Netflix is celebrating its 20th anniversary in style - announcing a record-breaking year in which both revenues and subscribers grew substantially faster than expected, surpassing the 100 million milestone during 2017 to reach nearly 118 million subscribers.
Since the launch of its streaming service - which is now celebrating its 10th anniversary - Netflix has been instrumental in the disruption of the traditional video entertainment delivery model, having a significant impact on pricing models, content distribution, devices, network architectures, net neutrality rules and perhaps most importantly the video consumption patterns of individuals.
In fact, its disruption has been so impactful that most of the leading pay-TV operators are now partnered with Netflix in an effort to strengthen their own relationship with their customers.
A timeline of key events and subscriber growth for Netflix is shown below:
Netflix leads the streaming video (or as they reference 'internet TV') market in terms of subscribers due to a number of factors. First and foremost is the fact that the service is available in virtually every country except China (its largest market opportunity), Syria, North Korea and Crimea (Ukraine). In addition, Netflix is benefiting from a broadband infrastructure (both fixed and mobile) that is getting faster and more reliable; increasing penetration of smart phones and smart TVs; a growing desire by consumers for personalized content on demand, available on any screen; and continuing innovation in technology and network architectures that is improving the quality of experience.
Content is king
Netflix has been making significant investments into original content since 2011 - with investments doubling year over year. In 2018, they will spend nearly $8 billion on content. Original content provides Netflix with a number of advantages. The first is its ability to release its shows on the same day across all of its markets - which is of particular value to its international members, who often have to wait months after a US premiere to enjoy the same content. Secondly, without the constraints of linear TV - such as timeslots, ratings or advertising - Netflix is able to commit to producing and publishing content as complete series, rather than pilots. This has provided content creators with flexibility in storyline development and multi-episode story arcs. Third, it allows Netflix to develop episodes that are not all exactly 22 or 44 minutes in length - again breaking the rules of linear TV. Finally, in another break from the traditional model, Netflix has been able to offer an entire season at once - known as the all-at-once distribution model, which has proved to be an effective marketing tool to both attract and retain members.
As a side benefit, a more flexible platform for content creators has been central to its ability to attract creative talent.
From a business perspective, original content has proved to be some of Netflix's most efficient content - costing less money relative to viewing metrics than most of their licensed content produced by top studios.
The Netflix experience is driven by continuous innovation in technology and network architectures, often leveraging open source technology, to improve the quality of experience - which includes not only the viewing experience but ranking, rating, search, recommendations, etc.
In order to provide a viewing experience that would be truly available everywhere, even when the internet is not working well, Netflix needed to understand how to provide uninterrupted video on unreliable internet. That meant reducing the data usage for those viewers on mobile, as well as enabling Netflix to be viewed without an internet connection (e.g., on a train or plane).
Some highlights include:
- Per-title encoding, which encodes individual titles based on complexity. This allows Netflix to deliver the best video quality stream to a subscriber, no matter what the program or genre and tailored to the subscribers' available bandwidth and viewing device capability. This has proven particularly useful in markets where the broadband infrastructure may not be as robust or where the majority of video viewing often happens on mobile networks.
- Cloud computing. Netflix has fully embraced the use of cloud computing for its services. Although requests for content are generally served from the region the subscriber is closest to, the network traffic can shift around for various reasons, including problems with critical infrastructure or region failover exercises. As such, via a stateless application server architecture, Netflix can serve any subscriber request from any region.
- Open Connect is Netflix's own content delivery network that allows ISPs to directly connect to Netflix servers at common internet exchanges, or place a Netflix-provided storage appliance (cache) with Netflix content on it at ISP locations. The goal of Open Connect is to locate the content closer (in terms of network hops) to its members to provide a high-quality experience.
A game changer
Netflix has moved beyond being simply a streaming service as it shifts its focus towards being an entertainment company. More importantly, its influence on industry trends cannot be overlooked. Not only has Netflix changed the rules of content creation, but they have heavily influenced the way users view and consume content. This has resulted in new business models and network architectures for both video and broadband service providers as streaming video continues to take a larger share of all consumer internet traffic.
Services such as Netflix have helped to accelerate cord-shaving - a reduction in the amount spent by consumers with their video services provider. In an effort to stem some losses, many MVPDs have taken a "can't beat 'em, join 'em" attitude and have integrated the Netflix app into their set-top boxes and even into their billing systems - enabling their subscribers to enjoy both services through the MVPD remotes and devices.
Consumers may no longer want their MTV, but they definitely want their Netflix.