How Netflix Won The Streaming Wars

The streaming landscape is currently a smouldering battleground. HBO/Discovery & Disney+ are licking their wounds after a bloody war of attrition. Netflix has won.

Source: Unsplash

The streaming landscape is currently a smouldering battleground. HBO/Discovery, Disney+, Peacock and Paramount+ are all licking their wounds after a bloody war of attrition. As we stand in what remains of that battlefield today, Netflix may be the only one standing.

While these players entered the market at different times, they eventually found themselves burning billions of dollars in order to capture the mindshare and subscription dollars of an already over-consuming and oversubscribed customer base. In the end, it looks like the only clear winner is the platform that was there before all the rest. Let’s look at how Netflix reached this position of strength with an analysis of their journey and where they sit in the food chain now.

Origin & Journey

Netflix, the brainchild of Marc Randolph and Reed Hastings, was born in the dot com boom, 1997 to be precise. Hastings, frustrated with the hassle of late fees and shipping returns at libraries and movie stores, experimented with mailing movies to customers who would pay a fixed fee.

The idea was an immediate success and they quickly garnered customers and attention. Testament to this was Amazon’s Jeff Bezos quickly offering to buy the company for around $15 million. Already wealthy from past entrepreneurial ventures, the founders turned the offer down and doubled down on their startup. In 1999, they switched to a monthly subscription model, which remains the foundation of their business model today.

After overcoming the burst of the dot com bubble, Netflix marched firmly into the mid 2000s. With the cost of DVD players going down, the company’s total addressable market (TAM) grew which culminated in a 2002 initial public offering (IPO), and an immediate profit the following year.

By 2004, profit had increased to $49 million on over $500 million in revenues. Staggering numbers highlighted even further by the fact that in 2005, the company was shipping out 1 million DVDs per day.

It is often said that a growing company must “iterate or die” in order to maintain competitiveness in the buzzsaw that is capitalism. Netflix’s earliest competitor, BlockBuster, had failed to do this and found themselves behind by the mid to late 2000s. This image fresh in their minds, Netflix iterated their way into the world of video streaming in 2007.

Despite a small initial catalogue of content and limitations with internet bandwidth speeds at the time, the foundations had been laid and by 2009 Netflix streams had overtaken their DVD shipments. Just two years later, Netflix was responsible for 32% of peak internet bandwidth in the US - more than any other website.

The first piece of the domino had fallen. Customers were now subscribing to see their favourite movies and TV shows right at home over the internet. There are, however, only so many shows and movies one can watch before they start flirting with the unsubscribe button. Realizing this, Netflix’s main goal became how they fast can accumulate as much quality (or sometimes not) content on their site for as cheaply as possible.

“Cheaply as possible” because content is a very expensive endeavour. Whether its green lighting original content or licensing content from other studios, this was a very capital intensive project which would take a long time to reap the fruits of.

The content acquisition strategy was working. Netflix added Breaking Bad and other acclaimed shows and movies to their catalogue at the turn of the decade to great success. It also helped that critically acclaimed shows such as The Sopranos, Mad Men, Breaking Bad and Sons of Anarchy had started what is now known as the Prestige TV era right at that time.

The era was further catalyzed by water cooler moments where people would talk about these shows at work, at school and growingly, online. Since Netflix was the place where you could watch some of these shows on demand, their subscriber base exploded.

Knowingly or unknowingly, a flywheel effect had been created. Netflix licenses or creates critically acclaimed shows that generate viral consumer interest, people rush to subscribe for fear of missing out on the zeitgeist, subscribers stay for the wealth of content available on the site, steady subscription revenues provide ability to borrow cheap debt to finance content - and thus the cycle continues. The company had created a cash cow.

In my piece earlier this month, I spoke about how cable television, once a mainstay in American households, had begun to lose market share at the start of the 2010s.

The major catalyst for this change was streaming. Netflix, well capitalized after acculumulating cheap debt in a low interest rate environment, began to license content from traditional studios such as HBO and FX that traditionally aired on cable TV. This was the premium content, besides sports, that kept these cable subscriptions renewed by customers. These networks coexisted with Netflix at first, but began to compete with them by offering their own streaming services with their proprietary content. Namely Disney+, Hulu, HBO Max etc.

