When the model switched to streaming in 2008, the sources of benefit remained the same, although the fixed costs of physical distribution were now replaced by the fixed costs of digital storage and distribution. However, conventional wisdom is that the Netflix streaming model has unleashed a host of supernatural powers resulting from AI and network effects. The result, wrote Deutsche Bank analyst Bryan Kraft in a 2019 research report, was to give Netflix a mystical “platform status” that implies stronger barriers to entry and supports higher ratings. Such true believers, for example, think that the streaming model not only allows Netflix to refine its already excellent recommendation engine to what it does, but actually gives Netflix the magical ability to algorithmically select hits that it doesn’t.
Daily business briefing
9/2/2021, 4:54 p.m. ET
This particular duck begins with the genesis of Netflix’s first big hit “House of Cards”. As The Times columnist David Carr put it, Netflix carefully outbid all other comers for two seasons of the series – a total of 26 episodes for a reported $ 100 million – without a pilot due to structural advantages of big data and artificial intelligence. In that narrative, competitors were not privy to three key dates that combined made House of Cards a surefire hit: the popularity of films directed by David Fincher, films starring Kevin Spacey, and the original BBC series House of Cards “. with Netflix viewers. “With these three interests,” wrote Mr. Carr, “Netflix was able to locate an intersection on the Venn diagram that suggests buying the show would be a very good choice.”
Such ex-post explanations for the selection of successful creative projects suggest a false predictability. They inevitably follow hits, just as deafening silence follows flops. Shortly after the triumph of “House of Cards”, Netflix committed to an even more expensive series – “Marco Polo”. The first two seasons of 10 episodes had an estimated budget of $ 180 million and were dropped by original buyer Starz because of the prohibitive cost and complications of filming in China. When the show was canceled there was no evidence of an algorithmic error.
Increased spending on original content has been the most significant change in Netflix’s business model since then, and this doesn’t reflect better business, but increased competition from companies like Disney, WarnerMedia, ViacomCBS, and NBCUniversal, on which Netflix relied on its licensed content. “Reading a script and guessing who’s good at it – that’s not that fundamental for a tech company … we’ll likely develop strong organizational skills,” Netflix CEO Reed Hastings told Fast Company at the time of the original “House of.” Cards ”investment. His conclusion could not be clearer: “We think it is better to let other creative risks take.”
Netflix’s unleashing the octopus of content investments reflects the need to compete, not newly discovered competitive advantage. Of course, the easiest way to check if the barriers to entry have gone up or down is to see how many entries have taken place since then. Between the beginning of 2019 and the end of 2020 alone, Netflix rose from nearly half of US subscriptions to on-demand video services to around a quarter, according to the Wall Street Journal.
For almost 20 years, Netflix has tried again and again to integrate network effects into its core business model. But it consistently failed and eventually gave up.
Even back to the days of DVD mail, Netflix attempted to create its own form of social network by founding Netflix Friends in 2004. Though the company never gained momentum, the company held the service until 2010 before shutting it down. Some follow-up programs with Facebook, one of which Mark Zuckerberg personally helped shape, were also discontinued due to a lack of user interest. Netflix even completely eliminated user reviews in 2018. Hastings himself ultimately described his futile search for network effects as a “competitive fantasy”.