Last week I offered up my view on how the major SVOD companies (Netflix, Amazon, Hulu) were likely to unseat many of the traditional powers in the US TV landscape. There are a number of reasons why I believe this will happen, but I’d like to highlight one which I’m not sure people focus on enough.
We know that Netflix and others like to trumpet the “watch it anywhere, anytime, on any device” capabilities of internet video. Video on Demand is a user experience that has undoubtedly struck a chord with customers (especially millennials). Importantly, implied in this experience is the concept of non-linear TV, and it is a dramatic departure from how we’ve consumed TV historically.
What do I mean by linear and non-linear TV, and why is it important? Linear TV is TV programming constructed around a timeline: the clock. Traditional networks operate by broadcasting a single, continuous signal, and are therefore required to develop content to fill that timeline; 24 hours a day, seven days a week. Fill that up and they are done.
But linear TV has a natural limit, a cap, a constraint on the amount of content that can be broadcast. There are only so many hours in a day. Once they program their schedule, the networks have no ability to offer anything more to their viewers. And that constraint means there is room for multiple players in the market. After all, not everyone wants to watch the same thing at the same time. Even when the Super Bowl is on, there is a percentage of the market that would prefer to watch reruns of Friends.
Non-linear TV has no such constraint. An SVOD operator can theoretically develop and offer its customers as much content as it wants, enough to program ten clocks. It is handicapped neither by time, nor by its stated theme. Dramas, comedies, children’s programming or documentaries. It has no thematic bounds. Its customers can watch all of those things at the same time all around the world. As such, its only constraint is its wallet.
This is the genius of Netflix. The faster it grows, the more customers it counts, the more money it will have to spend on content. It will eventually be able fund and offer enough content to satisfy most of your viewing needs. In a non-linear world, where resources matter, economies of scale will dominate. That means bigger is better, at least economically. This will be a winner take all, or relatively few winners take all game.
Netflix CEO Reed Hastings gets that. And he is on a mission to make sure his company is the winner.
6 thoughts on “Netflix’s World is Winner Takes All”
You raise many good points. However, personally, I would not think that Netflix is winner takes all.
Unlike Facebook, ebay, Seek or even Youtube, which is depended on user provide contents to users. For example, more buyer on ebay attract more seller and hence leads to more seller. Or more job advertised on Seek attack more job seeker and hence leads to more job advertiser. Therefore once it has became the market dominant, it can take most of the market share and maintain to be so.
However, for Netflix, it is the platform whom provides content to the end user. That means it is the content library and content quality that attracts new user. What can set them aside is their original and/or exclusive contents. So, in my view what helps Netflix or alike to fence off competition will ultimately be its exclusive contents.
So, it make me think that Netflix is not really in a winner takes all market.
Hi Max, it is actually Kevin’s post. I accidentally posted it under my name.
My initial thoughts were the same as yours – that the new world could mean dozens of content platforms. But Kevin has raised the point that more revenue = more and better content. More and better content leads to more revenue etc etc. So the bigger Netflix gets, the more content it can create or buy and the more attractive it becomes.
Perhaps you could argue that, in a creative industry, more money doesn’t necessarily mean better content, but to the extent that the relationship holds I can see where he is going.
I agree with Max. Take HBO as an example, renowned for their content. No matter how many shows Netflix can create, this won’t stop HBO creating good content that people want.
Netflix could certainly sure up the quantity of content though with deep pockets. Eg there’s no reason why they couldn’t get an exclusivity deal on online distribution of Friends or Seinfeld.
I see a world where Netflix might win the war but they’ll have allies, for their low cost there’s no reason why people couldnt have a few streaming services for all their favourite content, as well as direct deals with their favourite sports.
I was carried myself away a little bit in the earlier comments. the point I wanted to make is not really all about the exclusive content. Of cause, it helps, but not necessary means Netflix is in a winner takes all market.
One of the distinct difference between content provided by user to user and platform to user is the difficult to switch. Netflix does not has the stickiness to prevent user from switching.
No doubt that with a deep pocket, Netflix has the ability to produce exclusive content. However it is not necessarily mean it will prevent user from switching to other providers. For example, Google was once push very hard for their Facebook equivalent Google Plus. Google has one of the deepest pockets in the world. Also, they have access to millions of YouTube and Gmail users. For them to activate Google Plus is literally one click away. Also, at one point, Google even force Youtube user to activate Google Plus before they can continue to comment in Youtube. However Google Plus still fail and was shout downed at the end.
Why? Because the nature of Facebook creates the stickiness that prevents user to switch. It is hard to convince millions of user to switch to Google Plus and to recreate their online portfolio and to reconnect with Facebook friends.
On the other hand, if my friend or family switch to Hulu Plus or any other on demand services. It will be in no way affect my experience or theirs in streaming videos. Because all the content is provided and generated by the platform not users in the platform.
Furthermore, traditional cable company has the rights to some high quality original content already. If you want to watch Game of Thrones, you need to have HBO Go. They can also make a push into on demand services.
If someone give you the money that equals the market cap of Facebook, you can’t create another Facebook. However, with the market cap of Netflix you may create another Netflix, thought it won’t be easy.
I think Netflix will comfortably be an leader in one segment of the on demand market once the market and company mature. However, I am bit skeptical that it will “takes all” like Facebook to social media.
I am really keen on this topic as I am trying value the company. Would you think that whether Netflix can “take it all” be significant factor on the growth rate used to determine its terminal value?
Agreed, Kevin, this is a few-take-most industry at the least. Although I wouldn’t think of on-demand as the genius of Netflix. Or if it is genius, it’s an elegant, simple kind (the best, I suppose). Reality is that on-demand was always a better model – we’ve known that since at least Betamax/VHS arrived in the 1970s. It’s just that all the incumbents were wedded to the advertising revenue model, which works better with broadcasting that on demand. So it was always going to take outsiders to bust that open – enter Netflix, Amazon, Google Play etc. Interesting that Sky started offering a proper on-demand service in the UK recently – they’ve realised it’s better to cannibalise yourself than have someone else do it. That’s an all-too-infrequent conclusion for the incumbent to arrive at.
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