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The impact of competition on business growth: Insights from Netflix

Netflix is a leading streaming platform that has Revolutionised the way we consume movies and TV shows. With its vast collection of content, ranging from popular series to critically acclaimed films, Netflix has become a household name. Offering a seamless streaming experience, Netflix allows users to access their favourite shows and movies at their convenience, making it a go-to option for entertainment enthusiasts worldwide.

How Netflix Happened?

After the closure of his startup Pure Atria in 1997, Reed Hastings, an American businessman, asked one of his former employees, Marc Randolph, to stick around for six months. He had to come up with another business idea for his next startup. But before he brought the idea to life, he had to ensure that he does not face challenges like the ones in his previous startups. He came up with this idea when he was charged a late fee for renting a movie and returning it late. Ultimately, Reed Hastings and Marc Randolph co-founded a movie rental startup.

In 1997, videos were recorded in VHS cassettes. A little research made them realise that a movie rental business could prove to be expensive for them as VHS tapes were heavy and fragile, with a greater cost of shipment and, therefore, they decided to abandon the idea. 

Despite this big challenge, this startup was meant to happen. Reed Hastings came across the information about an emerging technology called DVDs, that were as thin as the size of a CD, easy to ship and, got delivered within a short period of time without any damage. Marc and Reed realised that this idea might work. Reed invested 1.6 million dollars, leased a workplace, hired employees and spent six months to develop a simple e-commerce website and finally, on April 14, 1998, they launched a company that was known as Netflix. This movie rental business was different in just one aspect- the orders to rent movies were placed on web.

Competition gains momentum.

Around the early 2010s, Netflix started facing some real competition in the online streaming business as more companies began entering this market and started offering their own streaming services.

Source: Statista

Netflix had to face tough competition by renowned platforms that were also emerging as big players in the market.

The post-2017 scenario for Netflix.

In 2017, Netflix experienced a sharp increase in its shares, that rose by nearly 60%. This rise can be attributed to the untapped growth potential Netflix had, especially in the international market. Investors recognised this and realised that the company had only just begun to draw the attention of its global audience, while still having room to expand in the United States. This optimism about Netflix's prospects contributed to the significant rise in its shares during that time.

Moreover, Netflix proved that to earn more, you need to spend more. Netflix spent an incredible amount between $7-$9 billion on content in 2017. In the same fiscal year, it added about 5 million subscribers in the first quarter, 5.2 million in the second quarter, 5.3 million in the third quarter and 8.33 million in the fourth quarter.

Many people question the sustainability of Netflix’s content expenditure; however, Ted Sarandos looks at it with a different perspective. He believes that the measure of their success starts with the engagement people have with their platform or in other words, whether people care enough to spend their screen time on Netflix. If we talk about figures, in 2018, the company spent an even higher budget on content, including 700 original TV shows and 80 movies. Netflix’s content budget has only grown in the last decade and was $17 billion (approx.) in 2022.

Source: Netflix, Business Of Apps, Variety

Moreover, the production of original content has allowed Netflix greater freedom for distribution and global growth.

The Streaming War

In April 2022, Netflix’s shares plunged by 30% and cost the company a hefty $45-$50 billion off their valuation. According to Netflix, it lost their 200,000 subscribers in the first quarter of 2022. It became the worst-performing stock of 2022 in the S&P 500.

According to Netflix, there were several factors that affected their growth including, the withdrawal of its services from Russia that made them lose 700,000 subscribers.

Netflix stated that during the pandemic, people across the world spent more time on streaming digital video platforms like Netflix, which they subsequently reduced as they got back to work after the ease of restrictions.

Increasing competition from other video streaming platforms like Amazon Prime Video, Hulu, Apple TV+, etc has been a challenge for Netflix. According to an S&P Global report, “the launch of new subscription video-on-demand players, such as AT&T Inc.'s HBO Max, Comcast Corp.'s Peacock and Viacom CBS Inc.'s Paramount+, resulted in swaths of content being held back as each aimed to populate their own services”. Moreover, in 2019, Disney+ had announced the end of its multiyear partnership with Netflix that began in 2012, withdrawing its Disney and Pixar content from Netflix. When Netflix lost Disney’s content, it had to face another competitor in this business.

Netflix also stated that about 100 million households are sharing passwords with family or friends and that people are using a Netflix account, but not paying for it. It announced that customers should see a password changing policy coming soon. In 2023, Netflix implemented password sharing restrictions in 2023 in compliance with their declaration. These restrictions went into effect on 20th July 2023, in India. Netflix users in India were no longer allowed to share their passwords with friends or relatives if they did not live in the same household.

According to a report by ABC News stating Netflix, 5.9 million new subscribers were added over three months after the new password sharing restrictions came into effect. Netflix saw this as a notable improvement in comparison to the same time, in 2022 when it lost around 200,000 subscribers.  

Source: Netflix, Statista, Backlinko, Variety

The final question: Is growing competition a threat to Netflix’s success?

Netflix's success and profitability gets questioned at times, due to concerns about growing competition from other streaming platforms, or the challenges of producing original content consistently. In spite of that, it has proven to be a major player in the entertainment industry.

Despite a decline in its stock price, Netflix has continued to show resilience and constantly tries to adapt to the changes in the industry. It is safe to say that Netflix is going nowhere and remains to be a significant player in the digital video streaming market. Even today, despite stiff competition from top players like Amazon Prime Video and Disney+ with a subscriber base of over 200 million and 157.8 million respectively (source: USA Today), Netflix has a strong subscriber base of over 247.2 million, as of the third quarter of 2023, and a strong presence in this industry.

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