The dilemma of Netflix is actually the dilemma of all "subscription-based entertainment content"

Netflix's stock price has fallen by more than 70% from its peak, and its business model is no longer favored by investors. Of course, there are many reasons for weak user growth and less profits than expected, such as "post-epidemic" users no longer staying at home to watch dramas, such as inflation causing Users in Europe and the United States to reduce entertainment spending, and such as the aggressiveness of competitors such as Amazon Prime, Hulu, and YouTube Premium. However, these problems can be solved; if Netflix management is smart enough or has enough resources, these can be overcome. One problem that cannot be overcome in any way is the fundamental weakness of paid video and even the "paid subscription" business model.

Let's review this: Netflix and its main competitors (including China's three major video platforms) have the main business model of allowing users to pay for subscriptions on a monthly basis (or quarterly or yearly), so as to obtain the right to watch all the content of this platform. Of course, platforms can also insert ads to earn revenue, but that's secondary. For a mature long-form video platform, a user's paid subscription is the most important, and sometimes even the only source of revenue. China's Aiyouteng was originally driven by "advertising + paid subscriptions", and in recent years it has become more and more inclined to paid subscriptions.

Herein lies the problem: all paid content subscriptions that are time-cycled and untied on specific works are inherently inefficient and self-destructive. This is probably the worst business model for entertainment content, not one of them.

Whether you're a platform, publisher, or creator yourself, if you're selling an entertainment content to end users, your gross revenue is easy to calculate (don't take into account channel costs, payment costs, etc.):

Operating Income = Paying Subscriber Base X Average Paying (ARPU)

This has led to two most basic business ideas: the first is to expand the paying user base, and the second is to increase the average payment. It is best to do both at the same time, but in reality, it is not easy to do one. Increasing average payments can be divided into two ways: the first is to raise the overall price, and the second is to implement differentiated (discriminatory) pricing.

Obviously, all subscription-based video platforms, including Netflix, can only make a fuss about "expanding the paid user base" and "raising the overall price", and it is difficult to implement real "differentiated pricing":

The main driver of Netflix's revenue growth over the past few years has been the paying subscriber base, starting in North America, then overseas, and now in overseas emerging markets (such as India). The decline in paying users in the most recent quarter has indeed triggered a sell-off on Wall Street, indicating that the market agrees that the user base is the most important operating parameter.

Netflix can increase the subscription price of its membership every once in a while, usually by $1 each time. Subscription fees tend to be lower in emerging markets, but there is a greater likelihood of rising as user habits develop.

Netflix also has so-called "differentiated pricing", but it is mainly based on the number of screens viewed at the same time: basic members can only watch on one screen at the same time, premium members can only watch on one screen at the same time, and so on. This differentiated pricing is not related to the content itself, and there is no "premium membership sees better content".

There is also another kind of "differentiated pricing" in platforms such as Hulu, that is, basic members are not exempt from advertising, and senior members are free of advertising (domestic Aiyouteng is also good at playing this trick). However, this pricing is still not related to the content itself, only to the user experience.

In short, when users pay for Netflix, Hulu, YouTube Premium, HBO Max, as well as domestic iQiyi, Tencent Video, Youku and other platforms, he actually pays a "rain and dew" fee (flat fee); he can't "pay less" for the content he doesn't like, and he can't "pay more" for the content he likes.

For example, for my part, my favorite original Netflix series is The Queen's Gambit, but I feel a little less about Stranger Things. Unfortunately, the former closed after just one season, while the latter received a renewal for the fourth season. So, can I bargain with Netflix to pay half the money for Stranger Things and spend more money to watch the second season of Rear Wing Deserter?

Needless to say, this is impossible, even if users with similar demands around the world join forces. So the second step is: can you spend a little more money to enjoy the "value-added content" of "Rear Wing Abandonment", such as fan-specific tidbits, exclusive plots, or interaction with games and other content?

The odds are also low. At most, we can only enjoy things like original art albums, soundtracks, behind-the-scenes interviews, just like the Previous Extra that came with DVDs or Blu-ray discs. These things are hard to sell for (at least not on a platform like Netflix), and they're not too thirst-quenching. In the ideal, the "Rear Wing Outcast" IP could make at least $200 from me; in reality, it can only support my two-month payment, worth more than $20.

