Netflix is having a hard time, but the streaming industry's reshuffle has already begun

Image source @ Visual China

The text | reading entertainment, the author | Zero One

Netflix's user regression and historic plunge are major events in the streaming market. In the previous analysis, Yujun analyzed the reasons for Netflix's regression and the differences with domestic video platforms, and this analysis focused on starting from Netflix's concept and analyzing the current situation of the international streaming media market - from a single company, a group of heroes and to the current reshuffle.

On April 20, Netflix's historic plunge became the focus of the entire U.S. stock market. Because Netflix has almost always been in the momentum of soaring, the stock price has increased sevenfold in the five years from 2017 to 2021, so this time and the entire streaming media, film and television section have been affected.

The loss of paying subscribers in Q1 earnings was the trigger, the first time in nearly a decade that the company had negative growth. For the decline in the size of paid subscribers, Netflix mainly attributed to several reasons: abandoning the Russian market, user password sharing, increasing competition, etc.

Netflix, which once adhered to a pure subscription model, also announced this week that it is considering launching a cheap subscription service with ads in the next year or two. It is no wonder that some netizens said that domestic video websites feel that competition can become the only one of Netflix in the end, and it turns out that the trend of international streaming media is the same as that of China, and the fierce competition results of each company are not very profitable.

But in the view of the reader, it is difficult to compare Netflix with the domestic video industry - the advantages accumulated by Netflix in the streaming media market for a long time come from early entry, the early underestimation of online streaming by American film and television giants, and the good user payment base in the US market. And as more and more competitors join, the market environment Netflix has faced in the past may never have been more complicated than it is today.

At the same time, it is worth mentioning that on April 21, local time, Warner Bros. Exploration announced that it will stop operating and launching the CNN+ streaming news service for less than a month on April 30, and Andrew Morse, an executive who designed CNN's streaming strategy, will also leave office.

"Simple" Netflix mode

Netflix is perhaps one of the companies with the simplest business models, with more than 90% of its annual revenue coming from subscription members. Why has this simple model been able to stand still in the past, and why has it loosened up in the present?

As we all know, Netflix began as an online DVD movie rental company, relying on mailing DVDs to subscribers to achieve business model operations, which is actually in line with the later Netflix streaming service concept.

What makes Netflix special is that it is always at the "forefront" in its development. Whether it's DVD or streaming, the timing of Netflix's entry is just emerging, Netflix co-founder Mark Randolph wrote in the book "Re-examination Network Article": "Betting on DVDs is risky, but it may also become our final way to break through this category." With the entire market occupied by VHS video tape rentals, we may be able to rent mail-in DVD and monopolize the segment of mail-based video rentals in the short term. ”

In the early days of the later streaming era, CEO Hastings even tried to partition the DVD business out of Netflix, when the DVD rental business reached its peak and was still an important business segment of Netflix. It's tantamount to breaking it all down and refactoring it, and Netflix's innovative drive is amazing.

In Netflix's Netflix Adventure, written by well-known journalist Gina Keating, he described it this way: "He wanted to avoid mistakenly protecting the still powerful but doomed DVD business because he had seen the consequences of Beststar's attempts to get its store base to avoid online rental services." Business that does not change with technology will undoubtedly die, which is a core principle of Hastings, and Netflix is the embodiment of this principle. The demise of DVD is inevitable, and Hastings is only promoting its process – for the benefit of Netflix and its users. ”

It is worth mentioning that in the DVD business period, Netflix has done the following: 1, abandon the separate pricing, in the monthly subscription model charging, 2, cancel the rental late fee, 3, establish a wish list, users also dvd automatically send the next one, 4, recommend movies for users. The development of Netflix streaming subscriptions is clearly a continuation of the advantages of these measures – the constant polishing of the recommendation algorithm plus the volume of content libraries.

This is actually completely different from the market soil born of domestic video platforms. The domestic VCD and DVD rental market has risen to decline, and the disc rental shops in the streets and alleys of the majority of counties and towns are almost all tied to pirated discs, and the copyright protection foundation has been backward from the beginning. The same is true on the network side - before several major video platforms entered the right track to start copyright purchase, almost all online content came from copyright-free porting, and watching movies without spending money is the norm for domestic netizens to understand.

Netflix's simple membership subscription business logic was not an option for domestic video platforms from the beginning, but in turn, this subscription gene also laid the groundwork for Netflix's ceiling today.

Hindsight streaming competition

At first, Netflix's content rights in streaming came from the US cable station starz, which signed a five-year licensing contract with Netflix for $30 million in 2008, and only three years later, starz realized the huge benefits of online streaming, and it sought an early renewal from Netflix, and the price was increased tenfold.

Behind starz's actions, there is actually a step behind the traditional film production company - at that time, Starz owned 17 channels, the company purchased pay TV program licenses and Internet distribution licenses from Sony and Disney. It can also be seen that Sony, Disney and other film manufacturers did not care so much about the value of online copyright in the early days.

