Why Netflix Will Falter
Consumers struggle with a proliferation of TV streaming platforms, but a simpler landscape is coming—and not just in video
How many streaming TV platforms do I really need?
I only watch about one hour of television or film per day. Generally my wife and I sit down after dinner, and check out either a single episode of a TV show, or watch a movie—but we rarely tackle an entire movie in a single dose, typically starting it one evening and finishing the next.
I’m not a binge watcher. I’ve never been much of a TV viewer. I didn’t even own a television until my mid-30s. For many years, I only noticed what was on television when I was traveling and turned on the set in a hotel room. Getting married and raising children changed that—even I acquired a boob tube, as they once called it (still a good name even if there are no more tubes in today’s TVs)—but I get restless if I spend too much time staring into that flickering screen.
My wife Tara has a similar attitude. When I met her, she was working as a dancer and choreographer in New York, and had a marked preference for live performances when we went out on dates. I suspect she viewed my interest in Hollywood movies as a symptom of the West Coast decadence I’d imbibed growing up in LA. But she has also made her peace with screen entertainment—although, like me, only in small doses.
So I’m surprised at how many TV subscriptions we now have.
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I started out with a Netflix account—but the offerings on that platform got narrower over time. So a few years ago, I added Amazon Prime, which expanded my range of choices. Then finally I signed up with Apple Plus. I’ve held the line at three subscriptions, but when you add in my two music streaming platforms and my Kanopy account, the number is actually six.
Despite all those options, I still look on in envy at the HBO offerings I can’t access. I’m less attracted to Disney’s fare—I’m not much of a fan of superheroes and animated features—but even I wanted to see the recent Beatles retrospective. After a prolonged inner struggle, I resisted the urge to send any more cash to the Magic Kingdom. And I don’t even think about Paramount Plus or Showtime or Hulu. . . except when something interesting appears in their line-ups, and I ask myself whether I’m missing out.
But I have a hunch that my choices will eventually get simpler. And that opinion isn’t based on any current developments—in fact, all the evidence right now is that more platforms will appear, making the competitive landscape still more cluttered. In the short or medium term, I may even sign up for more platforms. But the long term trend will, I believe, show a surprising reversal.
“The next phase will see various companies in film, TV, music, and video starting to cooperate, sharing their catalogs and perhaps even their platforms.”
I base this prediction on my study of similar situations in the past. The track record here is clear and unambiguous. Open, shared systems always beat out closed proprietary systems. And when too many competitors launch stand-alone platforms, they merely accelerate the eventual consolidation.
Let me give you some examples.
CREDIT CARDS: The first Visa credit card was issued by Bank of America in 1958. But—here’s the key point—it wasn’t called a Visa card back then. It was marketed as BankAmericard, and it was only available to Bank of America customers. The card was a huge success, and in the next few years more than 400 other banks issued their own credit cards—none of them, however, capable of competing with BankAmericard. That changed in the late 1960s when hundreds of smaller banks joined forces to launch MasterCard. Bank of America was forced to open up its proprietary product and license it to other banks under the new Visa name. This case study suggests that a closed system run by a single company, no matter how powerful, can’t compete with a shared open platform allowing hundreds of smaller players to participate. But there are more examples. . .
AUTOMATED TELLER MACHINES: The same thing happened a few years later with the launch of the first bank Automated Teller Machines (ATMs). Once again, Bank of America (and a few other large banks) believed they had a huge advantage with their branch networks—so they installed ATMs at each of their bank locations and refused to share their machines with competitors. They assumed this would lead to market dominance. But once again, the smaller banks joined forces, and started sharing their networks over the STAR system (now with 5,700 participating institutions) and other similar open platforms. Even the large banks had to open up their proprietary networks in order to remain competitive. Once again open platforms had defeated the most powerful closed networks.
COMPUTER OPERATING SYSTEMS: A similar evolution took place during that same period with personal computer operating systems. Apple had the best operating system—and still does, in my opinion. But Steve Jobs didn’t want to license it to competitors. This provided a billion dollar opportunity for Bill Gates. He became the richest person in the world by making the Microsoft operating system available to all and sundry. The power of an open approach was made especially clear in this instance—because the Microsoft offering was clearly inferior to Apple’s operating system, yet still attained more than 90% market share. Its only advantage was Gates’s willingness to wheel and deal, and make it widely available. Once again, an open system defeated a powerful proprietary competitor.
VIDEO RECORDING DEVICES: For another example, look at the competition between Betamax and VHS in video cassette players. Sony launched Betamax in 1975, and other companies introduced their own proprietary systems in response. But JVC eventually won the format wars by making the VHS technology widely available as an open standard shared among competitors. Here, too, Sony had an initial advantage in video quality and name recognition, but the company’s very strengths made its competitors all the more willing to cooperate. The open system absolutely destroyed the dominant closed system.
OTHER EXAMPLES: This same power of open, shared systems explains why competing airlines share frequent flyer programs with their ‘partners’. It explains why the compact disc, invented by Philips and Sony, was made available to all record labels. It explains why independent hardware store owners combined in a cooperative arrangement called Ace Hardware. It explains why my Hewlett-Packard printer works with both my Apple and Windows computers. It explains why the Internet, email and texting move seamlessly across competing hardware technologies (something many of us take for granted, but is really quite an extraordinary development). In each of these instances, competitors have been forced to open up their networks and platforms—not out of love or kindness, but merely to survive and prosper.
