Netflix is unquestionably one of the greatest success stories in recent history. Since their initial public offering in 2002, the stock has appreciated more than 43,000%; a mind-boggling return for investors. Central to their success is that they’ve been obsessed with uncovering customer problems and building compelling solutions that the market has found value in. Case in point, they disrupted the entire video rental industry, massacring companies like Blockbuster whose very business models were dependent on consumer inconvenience. Netflix’s growth has, in a way, been the fuel that spawned the birth of the video streaming market which, by 2025, is estimated to be worth over 125 billion dollars.
Despite waves of accomplishment and being a profitable company, Netflix has been under immense pressure in the past year due to growing competition in their space. Disney, Amazon, Apple, and Comcast are just a handful of the companies ramping up their efforts to capitalize on growing consumer demand for content. As a cause for concern, Netflix shares rose 12% in 2019, in comparison to its parent index, the NASDAQ, which grew 36%.
The so called “Streaming Wars” have called into question Netflix’s First Mover Advantage and their overall contention in remaining a major player in the industry.
Race for First
The concept of a First Mover Advantage is a common idea in business strategy. It refers to an organization’s ability to be better off than its competitors by being the first to market with a new product or service offering. The ensuing benefits of being first, come in the shape of establishing a brand, capturing net new customers, and refining product development with actual customer feedback. Companies such as Coca-Cola, Amazon, and eBay are three prime examples of companies that have enjoyed a sustained First Mover Advantage over the years.
However, for every case of a successful First Mover Advantage, there are an equal number of examples in which companies have dethroned early rivals in their space, calling into question the concept’s viability. Apple overtook BlackBerry in smartphones; Google destroyed Yahoo in search; and the Royal Bank of Canada is more than twice the size of the Bank of Montreal.
Ultimately, the successful execution in sustaining a First Mover Advantage is dependent on both internal business and external market factors which, when aligned appropriately, can enable a business to enjoy a durable edge over its competitors.
Building A Protective Moat
Traditionally, there are three internal factors that enable a successful First Mover Advantage: technology leadership, preempting rivals from scarce resources, and high switching costs. Having even one of these, is enough to give a business a leg up on its competition; Netflix had all three.
From a technology perspective, the container for video streaming wasn’t completely novel. YouTube and DivX were popular solutions for traditional web video hosting. Netflix’s technology leadership came from its ability to disseminate content effectively through its delivery network at reasonable speeds, without jacking up data usage for customer internet plans. In other words, they perfected the vehicle for video streaming. During their early days, Netflix was through and through a technology company, directing most of its investments towards innovating their core systems.
Preventing access to key resources was another ace up Netflix’s sleeve that shied away competitors. Early on, they signed exclusive agreements with major content powerhouses such as Warner Bros and Disney, making Netflix the only streaming service that consumers could turn to for the Harry Potter franchise, Pixar classics such as Toy Story, and of course, the beloved Marvel Studios productions. The exclusivity of their deals essentially boxed out other competitors from entering the space.
Lastly, Netflix managed to prevent customers from ditching its service due to high switching costs. When it first released video streaming in 2007, Netflix charged a monthly subscription fee of $5.99 that was bundled alongside it’s existing physical DVD business. No late fees, unlimited movies, and the flexibility of physical or online videos delivered to your doorstep. That’s an incredible amount of value compared to Blockbuster’s $2.99, two-day rental for a single movie which, by the way, you had to pick up and drop off from a brick and mortar store. That number doesn’t even include the obscene late fees Blockbuster charged, which accounted for about 70% of their profits.
From an internal perspective, Netflix had teed up the perfect threesome to actually give it a strong First Mover Advantage.
While a business can control its internal resources to favour a First Mover Advantage, external industry dynamics are equally, if not more crucial to take into consideration.
In their article titled, “The Half-Truth of First Mover Advantage”, authors Fernando Suarez and Gianvito Lanzolla suggest that there are two externalities businesses should factor into their strategy: the pace of technological innovation and the pace of market evolution. The first factor addresses how frequently new technology is popping up in a given industry, while the latter questions how quickly the demand for a product or service is growing. Understanding these, businesses can have a better grapple on their industry and institute the appropriate strategy in making the most of their First Mover Advantage.
