anything on tv, when shows/movies are interrupted by commercials
really annoying, not to mention waste of time. On one of polish commercial tv
stations TVN (on government owned ones there are commercials only between, not
during shows) God Father II which is 3h22m with commercials was little above 5
hours. Come on!

------
duxup
I remember the early days of Netflix a lot of folks were predicting that
Netflix was super cool and the future.... but they also predicted that the
first guy in sometimes gets run over by someone who comes later. They often
were referencing the content owners..... but content owners just didn't want
to / didn't get it / didn't get their act together... amazing how that worked.

------
vinayms
I wonder if the technology is sustainable. I mean, as they grow, can they
continue to use the tcp/ip network that is used for everything else by
everyone, or would they create their own private network. Would they become
their own service providers displacing the traditional ISP's?

(I couldn't read the full article as I didn't have access, so not sure if this
is touched upon there.)

------
msurekci
Lately, they have been compromising on quality and focusing on quantity. I
don't think the fact that they are producing more movies than the other
Hollywood production companies should be seen as a good sign.

This is all subjective but, I do believe that the 10 movies that Disney
produce will be far superior than any of the 73 movies that come from Netflix.

------
macspoofing
Haven't read the article, but I'll take a guess: They built a service that
people wanted, a pure internet-based streaming service that didn't need a
cable subscription.

~~~
dgritsko
You should read the article before commenting, it's almost entirely about the
original content that Netflix produces.

