Yesterday I wrote about Netflix and its increasingly plausible plan to take over the TV business.
You can read the full article here. But here’s the gist:
Netflix started out as a kooky DVDs-by-post business for film enthusiasts. But starting in 2007, it made a series of big, bold bets in new technologies and new business models. Its latest plan is to become the biggest sort-of television network on the planet.
Coming up: how it plans to become the biggest sort-of television network on the planet.
Total world domination, nothing less
Netflix started to butt heads with the TV industry around 2010. At that time Netflix had a pretty big subscriber base and a slick system for streaming video online. But it was relying on the TV industry for all its content.
As long as Netflix didn’t have any content of its own, the TV companies held all the cards. It was clear that eventually, they’d build their own streaming services and put Netflix out of business.
So Netflix “bet the farm” on original content. It bet it could produce great TV and films faster than the TV networks could build a Netflix-like online video service. As its CEO said in 2013, it needed to “become HBO [an American TV network] faster than HBO can become us”.
The Amazon of entertainment
That takes us up to the present day. The big bet on original programming looks like it’s coming off. Netflix has had a string of hit shows like House of Cards and Making a Murderer. More importantly, subscriber numbers keep on going up.
The most interesting thing about this whole story is Netflix’s investment plan for the next couple of years. It’s sticking with its bet the farm strategy, ploughing huge amounts of money into new content. It’s going to spend $5bn on content this year – more than HBO, Amazon, Hulu and Showtime combined.
Netflix is smart to invest every penny it has in new content. Once it pays the up-front cost of producing a TV show, it costs nothing to distribute it the show to all Netflix subscribers. And it’ll be there forever, making Netflix better for subscribers.
Another point: Netflix doesn’t need “hit” shows the way TV networks do. The TV networks’ business model is based on advertising, so they’re looking for shows that reach the biggest possible audience. That’s why a lot of American TV is broad, lowest-common-denominator stuff. If a TV show can’t find an audience big enough to sell ads on, it’s not economical to make.
Netflix’s incentives are very different. It’s a subscription model. So it’s looking to make shows its subscribers love. It doesn’t matter if a show isn’t a smash hit, as long as it has devoted fans (who’re willing to pay the subscription fee to watch it).
That’s Netflix’s strategy: build up a library of must-watch TV, re-invest all the subscriber fees into even more must-watch TV, which brings in more subscribers, and on and on. It’s a bit like Amazon’s plan to take over the retail industry by investing every penny back into a faster, better service.
I feel like I should emphasise at this point that this is an insanely ambitious plan.
To pull it off, Netflix will have to sign up hundreds of millions of subscribers worldwide (it currently has about 75 million). To sign up hundreds of millions of subscribers worldwide, it’ll have to become the biggest de-facto TV network on the planet.
The TV networks can see what Netflix is up to. And they’re getting worried. Netflix keeps outbidding big companies like Sky and Canal Plus for the rights to prized new shows. So now they’re planning to join forces in order to fight Netflix off. And HBO, a big American network, finally launched an online streaming platform last year.
I said yesterday that Netflix is trading at 144 times earnings. It’s a bit like Amazon – making no money now, instead investing everything in a bold plan to take over the world. At 144 times earnings, investors clearly believe the company can pull it off.
Here’s how Michael Pachter, a stock analyst, described Netflix’s plan for global domination in The New York Times: “For Netflix to win, everyone else has to lose.”