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Does Netflix need to diversify?

Netflix is hardly in hot water. It is clearly the flagship streaming service provider in the wider world and the marquee name within the film and television industry. Churn rates in markets such as The US and UK remain close to 4% while most other rivals are closer to 40%. As the price rises inevitably come, popularity has not waned and this seems set to continue for the near future at least. Nothing to see here.

However, such is life, success like this brings a new set of problems. Shareholders require continued growth and this is far easier said than done. The low hanging fruit of English speaking, highly developed markets has been well and truly gobbled up and penetrating other territories in a meaningful way is less than straightforward.

Also, Netflix’s competitive advantages are, let’s say, a little less obvious than they once were. They do the technology very well, but it is no longer a point of difference from its competitors who run the same model of delivery. The pipeline of shows it once garnered from other providers has run dry as studios now look to go it alone armed with this aforementioned and easily available method of delivery. This means Netflix needs to produce more of its own stuff, and despite the hyperbole around their data-led approach, there is little to no evidence that their commissioning process is particularly good. We hear about the hits, we don’t hear about the flops – the latter vastly outnumbers the former. Personally, I was always somewhat surprised that Netflix did not make a play to acquire HBO, who might have been able to put that money to better use. They certainly have the track record to suggest this may be the case.

But perhaps the most abrupt thing to note about Netflix, is its reliance on one industry while its rivals have become masters of diversification. The trend in TV has become very much about safety in services; triple play (TV, phone and internet) has been the major strategy of big networks over the last 20 years. When Netflix take a quick glance over their shoulder, they will see strong competitors who regard streaming as a cog in a bigger wheel. Amazon, Apple, BT Sport et al have bigger fish to fry (and more fish to sell) – including the infrastructure and devices Netflix will be consumed on. While Netflix remains strong, external forces gather and encircle with increasing menace. The name of the game here is not to get swallowed up. There are 3 strategies to choose for Netflix here. 1. Continue as you are and enjoy the dominance you have (for now), 2. Participate in lobbying government for the break-up of the tech giants (something that seems more and more plausible), 3. Diversify and become relevant in multiple markets. 3 is the proactive option here.

Re-inventing yourself while you’re on top seems preferable. In fact, it’s the only time to do it. While its competitors have diversified into streaming, Netflix will diversify from it, so there is no successful model to follow here. The good news (apart from its dominant position and obvious success thus far) is it has some highly valuable assets that allow for transition into other industries in a way that others will find hard to replicate.

Food and drink delivery

This is not the most inspirational of diversifications. Eating food in front of the TV (or ‘zombie eating’) is generally considered bad practice, particularly in an increasingly health-conscious world. The jump from TV to food may also seem a little strange, but Netflix has some major advantages here.

The first and biggest is the amount of time spent on The Netflix interface. Users spend a lot of time (estimated to be as much as 33%) on the UI rather than actually watching something. This familiarity of interaction might be an effective launchpad from where to place food and drink orders for those inclined to do so. This is particularly relevant for those settling down for an evening with a box set, or film, and may add a layer of convenience to an audience looking to stay in. Typing on a TV set is generally annoying (this is why statistically most people sign up to Netflix via a laptop or device external to the TV itself), but with a menu already laid out, this will only require scrolling and selecting. Netflix already holds customers card details and information which helps with synergy.

Delivery companies have become rife in the last few years so there is a choice when choosing which delivery company(s) to acquire. It is then just about integrating the menu as an option within The Netflix UI.

Linear/Traditional TV

This may seem regressive as the success of Netflix has been predicated on its move away from traditional TV. However, this may allow it to monetise its offering in new, often hard to reach territories.

If we take Eastern Europe for example, Netflix is often nowhere near as popular as it is in Western territories. The language is a major factor (although subbing and dubbing is common) but perhaps more significant, is the pricing. You can buy a full pay TV subscription in many of these countries for less than a Netflix subscription. This is a problem.

If Netflix were to package their content into a Netflix ‘linear’ channel they could monetise their library further in some of these territories. This means the Operator who packages channels in to a pay TV offering would pay Netflix for carrying the channel on their service. This would also allow the brand to monetise the content in that country and get greater exposure in territories where they are lesser-known.

Internet of things

There is a case to be made for ‘jumping out of the frying pan and into the fire’ with this one as this space is set to be hellishly competitive. But again, Netflix holds some interesting cards.

When Comcast bought Sky in 2018, critics were doubtful. Football rights, for instance, continue to be an oversized portion of the Sky portfolio and leave it a little vulnerable to things like a European Super League or loss of rights down the line. However, the value that Comcast saw was Sky’s presence in hundreds of millions of households across Europe paying on a subscription basis. This means they could acquire rich data on customer habits and use it as a foothold to ‘acquire the living room’; meaning that when devices become increasingly connected and controlled by IOT, Comcast will be in a prime position to lead by building on, and expanding from the Sky box.

Needless to say, Netflix has a gigantic presence in living rooms across North America, Europe and other parts of the world. The real estate of the TV UI is potentially a focal point from where IOT can be controlled and set up. Again, IOT technology companies are rife so there is perhaps an acquisition for Netflix to make here, using the presence of their TV interface within so many households as the Launchpad.

Cinemas

It’s no secret that many cinema chains have been in decline long before Covid hit. The larger cinemas particularly have had a hard time justifying the square footage they need to fill on a daily basis. This is now further complicated by the hangover from the pandemic and films being released straight to (often via Netflix) television.

There are certain chains of cinema that are doing well, namely the smaller independent types that create an experience around the film by providing a nice place to eat, drink and socialise. There is also a trend for people to watch old or themed movies and series at the cinema and this is something Netflix can cater for particularly well.

With the content pipe Netflix has running through it, it is primed to open up cinema experiences for films and box sets across movie genres and enable new revenue streams for the content it is already producing. This gives Netflix physical assets on the high street with the potential to expand if this was to prove successful. It would also play into the idea of Netflix ‘catering for all your evening’s needs’ that may play with some of the other suggestions mentioned here.

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