SPECIAL TO THE GLOBE AND MAIL
PUBLISHED FEBRUARY 14, 2023
Kean Birch is director of the Institute for Technoscience and Society at York University.
Netflix is changing its subscription setup, testing it out in Canada and three other countries before, presumably, rolling it out across the United States, their more lucrative market. Described as a “crackdown” on password sharing, this change will stop us accessing Netflix from devices not associated with our home network.
It does make you think about whether it’s worth paying that subscription fee any more.
There are also broader questionsthat this change raises. Most specifically, whether the business models and monetization strategies of digital firms like Netflix are viable in the long-run.
Netflix is desperately trying to find new ways to generate revenues because fears about the stagnating size of its user base have sent jitters through market investors. That’s because concerns about revenue and profit growth have an especially dramatic impact when your business model is driven by increasing the user base.
How did Netflix get here? And what are its implications?
It seems to be a consequence of growing competition in streaming services. As more content providers and others create streaming services, an increasing proportion of content is enclosed in dedicated media enclaves. Proliferating streaming services each require us to pay a fee. Netflix has pioneered thisstrategy with the production of its own content, which increases its expenditures – defined as cost of revenues in its financial reports – as the company ends up bearing the full cost of production rather than outsourcing most of it to independent producers.
As streaming services pull their content from their competitors’ platforms, each of them is forced to produce more of it themselves,thereby forcing up costs across the board.
At first glance, streaming services look like terrestrial TV channels. Netflix’s previous subscription model seems to have been based on this assumption. But this metaphor doesn’t really hold up. Instead, a streaming service like Netflix is more like someone’s DVD collection we pay to access. That collection thins out as other content providers take their DVDs back, forcing Netflix to produce more of its own content to ensure people will still pay. It’s vital that users like this self-produced content enough to keep handing over their money, especially when they’re facing higher and rising subscription fees everywhere.
And here is the problem for Netflix.
They’re probably at a point now where it’s going to be difficult to attract more users without significant spending: they may be at saturation point. And because of competing streaming services, Netflix is likely to be increasingly reliant on producing more of their own content to replace lost shows and films. Netflix produces major shows to attract new users and retain existing users, often through encouraging changes in watching habits, like binge watching. In part, this results from their use of viewing data to determine what to produce and what to cancel. This means that less well-viewed content obviously ends up being cancelled.
As a result, Netflix is facing a self-defeating cycle with its subscription changes.
First, Netflix is now focusing more on short-term hits that pull in viewers across wide audiences – just like terrestrial TV. This content has proven valuable to Netflix, especially in the first few years of its existence, when the company expects it to make the most revenue. Unfortunately, this comes at the expense of more quality and diverse content that would retain a broader array of more discerning viewers.
Second, users know that there is a good chance that their new favourite shows will not last, leading to shifting viewing behaviours as users become less committed to watching new content (increasingly produced by Netflix).
Finally, a growing proportion of Netflix users dip in and out of a number of streaming sites, meaning that they don’t have the same capacity to binge-watch content, nor the desire to invest their attention in watching shows that will be quickly cancelled. So they start cancelling their subscriptions.
What you end up with is a declining user base married to rising costs of revenues, and a business that gradually dies.