Analysts are wrong to be nixing Netflix

We are only just over half-way through a five round fight for the global SVOD market

Round 1 of the SVOD fight saw Netflix establish a new challenger business model to that of expensive established pay TV in the USA as it moved from the postal delivery DVD service that brought Blockbuster to its knees, to a premium streaming service with plenty of exciting original content.

Round 2 saw the successful global roll out of Netflix in terms of both customer focus and content mix pursued only by Amazon’s tangential move into SVoD through its bundled Prime subscription service across the world, and two US focused rivals - the collective home market hybrid SVoD/AVoD service, Hulu, and CBS All Access.

Round 3 has seen all the US major studios finally responding to the SVoD challenge by going all-in on a subscriber growth focused SVoD centred strategy – developing their own platforms and redirecting content they had licensed to Netflix and Amazon to their own services. No surprise then that the launch of five owned and operated services – Disney+, Paramount+, Peacock, HBO Max, StarzPlay- a major move into sports by Amazon, and the development of Apple+, may have pegged back Netflix in its more mature markets.

But O&O’s own consumer research and business modelling suggests there is every reason to believe Netflix will re-establish itself as a revenue growth based global leader in Round 4 and beyond as long it fully utilizes all the levers at its disposal and pivots fast. There is every sign that is exactly what they are doing.

Round 4 is likely to go Netflix’s way

We are already seeing signs of a Round 4 rethink by some of the Hollywood majors, with the newly formed Warner.Discovery returning to a more nuanced content windowing and licensing approach where owned and operated SVoD will still have an important role but will cease to be the sole focus of growth and value enhancement.

The likely easing of competitive pressures as the race for subscribers at all costs abates, is however, only one part of a more optimistic view of Netflix’s fortunes. In a number of important areas O&O research suggests Netflix has the tools to pivot towards a revenue growth story powered by a combination of (1) a cheaper “with ads” option, (2) more premium pricing on levels of password sharing, and (3) gradual headline price increases. O&O detailed consumer research suggests that all three strategies can lead to revenue enhancements in the core USA and UK markets despite the economic headwinds faced by the whole industry.

At the heart of this pivot potential is Netflix’s very strong brand image and consumer preference ranking among the majority of SVoD homes in its core markets, which means even if they do lose some of their least loyal and most economically challenged customers to rivals with some headline subscriber falls their loyal base can power them to strong revenue growth numbers consistent with their continued content spending ambitions.

Why is Netflix so well placed? And how might it increase revenue?

The consumer research O&O conducted in the USA and UK clearly shows that Netflix is:

1. The top ranked SVoD service by the most subscribers to two or more SVoD services

2. The least vulnerable to the consumer spending squeeze

3. Less vulnerable to being dropped than rivals if other services increase their prices

Much of this strong position is due to their sustained original content spend over the last decade with many Netflix subscribers linking their loyalty to key strands in the Netflix portfolio, and the expectation that great new strands will keep on coming.

In terms of the levers that Netflix can pull to enhance revenue, O&O survey evidence suggests all of them would be revenue positive. More specifically:

1. Further price increases would enhance revenue, with extra revenue from those that remain more than offsetting lost subscribers

2. Increasing the premium for password sharing would also enhance revenue. 40 per cent of current bill payers would be willing to meet the higher charge to keep the extra access, and a further 40 per cent would be willing to accept less access for the current fee. Plus 15 per cent of non bill paying password sharers would be willing to chip in for the extra cost to ensure the bill payer didn’t drop the service, while a further 20 per cent would try to persuade the bill payer to meet the extra charge in their behalf.

3. Introducing a lower fee “with ads service” would generate a 15 per cent increase in total subscribers which would more than match the revenue effect of any spin down among the current subscriber base. Added ad revenues would then further improve the revenue enhancing impact of this strategy. Netflix could gain over $1 billion of annual revenue in the USA and over £100m in the UK.

4. In the US market in particular it might be even more beneficial to introduce ads at the current tier price levels and ask for a price premium to keep the service ads free

Round 5 is likely to be the most complex yet

If Netflix does pull all these revenue enhancing levers in the next 12 months it will leave rivals needing to reassess their own pricing and overall offer in Round 5, many returning to more nuanced strategies that might include relicensing content to Netflix alongside their own services and introducing their own ad supported and super premium tiers. Disney has already pre-emptively moved to introduce ads to its current relatively low price offering while asking those who want to avoid the ads to pay more.

Some responses may have to go beyond pricing and positioning towards multi service bundling alliances or even full-scale mergers. Much will depend on the overlaps between subscribers, their preference ranking for the different services, the substitutability versus complementarity of the services and the overall propensity of households to spend on entertainment. Content strategies may have to shift, premium prices to the highest spending consumers may need to rise to increase share of wallet and squeeze rivals, while lower ad supported tiers pick up those consumers priced out of premium by a price rise war.

And, of course, once rivals make their moves, Netflix may have to think and move again – but always from a position of strength and leadership.

All SVOD players will need to deploy leading edge consumer research and advanced game theory thinking to get their strategies right

All Round 5 moves by all players will need to be supported by the same careful assessment of likely consumer and competitor responses O&O has deployed for subscription entertainment and sports providers over the last decade. State of the art consumer preference measurement and multi-player game theory will BOTH be needed to develop the optimal strategy and positioning for all the leading SVoD players. And optimal strategies may differ by national market. O&O has deployed these same techniques in the sports, tripleplay and audio streaming markets across many territories in the last few years.

This consumer research and business modelling relates to the US and UK SVOD markets and was carried out and funded by O&O; all views are O&O’s own. The article is the first in a series looking at different SVOD services.