The cable companies, such as Warner Bros. Discovery and NBC needed to do something fast. Licensing out their content was seemingly not enough.

Present Day

In March of 2020, the world entered lockdown. The pandemic meant that most of us had to stay at home and only leave when necessary. Students studied virtually and work-from-home (WFH) became the norm. People still needed their entertainment fix, however, and the world’s largest media companies were quick to notice this. Disney launched Disney+, Netflix doubled down on their content, HBO Max hit our app stores, Paramount was all in and thus the content arms race had begun.

Unlike Netflix, these apps did not have the sheer depth of content that it would take to keep a large subscriber base well…subscribed. Despite Disney and HBO making their old cable TV shows and movies available in vibrant HD adaptations, customers quickly got bored as the lockdown ensured that the rate of content consumption was rapid. As a result, original content was green-lit at breakneck pace to fill this gap, with Disney promising a catalogue of new Marvel and StarWars shows such as Wandavision and The Mandalorian.

Netflix, thanks to their first mover advantage, were not going to sit and watch. On March 20th 2020, two weeks into global lockdowns, they released Tiger King, a polarizing documentary that broke the internet. Anyone who wasn’t a Netflix subscriber at this point basically joined as there was almost nothing better to do. Hyperbole, I know, but not far from the truth. Upon completion of that there was Netflix’s entire back catalogue to explore. Subscribers were spoilt for choice.

Compounding Netflix’s position of strength was the actual economics of customer acquisition for their competitors. You see, traditional media entered the streaming game for a reason. Legacy revenue streams were shrinking; customers were cutting the cord on cable, Disney’s parks stood empty during the pandemic and thus streaming was the long term revenue plan.

These earlier headwinds had meant that the competitors had accumulated serious amounts of debt. As of January 2023, Netflix’s debt totalled $14 billion; Warner Bros. Discovery, meanwhile, had $50.4 billion in debt, Disney had $45 billion, Paramount had $15.6 billion, and Comcast, the owner of Peacock, has $90 billion. None of them — again, in contrast to Netflix — were making money on streaming! Cash flow was negative¹.

Not only were Netflix ahead, financially, they were among the only ones who could comfortably afford to wage this war. The others waged it painfully. Apple TV and Amazon Prime Video - by virtue of being massive marketing fronts for their trillion dollar market cap parent companies - can continue to wage the war as long as they like. For the others, however, it may be a race to see how long they can limp before they finally bleed out.

In their Q3 2023 earnings call in November, Warner Bros. Discovery announced a worrisome streak of subscriber losses. The service's subscriber count tumbled 700,000 in the third quarter after declining by 1.8 million in the second quarter, for a total six-month loss of 2.5 million subscribers in the latter half of 2023. Not to be outshone, Disney announced losses of $512 million that quarter, bringing total losses to $11 billion since the launch of Disney+ in 2019. This came after losing 11.7 million subscribers in the quarter prior.

Comparatively, Netflix gained 8.76 million paid subscribers globally in Q3 2023, thanks to the rollout of paid sharing, consistent programming and the ongoing expansion of streaming globally.

To stop the bleeding, Warner Bros. has began to sell licenses for some of its premier content to Netflix. An easy route to cash flows for the company, which is sadly also a waving of the white flag. The Batman and other notable DC films joined the Netflix catalog in late November. NBC/Peacock also went down this route, after licensing Suits to Netflix last summer, a move that introduced many new subscribers to the decade old show and was the source of some viral interest. Netflix were no doubt pleased with this.

In what’s a win win win for Netflix, they see a future where they can now pay to broadcast their rivals premier content on their site, further growing their subscriber base and even generating viral content with material that is not theirs. This keeps the flywheel spinning, further entrenching their position of strength.

Summary

In conclusion, Netflix has won this round. However, there may undoubtedly be other rounds and new players for the content behemoth to tussle with. As for Disney and HBO, theirs is a precarious position. The nature of their current revenue streams mean they must continue to bet on streaming, just in a more tactful and cost effective manner. After the SAG-AFTRA (actors) and WGA (writers) strikes of 2023, both studios mentioned looking to re-strategize and find a way to make their streaming operations profitable. I hope for their sake, and ours, that they do.

1. “Netflix’s New Chapter”. Stratechery. https://stratechery.com/2023/netflixs-new-chapter/