The Great Disruptor

Alfonso Cuaron’s Roma marked a number of firsts for Netflix when the 2019 Oscar nominations were announced. The black-and-white, autobiographical drama not only received the streamer’s first best picture nomination but also nabbed its first nominations for best director, best actress in a leading role, original screenplay, foreign-language film, production design, sound editing and sound mixing. In all, Netflix’s Spanish-language production received an incredible 10 nominations. Netflix has also joined the Motion Picture Association of America (MPAA), which is the world’s most influential entertainment lobby, with members including Walt Disney Studios, Paramount Pictures, Sony Pictures Entertainment, Twentieth Century Fox Film, Universal City Studios, and Warner Bros Entertainment. Neither event surprised the cognoscenti.

Netflix’s entry into the MPAA was overdue. Its output of some 82 films and 700 original television shows is more than the combined output of any five other MPAA members. Apart from scale, the content generation is truly global, spread across 21 nations, and sourced in many languages. Roma is not an outlier — a high percentage of Netflix’s content receives critical acclaim, quite apart from being popular. The company now has close to 150 million global subscribers, and its streaming services and content libraries are available in every major nation except China. By some estimates, Netflix’s subscribers consume 20 percent of global bandwidth on any given weekend. Growth has been phenomenal. The streaming service has picked up over 30 million subscribers in the last 12 months. Revenues have grown by over 35 percent in 2018, crossing the $16 billion mark, with operating profits almost doubling to $1.6 billion. Netflix does have substantial debt — about $8.5 billion — on the balance sheet, and it is cash-flow negative due to its huge spend. Nevertheless, investors love the stock, which has outperformed other tech giants such as Facebook, Apple and Google in the past year. It is an amazing track record, especially when you consider that Netflix entered the business of original content-generation as recently as 2011.

It started as a DVD-rentals outfit, back in 1997. It has transformed itself multiple times to stay ahead of technological change. First, it moved from being a DVD rental service to become a streaming service in the United States. Then it moved from sourcing content to producing it. In its journey to becoming a global streaming service, which delivered its own in-house content, it tiptoed past regulators in multiple jurisdictions, avoiding major trouble by sticking to entertainment. It also adapted to different flavors of the internet, handling slow connections in India, and coping with unfair local competition in places without net-neutrality. Indeed, Netflix has been accused of pusillanimity because it bends over backward to avoid trouble by self-censoring. This happened, for instance, when comedian Hasan Minhaj’s criticism of the Saudi regime was not broadcast in the Kingdom. But the focus on entertainment also avoids the fake news scandals that have rocked Facebook, Twitter and Google. Netflix has, therefore, successfully straddled the entertainment and tech universes, combining business models and techniques in a manner unlike any other company. It uses a subscription model similar to that of Hollywood studios and TV channels.

But it also uses data science as effectively as Amazon, Facebook or Google to guess what its viewers enjoy watching. Its algorithms sort viewers into thousands of different “taste clusters”. This is done reportedly by adapting an astrophysics program originally used to classify the spectrums of stars. It has proved remarkably successful in commissioning content that works locally and, globally, with appropriate subtitling. Narcos is popular in India while Latin Americans like Sacred Games.

This evolutionary process has made it a massive and serial disruptor. Netflix disrupted the home DVD-rental market. It disrupted conventional TV programming with its streaming services. It disrupted the global model of content generation and commissioning where even the biggest studios stuck, by and large, to their own turf. Ironically some analysts feel that the success will sooner, or later, lead to trouble with regulators if it crowds out free-to-air, public-service broadcasters. But until such an eventuality comes to pass, Netflix will retain a unique identity as the only company that is a member of both FAANG (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) and the MPAA.―Business Standard