• Pranav Patvardhan

Netflix's Waning First Mover Advantage


Netflix suffered its first subscriber loss in a decade as reported by the company in April this year, sending stock prices crashing by 26% and wiping out $40B of its value. Expectations of adding 2.5 Million new subscribers were dashed with an actual loss of 200,000 subscribers. Further losses of 2 Million subscribers has been predicted for Q2. Netflix was a pioneer in the streaming industry, starting out as the most recognisable heavyweight of the industry. However, that once dominant position has come under threat from massive entities entering into the industry with their own streaming services. The case of Netflix gives us a powerful insight into how first-mover advantages emerge and how they can be lost if not maintained/cemented.


Netflix’s loss of steam can be attributed to several factors


Increasing competition has brought in giants like Disney, Apple and Amazon into the streaming industry, but unlike Netflix they have much larger and diversified businesses that can be relied upon for synergies, talent and resources


Loss of content from Netlflix’s library occurred when rival Disney launched its own streaming service. Disney, being a longstanding juggernaut of media owns Marvel, Lucasfilms and several other brands, and managed to move them over to its library from Netflix. This has added further pressure on the company to speed up original content production - but this is a strategy that requires heavy investments and a high risk of failures


Password sharing has been a big behavioural problem for Netflix costing it significant revenues. Over 100 million subscribers worldwide are predicted to be sharing passwords with one another without any payment, with 30 Million in US/Canada alone which are its most charged and profitable markets


● The spurt in subscriber numbers caused by the pandemic and consequent increase in the number of people staying in at home has now begun to fade. As people return to office work and normality, their motivations for paying for a subscription service has dwindled and is likely to result in further subscriber losses


● The Russia-Ukraine war came as a complete surprise, with following sanctions on Russia driving several western companies out of the country for legal and moral reasons. It lost another 700,000 subscribers as a result


● Netflix remains one of the most expensive streaming services, even in the US with monthly plans of $9.99, $15.49 and $19.99. With current inflation and commodity price levels, consumers are facing dwindled disposable income and therefore are less likely to spend on luxuries like Netflix


Poor performance in India has won the company only 5.5 Million paid subscribers, a number that pales in comparison to Disney+Hostar’s 46 Million (that uses a free model that is supported with ads) and Amazon Prime’s 21.8 Million


While this scenario was somewhat expected, it serves as a powerful lesson for businesses that currently have a first mover advantage.


These are just a few lessons that current market leaders can learn from the case of Netflix:


Understanding the industry and barriers to enter it is critical - if being first to the race is your only call to fame, that fame will not last. In Netflix’s case, the barriers to entry were virtually non-existent as larger companies like Apple and Disney managed to venture into the space using their massive cash resources and IP garnered from other business lines. If no barriers exist, a competitive position is hard to sustain and might not last in the long-term (a monopolistic market will eventually become flooded with competition, driving revenues down for the industry as a whole)


Invest in competitive moats and advantages, IP - do more of what you do best/can do well with synergies. One of the few cards that Netflix can tout at present is its vast library of highly successful original content from all over the world - Squid Game from South Korea, Lupin from France and Stranger Things from the US to name a few. With such hits, it has been able to craft a highly desirable name in the cinema world that is sought after by directors, actors and writers alike. This advantage will be hard to kill, if the right strategic investments are made


Factors that are seemingly irrelevant may play a big role in your business - the Russia-Ukraine war and corresponding surge in inflation and commodity prices have dwindled incomes of consumers from all over the world, making them less likely to spend on unnecessary luxuries like Netflix. Always keep close tabs on geopolitical and macroeconomic events


Invest in ecosystems that lock-in consumers - the advantage that say an AppleTV has over Netflix is the ability to entice existing Mac/iOS users to give its content and subscription service a try. Disney already holds a massive portfolio of brands that are well known to the target market. Amazon enjoys similar advantages by offering Prime streaming as an add-on service to already existing customers. Netflix having only a subscription service has less “stickiness” than it’s rivals


Netflix suffers from having limited diversification vs that of key rivals like Amazon, Disney and Apple. Netflix’s options at this point include lower subscription fees and supporting it with ads, banning password sharing or looking for ways to monetize doing so and adding interactive/video game content like Exploding Kittens to stay relevant and financially sustainable.


First-mover advantage must therefore be cemented with other elements that make the market leadership position and the financial rewards that follow, sustainable in the long run.


References:

  1. Predications for Netflix’s subscriber base in coming quarter - https://www.aljazeera.com/economy/2022/4/20/netflix-suffers-first-subscriber-loss-in-a-decade

  2. Netflix’s subscriber loss - https://indianexpress.com/article/explained/netflix-subscribers-loss-explained-7888049/



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