28/08/2022
5 lessons from ’s 67% decline:
1. Competition changes your market
2. Content CAN trump product
3. Entertainment is hits-driven
4. Big tech is always a threat
5. The tyranny of spend
From 2011 to 2021, Netflix did not report a single quarter of decreasing subscribers. This year, it reported 2. In the process, it has declined from $300B in market cap to $100B. For students of product growth, it’s an amazing case to study.
1. Competition changes your market
In the first phase of the streaming wars, Netflix was dismantling the dominance of cable TV. It could pay the major content houses (like HBO & Disney) for the rights to their shows & movies. That has changed with the entry of these players.
In the new second phase of the streaming wars, each player is keeping their content exclusive. You don’t see Stranger Things on HBO Max, Obiwan on Netflix, or Game of Thrones on Disney+. This has changed the nature of the market Netflix plays in.
2. Content CAN trump product
In this new market, Netflix’s higher quality streaming product only matters on the periphery. Sure, its search, smart downloads, & home page algorithm are best in class. But the main turf for competition has shifted to content.
This is a major takeaway for product leaders. Unlimited optimization of every surface isn’t always how to move the needle.
3. Entertainment is hits-driven
There is a big difference between products that solve problems and products that entertain. For products that entertain, hits matter.
Netflix’s outdated approach of Metacritic rated 40-70 niche shows isn’t going to work anymore. Disney recently surpassed Netflix in subscribers due to its Star Wars, Marvel, and Pixar blockbuster HITS.
4. Big tech is always a threat
Big tech has come in with its own hits. Arguably some of the best new shows are from big tech: Apple with Ted Lasso, and Amazon with The Boys. Big tech is also a threat in markets Netflix WANTS to enter, like gaming & advertising.
Big tech just completed a beat-down in ads. Apple’s privacy changes took the air out of stocks like Meta & Snapchat. Amazon, meanwhile, grew a $40B ads business in just a few years. Always build a moat against big tech.
5. The tyranny of spend
When a paid acquisition channel, like content budget, starts working, it can become tyrannical. The temptation becomes: let’s just keep doing more of this. But this has led Netflix’s economics to more closely resemble media than tech.
This has led to multiple compression. DTC companies have fallen similarly. Their tyranny was performance marketing. SaaS companies too. Those with expensive outbound sales motions have fallen. To maintain tech multiples, companies must generate operating leverage as they grow.
This usually means: create a differentiated product. What if Netflix had positioned its product as a $60 cable bundle and compensated the competition more to stave off their entries?Maybe it wouldn’t have worked. But maybe it could have.