As part of a new series in which Future-tech investigates the secret behind some of the world’s largest technology and service providers, we start with US video streaming juggernaut, Netflix. If video did indeed kill the radio star then Netflix could be responsible for not killing but certainly hurting traditional television.
A poster-child for the digital age, Netflix is adored by investors, technology companies and its 137 million subscribers and counting in 190 countries.
A household name for many, the service has become synonymous with boxset binge-watching and the phrase to “Netflix and chill” a popular euphemism for more than simply watching TV.
While Netflix has achieved the holy grail of seamless connectivity between devices, start watching an episode on your TV and finish it on your smartphone, this comes at a price; a data price.
Netflix is now officially the world’s most data-hungry application, consuming 15% of the global net traffic, according to research from bandwidth management company Sandvine.
So how did a humble DVD rental shop in the United States grow into a $11.7 billion-dollar company in the last 10 years?
There are multiple answers but one is content, and lots of it. This year alone Netflix is estimated to be spending $12 billion to $13 billion on films and shows.
To put that into perspective, it’s biggest competitor Amazon Studios is estimated to spend $4 billion. While Warner Bros and Disney are expected to release 23 and 10 films, respectively, Netflix dwarfs this with 82 releases.
A second answer is price. For between £5.99 for the basic plan, up to £9.99 for the premium, a monthly ticket to watch the entire Netflix library is often cheaper than a single cinema ticket. And there’s no need to travel, viewers can access thousands of hours of content on the comfort of their own sofa.
Another reason is the early adoption of Big Data. Think it’s a coincidence that content you’re interested in often populates your account homescreen? Think again. Multiple analytics are used to interpret what and where you are watching and for how long. Recommendations are then provided, designed to feed consumers morsels of broad and rich content to keep them coming back, along with their monthly subscriptions.
This ties in what is being termed Netflixonomics, the science behind getting people to subscribe to the video streaming channel.
“One of the greatest attractions for viewers flocking to Netflix is the exclusive high-quality engaging content,” says Swetha Krishnamoorthi, senior research analyst, digital transformation at Frost & Sullivan. “For years, the key success factor for over-the-top (OTT) services was to achieve scalability in terms of subscribers to cover the content license and distribution cost.”
After transforming the DVD-by-mail market, Netflix launched its online video streaming service in 2007: a move that would change the company’s future and to fully optimise data.
On average, it’s estimated that subscribers scroll through between 40 and 50 different films or shows on their personalised home screen before deciding what to watch. Netflix reportedly has the ability to algorithmically tweak the poster art depending on the individual to make it more appealing depending on their tastes and previous activity. It’s using the Big in Big Data, not throwing it around wildly as another buzzword.
Netflix cloud migration
Another key pay of the Netflix success story is reliability. Rarely does the video streaming service go down, nor are films unavailable. With over 140 million hours of content streamed everyday through the service, it raises the question of where and how is the content stored?
Although Netflix had its own datacentres in the early days, this soon changed. Following a “database corruption” in August 2008, in which the company could not ship DVDs to its members, it decided to migrate all its assets over to Amazon Web Services (AWS) as its cloud provider.
“Supporting such rapid growth would have been extremely difficult out of our own data centers; we simply could not have racked the servers fast enough,” said Netflix in 2016 after completing its cloud migration and shutting the remaining data centre operations.
Justifying the move, the company added: “It took time and effort to transform Netflix into a cloud-native company, but it put us in a much better position to continue to grow and become a global TV network.”
With such meteoric growth, it seems the video streaming service is so far ahead of the pack but could the Netflix bubble eventually burst?
“As the subscriber base saturates in its core markets such as Americas and Europe, maintaining global growth will be Netflix’s biggest challenge,” says Krishnamoorthi. “As the company bets high on content, matching diminishing revenue from saturating subscriber base with escalating content costs will be a struggle.”
She adds that by becoming so big Netflix could be biting the multiple hands that keep its monstrous content appetite fed.
“Today, Netflix is not just competing with other OTT services such as Amazon, Hulu or other regional services, but with the entire content distribution ecosystem including broadcasters, media houses, Pay TV services and so on,” she adds. “This means broadcaster and media houses, who were thriving partners once, now view them as a potential threat to their own OTT service. The recent case of Disney pulling out its content from Netflix attests to this.”
Burning and churning
A recent analysis from The Economist reported that the market values Netflix at $170 billion, more than Disney. However, such valuations are being viewed as “outlandish” for a company $8.5 billion in debt and yet to make profit.
Furthermore, the report said another potential challenge is the easy-sign-up subscription model is also easy to cancel. Although it’s not made public by Netflix, research firm MoffettNathanson estimates the company’s “churn rate” to be in the region of 3.5% per month. This is higher than traditional pay-TV, which is around 2%.
Despite the expected road bumps, by 2026 estimates suggest Netflix could have 300 million subscribers, with an enterprise value of at least $300 billion.
There is no doubting the impact Netflix is having on traditional media channels. Next year Disney plans to launch a rival streaming channel in the US, with a live-action Star Wars series in the pipeline.
Addressing the question of “How big is Netflix?’ the answer is quite simply, gargantuan. Whether it will completely kill traditional satellite television as we know it is another question, but it’s certainly becoming one of the world’s most powerful brands.
– Keep an eye out for the next in the Future-tech ‘How big is’ series, which will focus on Chinese multi-purpose messaging, social media and mobile payment app, WeChat.