The contradiction with starz's contract renewal is a microcosm of the challenges to Netflix's development - Netflix cannot monopolize all high-quality content output, and when traditional film producers see that the value of streaming channels is irreplaceable, they will withdraw from the previous simple copyright partnership one by one. Disney, Sony, Warner... Former copyright suppliers have established their own streaming media platforms on their own portals, and the price of other copyright renewals has also soared, and the renewal price of "Friends" in 2019 alone has reached 100 million US dollars.

So from the popularity of "House of Cards" until now, the necessity of Netflix spending huge amounts of money and energy on platform production and self-made content is obvious. "One of our goals is to be HBO before HBO becomes us."

Before the upstream content producers joined the streaming media competition, Netflix has established a huge self-owned content library in a forward-looking manner, and for this reason, after Disney, Warner, Comcast and other major manufacturers have announced the cessation of copyright cooperation with Netflix, Netflix has not quickly lagged behind the emerging competitors at the time point of 2020, on the contrary, because of the explosion of online content consumer demand caused by the epidemic, Netflix in 2020 and 2021 has entered a dividend period, and the competitive pressure has been greatly reduced by market environment factors.

Paid subscription is a very simple business model, providing content in exchange for paying users, but as streaming media becomes a mainstream market for film and television content consumption, Netflix always faces an increasingly severe "user expansion - content expansion" speed competition problem. Netflix spends nearly $10 billion a year on content, but it is impossible to return to the top in today's competitive landscape - after other streaming platforms have gradually adopted exclusive content as a normal means of competition, it has become impossible for Netflix to "provide unlimited content" as in the past, "competitors often launch very good episodes and movies", and Disney, Amazon's classic IP and subsequent new works will not appear on Netflix in any form.

The fierce competition for copyright barriers has formed a new reality: Netflix dominance has become history, and the pattern of rising crowds has taken shape. Netflix's streaming rivals at the Oscars won the award, and there is more and more premium content outside of Netflix. Users have to subscribe to multiple platforms at the same time, Netflix is increasingly difficult to maintain the brand mentality of "subscribing to Netflix and watching endless content" in the minds of users, then for Netflix, the user ceiling will come earlier, because the user's payment expectations for streaming services are capped.

This is also why Netflix now puts the solution to account sharing behavior on the agenda, as a revenue growth point to look at: the subscription model is that each member pays a limited membership fee to obtain nearly unlimited content, the richer the content that the platform can provide, the higher the willingness of the public to subscribe, but to achieve continuous addition, the platform must open up the market and continuously increase content investment. Netflix must maintain more and more content expenditure, and the direct means to maintain profitability is only to increase prices and expand overseas markets, so making users who share accounts unpaid to pay money has become a major event that Netflix has to investigate.

Netflix's standard package in the U.S. market has reached $15.49, which is already twice the cost of a Disney+ subscription, and the price increase has caused it to lose 600,000 users in the North American market, and the price has not much room to rise. Overseas markets have therefore become the focus of Netflix's growth, and it is also true that the Asia-Pacific region is the only market where Q1 Netflix has significantly increased its paid subscribers. But the cost of localized content and competition from local streaming upstarts like Viu have also become new issues.

Forced to be "complicated" but Netflix won't be the one left behind

Paid subscriptions are originally a great model for entertainment content production, with users paying for it themselves, not advertisers, so that the connection between content creation and users is direct and close. And to promote the streaming media business among the low-priced people, it is difficult to recover the cost of a simple paid subscription model, which is why Netflix has proposed a low-cost package plan with advertising for the first time, but the logic of paid subscription is absolutely still true, but Netflix needs to have a more diverse understanding of more and more wide target users.

On the earnings call, Hastings said: "Those who follow Netflix know that I've always been against complex advertising and really like the simplicity of subscriptions. As much as I love this, I prefer the consumer's choice to allow consumers who want lower prices and are tolerant of advertising to get what they want, which makes perfect sense. ”

After the intensification of competition, the single revenue model of Netflix will gradually become a commercial disadvantage - after the epidemic factor gradually returns to normal, Disney and Warner's films will still be distributed in multiple channels such as physical theaters, while creating more revenue sources through IP operations, which are basically disadvantage areas that Netflix has not been involved in in the past.

In addition, Netflix has to accept the new fact that they once competed in the cable tv industry, which offered limited services through high subscription fees, compared with Netflix's subscription service is "cost-effective"; but now, Netflix's competitors are not only other streaming upstarts, but also youTube, Tik Tok and other products on the near unlimited video content, The streaming industry may face more competition than Netflix expected.

It is not difficult to find that in the entire development of the streaming media market, Netflix has not actually made a significant mistake in the direction of the business. After the industry competition became the Red Sea, Netflix did not have the possibility of continuing to dominate from the beginning, but in turn, Netflix was impossible to fall behind, streaming media such as Disney+ were also facing the same growth pressure as Netflix, and Disney+ and HBOmax could not invest in content costs for a long time at any cost. Warner CNN+ less than a month out of operation is a signal, in the end or mergers or exits, the market will eventually form a new balance, Netflix is also likely to be one of the giants that remain.

The process of streaming media from the fourth to the second shuffle has actually begun.