Netflix: Too Big to Fail or Too Big to Succeed?

In July 2019, Netflix had a major shock to the system. For the first time since 2011, Netflix reported a net-loss of U.S. subscribers for a financial quarter. Approximately 130,000 U.S. subscribers left the paid service in Q2, casting dark clouds over Netflix’s exponential growth business model, and even more so over its future, with rival service Disney Plus looming ominously on the horizon. There were net gains in subscribers globally of 2.7 million, but this was some way short of the 5 million forecast by the company.

Netflix cited the increase in the base subscription fee in January 2019 and a perceived lack of new compelling content as the causes for the slowdown during the period. The former of the reasons seems almost inevitable for the streaming service’s future, with ever-increasing production costs needing to be offset by the service’s adoption rates starting to slow; however, raising a price-point during the advent of a major new competitor is not ideal.

The lack of new compelling content may only be solved by the measure that will only exacerbate the issue above by further adding to Netflix’s expanding productions costs. For a company running at some $10 billion in the red at the time of writing, Netflix do seem to have painted themselves into a corner at a time when the streaming market seems primed to disrupt the disruptor.

However, could it be time for Netflix to turn that disruptive spirit inwards to re-think how it is presenting its existing content, and perhaps even its entire subscription model?

Get Curative

It has become something of a meme to suggest that people spend more time browsing Netflix than actually watching a show/movie on the service. This pithy irony taps into something more fundamental in consumer psychology: the tyranny of choice. Also known as “the paradox of choice”, this theory coined by American psychologist Barry Schwartz alludes to the paradigm where the more choice consumers are given in a particular product line, the more dissatisfied they feel with their final selection or they become so overwhelmed by the range that the very act of selection becomes too great an effort. Essentially, it is the point where choice stops being a privilege and becomes a burden.

In 2016, Netflix declared that 80% of user video selections were generated by its global recommendation engine powered by algorithms – an impressive claim that would suggest that users were still far more enticed than exasperated by the platform’s catalogue choices. However, this year, it came to light that Netflix were examining a more human approach to title recommendation by employing experts on its creative teams to curate Netflix Collections.

While Netflix Collections will surely support its global recommendations engine rather than supplant it, this could be a welcome addition to the title selection process for an audience that could be feeling that Netflix’s vast catalogue is beginning to weigh on them. By running a bespoke query using common phrases associated with browsing Netflix on conversational data from 2016 onwards, the overall sentiment returned tipped into the negative:

Sentiment 2

It appears that Netflix Collections is very much in a testing phase currently, with the new service only being available on iOS devices for users who opt in, but Netflix could take heart from a previous experiment in title recommendation.

In June 2013, Netflix released a recommendation service into its apps on PlayStation devices, called “Max”. Essentially posing as an AI assistant to the user, Max would ask a succession questions - some specific, some arbitrary – to attempt to find a title in keeping with the user’s tastes and mood. Given that Max was decommissioned in July 2015 without much ceremony, one could assume it was not a huge success for satisfying users; however, by analysing conversational data during the faux-AI’s tenure on Netflix, our analysis shows there could be a positive response in store for Netflix Collections if it is rolled out globally.

Firstly, positive sentiment was high for Max during its time:

Sentiment1

But more prescient for Netflix Collections is the suggestion in the semantic analysis below that users responded to Max on a human level, using phrases like “Max guy” and “goofy virtual assistant” as well as users tying the recommendation service into one of Netflix’s biggest cultural trends: “Netflix and chill”.

Word Cloud

Of course, novelty could be attributed to Max’s initial appeal, but that users responded positively to what they perceived as a more human guided selection process does bode well for Netflix Collections. With Disney Plus arriving in November with over 80 years’ worth of legacy content at its disposal, it is more vital than ever for Netflix to ensure that its vast range of less established titles feel succinct to its users rather than overwhelming, and more personable innovations such as human-led curation could be an essential part of that strategy. Unfortunately for the streaming giant, this may only be part of the battle as the choice between streaming services themselves verges on becoming tyrannical.

Setting Content Free

As the streaming wars reach boiling point, price-point is certain to play a major part in consumers choice of subscription services and Netflix is vulnerable to its rivals in this area. While Netflix’s standard HD streaming package price-point of $12.99 is in line with Amazon Prime’s in the U.S., Netflix lacks the powerful incentive and retainer of Amazon’s free next day delivery included within its Prime subscription. Likewise, Disney have undoubtedly targeted Netflix’s subscription as a weak point by offering a far cheaper basic subscription of $4.99 and Disney will match Netflix’s price-point for the premium package, featuring a range of streaming services including ESPN, Pixar, and Hulu.

As a result of streaming services further dividing content between themselves, consumers will increasingly find themselves torn not only on which paid subscriptions to access their titles of choice but on when to use those subscriptions as well. In this regard, a worrying trend could be emerging for Netflix.

Based on data from GlobalWebIndex, it appears users are increasing their use of Netflix’s free trial offer compared to its rivals:

Free Trial Streaming Services

This suggest that as the streaming market increasingly fragments, so could customer bases, with users dipping in and out the services as they see fit and taking advantage of easy to access exploits such as a free trial by creating new accounts when a title of their liking appears on a service.

One could argue that a service as established as Netflix could now abandon the free trial option for subscribers altogether, but given its vast production overheads and debt, subscriber acquisition likely remains a higher priority than retention, and a removal of the free trial period would certainly be seen as de-incentivising that strategy. A more radical answer to the quandary could be to lean into free trial trend and make it permanent.

It has been reported that Netflix has enlisted the services of BARB (British Audience Research Board) to gather third-party demographic data in the UK, likely for the purposes of luring in advertisers to the platform. Could we also be witnessing the advent of an ad-supported Netflix service?

Interestingly, using survey data carried out by EntSight last year, participants favored an ad-supported streaming service if it meant a cheaper subscription as their overall preference for the introduction of ads:

Ads On Streaming Services

Although there seemed to also be a surprisingly high level of acceptance of ads on a streaming service without a change to customer cost, there was also a more predictable outright rejection of the idea. In such circumstances, it could be advisable for Netflix to consider a free, ad-supported service with a reduced catalogue of lower-performing content and introductory episodes of premium content which could only be accessed in full using the paid subscription.

However Netflix decides to evolve its platform, with the streaming audience soon to be overwhelmed more than ever by a choice of paid-subscription services and the content contained therein, it has never been more essential for Netflix to ensure that the choice for how and what users access on its service is as tailored to its audience as possible.

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David Murphy

David Murphy

EntSight Researcher