How Netflix is changing the Entertainment Industry

Stranger Things, Orange is the New Black, and Narcos. Sounds familiar? Chances are that either you or your friends have a Netflix account. These series are all Netflix Originals and pretty successful. Where a couple of years ago almost nobody knew what Netflix was, it is now an essential part of our home entertainment platforms. However, more and more top series and films disappear to make space for the Netflix Originals. Just recently, the online streaming service announced to increase its monthly subscription fee in order to create more of its own original content. How does this affect the way we watch our favourite films and series and how does this change Netflix’ business strategy?

 

Shift in Trends

Back in the day people would buy or rent a DVD, or go to the cinema when they wanted to see a film. However, the big trend of online streaming changed this drastically. Now, it is much easier to stream a film rather than going to a film rental. Children don’t even know any better than having on-demand access to hundreds of films and series on their iPads. Because of this trend, it is becoming more difficult to lure people to the cinemas to spend their money and time there. Only the big event-films and tent-pole-films are visited frequently.

Children don’t even know any better than having on-demand access to hundreds of films and series on their iPads

The blockbusters do not only create the biggest revenue, they also strengthen the firm’s brand, keep its employees focused, and enlarge the path for future successes. Even though these films create the biggest revenue for film studios, these studios can’t survive on blockbusters only.

 

The Need for Smaller Productions

The answer to why big studios invest in blockbusters is clear. They may be expensive, but they cause the biggest income. Smaller productions, however, are most of the time not really profitable. To give an example, where the Warner Bros.’ top 5% of its big bets yield 28% of its total income, the bottom 25% of small productions do not even yield 5% of Warner Bros.’ total income (Elberse, 2013). Why do studios not only invest in blockbusters then? The reason is that the smaller productions cause a lot of benefits for the firms as well. These productions can function as a test case to see whether a certain actor or director would have what it takes to carry the weight of a bigger film; It keeps the studio’s customers, such as cinemas, happy. Since studios that keep producing, are more reliable to fill the cinemas with new films; It is a great way to allocate fixed costs, like the production and distribution costs; Lastly, sometimes these productions turn out to be a big success as well. An example is The Hangover. Its production costs were 35 million US dollar but got an income of 470 million US dollar (Elberse, 2013). This enabled Warner Bros. to make a successful tent-pole sequel.

However, because of the reduced number of visitors at cinemas, these smaller films have a hard time reaching their audience. Streaming services put a lot of pressure on DVD sales, pay-per-view buys and pay-tv licensing rights fees, leading to a decreasing potential revenue. With Netflix being the biggest player in terms of online entertainment platforms, a lot of studios decided to make its content available on the site.

 

Netflix’ Strategy

Netflix became so successful, because of its first-mover advantage. The firm was one of the first and became one of the biggest streaming websites. A lot of studios gave Netflix the rights to broadcast their films because Netflix was the easiest way to reach a big audience. Despite Netflix’ success formula, its CEO Reed Hastings already figured out that big TV and film studios would pull their content sooner or later and create their own distribution channels. And Hastings was right. The well-known film studio Disney is withdrawing all its content on Netflix and announced to start its own streaming platform, whereas Fox also pulls out its content and making it available via Hulu.

Despite Netflix’ success formula, its CEO Reed Hastings already figured out that big TV and film studios would pull their content sooner or later and create their own distribution channel

These studios figured out that they could make more money when they would distribute their productions on their own rather than let Netflix do it. Hastings knew this shift would happen and that he had to do something in order to keep and attract customers. That is why he transformed Netflix into a content creator, causing Netflix to be more studio like. However, in order to make more and more original content, Hastings decided to increase the monthly subscription fee. With series like Stranger Things, Orange is the New Black and many more, he keeps his audience entertained and willing to pay for their subscription. Though, will this strategy cause the content-streaming industry to look like an old-school TV model again?

 

Change in Entertainment Industry

With Netflix not being the blockbuster replacement any longer, and big content makers shifting away from the site starting its own streaming service, it looks like there is a big change happening in the entertainment industry as we know it today. The industry changes into one where there are multiple channels to subscribe to, which all make their own content. Instead of paying your monthly cable-TV bill, you now will pay your monthly subscription to all the streaming sites you wish to pay for. So, it will look more and more like an old-school TV model where you can shift between channels and see the programmes that you like, with the only big difference of having all the series and film on-demand. Even internet providers, like the Dutch KPN, already offer Netflix with its internet-plans. With the rise of multiple streaming platforms, we could assume that internet providers will offer multiple streaming channels like Netflix and Disney together with its internet subscriptions. Just like the way people can choose which TV channels they would like to have in their TV package.

It will look more and more like an old-school TV model where you can shift between channels and see the programmes that you like, with the only big difference of having all the series and film on-demand

Though,which new ‘’channels’’ will arise, is the question. While Apple and Amazon are trying to build up their own studios, trying to replicate Netflix’ success, with the big amount of money it has, both the companies discovered that this is easier said than done. Without at least one commercial hit, it is hard to put itself on the map. Firms like HBOalready have a bigger chance to survive, because of previous successes like Game of Thrones, and are therefore most likely to gain bigger success than for example Amazon Studios for now. While Disney has a big brand name already, the firm is expected to become successful with its own streaming platform and will maybe become a big competitor of Netflix.

 

To conclude, Netflix changed the way we watch our series and movies. It caused a decrease in cinema visitors for smaller productions and directly put pressure on these films’ DVD sales, pay-per-view buys and pay-tv licensing rights fees, causing studios to shift their films to the biggest streaming platform: Netflix. Bigger studios noticed Netflix’ success and started to create their own streaming platforms to generate more revenue for own productions. While Netflix started out as a distributor of big hit series and blockbusters, it changed its strategy towards making own content and is slowly shifting to becoming an own studio. These changes cause the entertainment industry to start to look like TV again, where people can decide for themselves which channels they would like to see. With the biggest difference that all the content is on-demand. Netflix changed Hollywood for good, but how it will change the rest of the world is something only time can tell.

 

Joyce van der Voet 

27-11-2017

 

Bibliography

Elberse, A. (2013). Blockbusters. Why Big Hits – and Big Risks – are the Future of the Entertainment Business . Amsterdam: Luitingh-Sijthoff B.V.

Gerber, R. (2017, November 02). Apple And Amazon Fight Losing Battle With Netflix As Movie Industry Falters. Retrieved from Forbes: https://www.forbes.com/sites/greatspeculations/2017/11/02/apple-and-amazon-fight-losing-battle-with-netflix-as-movie-industry-falters/2/#c1e01ba160d4

Gilchrist, D., & Luca, M. (2017, August 31). How Netflix’s Content Strategy Is Reshaping Movie Culture. Retrieved from Harvard Business Review: https://hbr.org/2017/08/how-netflixs-content-strategy-is-reshaping-movie-culture

Trainer, D. (2017, October 17). Box Office: How Netflix And HBO Are Killing The Oscars. Retrieved from Forbes: https://www.forbes.com/sites/scottmendelson/2017/10/17/box-office-how-netflix-and-hbo-are-killing-oscar-season/#4f8e3fc220d1