Switching to other platforms is pretty much the same. At HBO Max, for example, I'm happy to pay a fortune for Mare of Easttown, but there's no such option and no such value-added content to buy; when I hear that the title at this time next year will be the second season of "The Gilded Age," which I don't like very much, I'll probably just drop my one-month subscription, after all, I won't lose anything without watching the show.

In other words: users only have one paid option that is not bound to content, and when they want to pay more, they can't buy value-added services, and when they want to pay less, they may directly choose to unsubscribe. For the platform, this model is "stable loss and no profit". According to economic theory, the platform cannot occupy the "consumer surplus", but it has to lose a lot of "producer surplus".

In a better economic situation, although the video platform can not get more wool, at least there is no risk of subscriber loss (no one cares about a month or two subscription fee). But in the case of slowing economic growth and inflation, the problem is great. On English-language social media, articles are everywhere that teach you how to jump between video platforms to save money on payments. For example, Netflix's most heavyweight new show in May 2022 is the fourth season of "Stranger Things", and it will not be launched until the end of the month, and the second half of the season will not be launched until July, so it is better to simply unsubscribe; however, if you happen to watch the last season of "Ozark", then bear with it and book this month.

Frankly speaking, this business model of video platforms is not only far inferior to the current game industry, but even inferior to the traditional film industry (if there is no impact from the epidemic):

Mobile games and some PC games have fully shifted to a "game as a Servie" (GAAS) model. In other words, we do not charge those who "don't feel", but provide a variety of paid value-added services to those who are "very feeling". Especially in the "pay for love" model based on appearance props, paid value-added services will not affect the comprehensive experience and fairness of the game, thus achieving the maximum degree of "differentiated pricing".

Traditional games and movie content is a buyout system to pay, one hand to pay for the delivery of one hand, up to a few VIP grades can be set. This model is not so efficient, but user payment is at least corresponding to specific content - the ROI of a single work is clear at a glance, and users can also allocate budgets more efficiently.

The payment for online text subscriptions (mainly in China) is generally bound to specific works, and the paid chapter updates of a certain work are spent. The web platform will also offer VIP users free rights to some popular works, but that is secondary. Most users pay for their favorite books.

Take a popular game, for example: If Glory of Kings launches a new hero, or Original Gods launches a new drawable character and you just don't like it, you can completely skip buying anything related to that character. There's no need to "drop back" for the time being, as game operators won't charge you any "flat fees" for new characters. You may feel a little bored by the fact that you often see the character's activities on the game interface, and that's it.

What if this new hero/character happens to be very good for your appetite? Then spending money is a multi-level, multi-stage bottomless pit. In Glory of Kings, you may first buy a 488-point warrior skin, then buy an 888-point epic skin, then buy a legendary skin with 1688 bonds, and finally enter the bottomless pit of "Star Skin". In "Original God", it costs a lot of money to extract this character, not to mention the subsequent various enhancement costs. It's all voluntary, you're paying for love, and game operators are successfully taking up your "consumer surplus."

Subscription-based content platforms represented by Netflix not only failed to do the above, but even went backwards. If I go back in time for twenty or thirty years, in a DVD or videotape rental store, I can at least choose which content to rent, and I can ask the owner to show me a paragraph to see if it is appetizing; in front of the movie theater or video hall, I can at least judge which ticket to buy based on posters and profiles. As a viewer, I'm paying for specific content, and that's a no-brainer.

Then the DVD rental shop owner changed the rules: I paid a fixed monthly fee, and then I would receive a lot of well-made, richly themed, and well-burned content; as long as I renewed it on time, I could read it again at any time. These are all good and good, the problem is that the shop owner is actually guessing my preferences. If he guessed correctly, the result was nothing more than me continuing to subscribe; if he guessed wrong, the result was that I lost it. Incidentally, there are many DVD rental stores on the street, all learning this inefficient business model and competing with each other for destructive value.

The only advantage of the above rules is that it may be a little more stable when the economy is good — if consumers can easily earn $6,000 a month and prices remain stable, it is acceptable to spend $35 to subscribe to three DVD rental stores at the same time. Investors may even think that this model has "superiority" and is destined to replace the old model.

Now everything is in its original form. Relying entirely on in-app paid game content, or relying on buyout traditional movie content, may indeed be unstable and cannot achieve "drought and flood protection"; but Netflix's subscription payment model cannot do this. In the economic downturn, the subscription model cannot maintain the lower limit; when the economy is up and the quality content bursts, it cannot achieve a high ceiling. Is there any superiority to such a business model?