In the video streaming market, the pace of technological innovation has been fairly low. Though the underlying architecture to support video streaming has improved over the years, the reality is that most companies are following the same playbook to deliver content to consumers. As a point of comparison, the camera industry is one that has a high rate of technological innovation. Consider the shift we’ve seen in the past decade alone, moving from dedicated digital cameras to having cameras near the quality of a DSLR in our pockets.
However, the pace of market evolution for video streaming was, and continues to be quite high. A rough indication of this can be seen in the number of competitors flocking into this space. Google’s acquisition of YouTube back in 2006, Amazon’s Unbox product, and Hulu all suggested the tide was turning in the way consumers sought out entertainment. Fast forward to today and the same argument holds true with even more companies entering the market.
Create, Reach, and Distribute
Based on those industry dynamics, Suarez and Lanzolla suggest Netflix would enjoy a First Mover Advantage by focusing on enhancing its production capacity, growing its global distribution, and funding large scale marketing; three components of strategy Netflix has already been prioritizing.
From a production perspective, early on, their exclusive agreements with media companies filled this void. As of late, given the spawn of multiple competing services, Netflix has been investing heavily into the creation of original content. In fact, in 2019, the company spent 13 billion dollars on the production of its own, in-house content. The likes of House of Cards, Narcos, and Big Mouth (this show had me on the floor laughing within the first 30 seconds by the way), are just a few examples of popular Netflix Originals that are the result of this strategy. The shift is also reflective in their company description which reads: “Netflix is an American media services provider and production company.” That’s a very different position than something like Hulu which reads “Hulu is a US based subscription video on demand service”. There’s a clear distinction suggesting one is a production company versus being a technology provider.
From a distribution perspective, Netflix was intent on international reach right from the get-go. In 2011, it opened its service to parts of Latin America, Mexico, and Europe. Even today, a key area of focus for them is international expansion. Since saturating the US market, the APAC region is now their fastest growing segment, tripling their subscription volumes from 2017; followed by the EMEA region in second place.
The spike in subscriber growth is fuelled by the rampant efforts of their marketing. In 2018, Netflix spent approximately 2.37 billion dollars in marketing, the highest they’ve ever spent in the history of their business. In 2019, estimates suggest that number will be around 2.9 billion dollars.
Netflix has continued to invest in the right activities to capitalize on it’s First Mover Advantage. However, there is a growing concern Netflix will be forced to address moving forward: price.
In 2019, for the first time in the company’s history, Netflix missed it’s subscriber growth forecasts and worse, it reported that 123,000 subscribers cancelled their licenses. This could be an indicator that consumers aren’t getting $12.99 worth of value from their monthly subscription anymore. The combination of losing content to competing media providers alongside competitors providing their services at a lower cost — Disney+ is $6.99 a month, Apple TV+ goes for $4.99, and Amazon Prime Video clocks in at $8.99 — is a legitimate problem for Netflix. This holds especially true given that streaming content represents an additional revenue stream for most of these new players, meaning they can deploy a loss leader strategy early on, purely to grow their own market share.
The silver lining is that their market is growing at the expense of another. Fewer consumers are spending money on traditional cable services. About 27% of consumers do not pay for a typical TV service and forecasts are suggesting this trend will continue to increase with Millennials and Gen-Y’ers leading the charge. They are the two main demographics that are dropping cable services at the highest rate.
Growing competition in the industry will undoubtedly exert pressure on players, but at the end of the day, it will only promote greater differentiation to the benefit of the customer. In the case of Netflix, it has, and continues to invest in the right areas of its business to ensure it remains a dominant force in this space. The creation of original content done alongside international growth, underpinned by strong technology will carry Netflix towards future success. But, don’t take my word for it. Here’s what, an Analyst at Morgan Stanley had to say about them after their recent earnings call:
“We believe [Netflix] could, if it chose, ramp margins more quickly by limiting growth in its substantial investment in global marketing and production, but it is (wisely) playing the long game,”Ben Swinburne
Netflix will be fine. For now, let’s just enjoy how spoiled for choice we are as consumers in this content rich world. I mean, have you seen Baby Yoda?