I could give you more examples, but you get the idea. Netflix is the Betamax of today. It has pursued the wrong strategy, and doubled down at every opportunity. The company has spent billions of dollars on proprietary films and TV shows in order to create a position of market dominance with a totally closed system. But that was only phase one. We are already in phase two, with Disney, Paramount, and others removing their offerings from the Netflix platform, and trying to create their own powerful fiefdoms.
This is like 1965 all over again, with every bank deciding to build its own credit card brand. The very zeal with which Netflix has worked to bypass Hollywood studios has energized these companies, and they are now determined to fight to the last breath in order in order to prevent Netflix from establishing a dominant proprietary network.
“Netflix is the Betamax of today. It has pursued the wrong strategy, and doubled down at every opportunity.”
The next phase will see various companies in film, TV, and video starting to cooperate, sharing their catalogs and perhaps even their platforms. Other platforms in comparable businesses—podcasts, music, sports, video games, streaming concerts, etc.—will inevitably participate as well.
This cooperation might happen via actual mergers, or simply via licensing arrangements, or perhaps lead to the launch of new standalone companies with shared ownership. There are hundreds of possible participants out there with valuable film, TV, or other intellectual properties, and they aren’t large enough to take on Netflix on their own. But if they combine their efforts, they will be formidable—especially if they simultaneously remove their offerings from the huge platforms currently dominating the competitive landscape.
Can you imagine the power of a single monthly subscription that gave you immediate access to films, TV shows, music, video games, streamed live events, etc.? Do you think Netflix can match that with its proprietary approach? The company will be forced to open up its own system, or face inevitable decline, perhaps even obsolescence.
I know many people view Netflix as invincible. Its market capitalization is around $250 billion—and revenues have grown a hundredfold since I signed on as a customer. But financial analysts underestimate the risks Netflix took on when it decided to be self-sufficient, creating its own library of movies and TV shows. This huge and ongoing cash drain is a weakness, not a strength.
The key number here is cash flow. Even as Netflix has grown its revenues at an amazing pace, the company has proven incapable of generating much cash. To build its proprietary position, the company has taken on more than $15 billion in debt, meanwhile accelerating the pace of spending even as it grew more indebted.
That’s why Netflix is raising subscription rates. The folks running that huge business understand how much they need cash, and how fast they are burning through your subscription payments.
But the metrics are still ugly. Netflix’s market share has been declining steadily, and has now fallen below 50%. One estimate claims that the company’s share of consumers fell more than 30% in a single year. Netflix’s recent quarterly report was a disaster, spurring a share sell-off. You could easily conclude that “Netflix’s long awaited funeral is finally here”—as Bloomberg hinted in its blunt assessment of the results.
And then there’s a whole different question of whether the amortization practices that create reported earnings are reasonable—but I will spare you the nitty gritty forensic accounting. I’ll leave that to the Wall Street analysts.
Here’s the bottom line: Netflix might be one of the largest companies in the world, but it’s far more vulnerable than it looks at first glance. And it doesn’t have the brand franchises it can milk like Disney—which can churn out Marvel and Stars Wars movies with reasonable assurances of market success.
What’s the biggest franchise at Netflix? The fact that you don’t have an answer ready on the tip of your tongue is revealing. It takes a lot of Tiger Kings, Queens Gambits, and Squid Games to match up against the Marvel and Star Wars universes. Netflix’s recent move to acquire the Roald Dahl catalog (Charlie and the Chocolate Factory, Matilda, etc.) tells you that they grasp the seriousness of this vulnerability. But they are decades behind Disney in this regard.
Right now, Netflix still has money to burn—and burn is the right verb. They are fortunate that their competitors are still operating as lone gunslingers—also aiming to establish single-owner proprietary systems. But that will change when we get to the third phase of industry evolution, with consolidation and cooperation creating the real winners of the platform wars.
The ultimate victor might be Amazon Prime, which seems to have more a cooperative arrangement with Hollywood players. Or it may be some new entity, like MasterCard or the STAR system or VHS in the old days—with a bland name that makes it easy for participants to enter the network without feeling like a competitor is swallowing them up.
And, as hinted above, these sharing networks will include more than just new TV series and movies. You might find live concerts, streaming of video game competitions, podcasts, sports, songs, comedy, and all sorts of other forms of entertainment packaged together in a giant-killer platform. (The killed giant I’m envisioning here is Netflix, but don’t think for one moment that Spotify isn’t vulnerable too.)
Just consider the alternatives. If you want to compete with Netflix, you can either (1) try to find ten billion dollars plus to spend on proprietary movies and TV series, or (2) sit down with your competitors and work out a way to cooperate. I know that Disney and Paramount have opted for option number one. But don’t expect others to do the same. The field is already too crowded.
I can’t predict the time frame of this evolution, but I am confident I can see the endpoint. Netflix’s proprietary approach— based on sole control of intellectual property and intense hostility to all other players—is destined for long term failure. And it might not even be all that long before we see the first cracks in the empire.
Thanks for the perspective. Sounds right.
Good read. Thanks!