By Steven Hawley
The third quarter results released last week by Netflix remind us that Netflix is no longer the challenger in the media and entertainment world, but rather, is one of its leaders. Need proof? Look at how pay TV operators have added Netflix to their lineups to reduce churn, and look at the amount of original programming Netflix is producing.
Because it doesn’t have nearly the 2 billion users that Facebook and Youtube each have, Netflix says that there’s still more growth to come, and it will be global: 90% of its Q3 growth was outside the US.
Growing new market opportunities
To enable this growth, Netflix continues to invest in original content, new market expansion and new channels of distribution. Netflix also recognizes that these growth drivers are interdependent and should be tailored to the unique dynamics of each region.
In the more advanced markets like the North America, Europe, and some Asia/Pacific countries, incrementalism is more the order of the day. One example is to partner with pay TV operators. Another is to grow brand equity for original programming by producing regional variations for a global audience.
Growing concern about revenue protection
And there’s another form of incrementalism: to incrementally ensure that everyone is paying for the service. If you weren’t paying close attention, you could have missed the question from analyst Michael Morris:
“Another topic that we haven’t talked about a little while … password sharing or stealing or whatever you want to call it.” … “How do you address it without alienating a certain portion of your user base? How do you strike a balance there?”
To which Chief Product Officer Gregory Peters replied: “…we’re looking at … consumer-friendly ways to push on the edges of that, but I think we’ve got no big plans to announce at this point in time in terms of doing something differently there.” …And then they moved to another topic.
Two UK newspapers, The Sun and The Mirror covered this in news stories this week.
Hammers or velvet gloves?
It was a careful low-key answer that was likely intended to mask what an enormous and growing concern revenue protection must be within Netflix, given its $15 billion content budget and its 30% increase in production costs over the past year.
One way to ensure revenue is to raise prices, but at what point does it become egregious? Especially given the danger of churn as new entrants continue to threaten.
Pertinent to credential sharing, how do you detect it, and what do you do about it once detected? Interventions can range from extending incentive offers, sending a warning notice, degrading the service, revoking access keys, or even deactivating the end user’s account. And depending on circumstances, to be able to enforce any number of these, sequentially, for the same user.
What it means
Netflix has to strike a balance between concerns over negative free cash flow (estimated at $3.5 billion for 2019), growing costs, slowing growth in advanced markets, and new competition from the likes of Disney, AT&T, Apple and their equivalents in other world regions. Not to mention less-spoken-of concerns that pirates themselves are also significant competitors.
Credential sharing is the abuse of otherwise legitimate access. But at what point does credential sharing becomes piracy (aka rights-sharing that crosses the line into infringement). The most meaningful answer is the usage policy that comes from the content owner or rights-holder, since distributors must enforce those policies in the end.
As the stories in The Sun and The Mirror note, technology solutions are available. The “best” ones are the ones that enable – and make it possible to enforce – the usage policies that are required across all content providers carried by online aggregators like Netflix – which happens to produce its own as well.
We can’t read the tea leaves of Netflix’ entire content protection and anti-piracy strategy from a quarterly earnings call, but Netflix reminds us that it’s a serious concern and not one to be commented upon or addressed casually when small moves mean billions.
