krysbenz walerya warford
Fatima Teem
Games may feel like a stretch, but recall that in January 2007, Netflix launched three hundred mediocre streaming titles to complement its DVD by mail service. Today, the company is an original content powerhouse and is one of the biggest studios in the world. These step-function innovations take time.
Below is a sample roadmap. I completed this exercise to illustrate how to transform the SMT framework into a rolling, four-quarter roadmap to tell a story of how each strategy might play out over time:
Netflix released its Q1 2022 earnings detailing a loss of 200,000 customers against a forecast of 2.2M new subscribers. It was the first quarter in ten years with no growth. Worse, Netflix forecasted a 2 million subscriber loss in Q2.
Performance in India is below par. Netflix lowered prices in India and is still working to understand how to compete there. Compared to the US, where households pay $100/month for cable TV, cable TV costs $3/month in India. The value equation for streaming services in India is very different from the US.
In 2005 Netflix struggled to deliver profits with its DVD by mail service and launched an advertising business to try to generate profits. They displayed ad banners on the site and printed ads on their DVD envelopes. They even executed an A/B test to see if there was a negative impact. The surprise: no retention impact. And for three years, advertising delivered meaningful profits.
Like advertising, Netflix believes that it will take a year to figure out the best approach. Netflix also acknowledged that account sharing exists because of their customer-friendly policy; they made it easy for members to set up multiple profiles and watch many movies simultaneously. It will take a while to reset expectations for account sharing among Netflix members.
Each month, I answer a few questions, drawing from my experience as VP of Product at The Learning Company, Mattel, Netflix, and Chegg. My free \u201CAsk Gib\u201D product newsletter now has 30,000 subscribers. A few quick notes:
You can purchase my self-paced Product Strategy course on Teachable for $200 off the regular $699 price. The course takes you through the same product strategy frameworks that I outline in this essay. The first two modules are free, so you can \u201Ctry before you buy.\u201D There\u2019s no expiration date for the materials, you\u2019ll receive an invoice you can expense with your employer, and there\u2019s a certificate of completion.
Two weeks ago, Netflix reported its first subscriber loss in ten years. They forecasted two million new subscribers in Q1 but lost 200,000 members and then predicted a loss of two million members in Q2. Wall Street responded quickly, driving Netflix\u2019s stock price from $350 to $200 per share. What should Netflix do?
Like product strategies, each of these steps is a hypothesis. Today, Netflix focuses on original content, and its next big bet is games. The vision is that games will be a significant part of Netflix\u2019s subscription service in five to ten years.
Over the last five years, in anticipation of Disney+\u2019s launch, Netflix focused on growth, enabling the company to build a hard-to-copy advantage through economies of scale. This year, Netflix can amortize its content investment across 222 million members allowing it to invest $18B in content \u2014 twice as much as Disney+. As a second priority, Netflix focuses on monetization so it can invest incremental profits in even more original content. The third priority is engagement, as measured by retention, given that the product\u2019s 2% monthly churn is so low.
A good product strategy answers the question, \u201CHow will your product delight customers in hard to copy, margin-enhancing ways?\u201D Below are five high-level hypotheses \u2014 product strategies \u2014 outlining how Netflix plans to continue doing this. While their high-level engagement metric is retention, I listed a proxy metric for each product strategy to assess short-term progress. I\u2019ve also added sample tactics against each strategy.
My work below is highly speculative and is not comprehensive. It attempts to craft a story using several product strategy models and observations from Netflix\u2019s blog, earnings statements, and the product itself.
Personalization delights members by making it easy to find movies they\u2019ll love. Executing personalization at scale is very hard to copy. Personalization also helps Netflix to generate profits. They have taste data for 222 million members and use it to \u201Cright-size\u201D their content investment. Netflix spends more on potential blockbusters like \u201CStranger Things\u201D and less on niche content like \u201CDawn Wall\u201D based on forecasts derived from their personalization algorithms.
Viewing experience. Netflix encodes titles hundreds of times for different devices and bandwidths. They also partner with over a thousand Internet Service Providers to localize traffic with their Open Connect Appliance embedded deployments, enabling movies to be viewed in high resolution nearly instantly. Open Connect also creates a hard-to-copy network effect via this ISP network. High-quality video and audio that \u201Cjust works\u201D delight customers.
Why did growth stop? In Q2 of 2020, Netflix exceeded its forecast by 8M subscribers, delivering nearly 16M net new subscribers. As the pandemic began, COVID \u201Cpulled forward\u201D lots of subscriber growth, given theaters were closed, and folks had lots of free time at home. Think of these extra eight million subscribers as fence-sitters that COVID pulled over the fence. These new subscribers might have joined in the next two years, but COVID inspired them to join early 2020. How long will these new members stay? Should Netflix expect more new subscribers over the next year, given this rapid influx? As COVID receded, would these fence-sitters cancel?
In 2021, Netflix's growth was slightly slower than expected, but they believed it was because growth had been pulled forward into 2020. However, by the 2022 Q1 earnings call, the answer was apparent\u2014 there was underlying weakness in the business. During the call, the Netflix exec team explained four factors:
Slower than expected rate of broadband & smart TV adoption. Netflix\u2019s potential audience is households with broadband Internet and smart TVs. With slower adoption, the migration from cable TV to streaming was slower than expected.
Widespread account sharing. Netflix is very customer friendly as they make it easy for customers to set up multiple profiles and watch up to four simultaneous streams from one account. Worldwide, Netflix reported 100 million \u201Csharers\u201D across 222 million paid memberships due to this customer-friendly approach.
Effect of price increases. Netflix has slowly raised its prices as AB tests determined they were revenue positive. There\u2019s slight, expected churn with each price increase, and Netflix works to win these customers back through continual service improvement.
It\u2019s more about cancels than customer acquisition. The main surprise was slightly escalated churn in Eastern and Central Europe \u2014 both connected to uncertainty caused by the war in Ukraine. There\u2019s also higher churn than expected in Latin America. Netflix will dig deep to figure out what\u2019s going on in both regions to forecast more accurately and address the underlying issues.
Content is critical, but its impact is hard to forecast. Ted Sarandos, Netflix\u2019s co-CEO and head of content, described the rich, upcoming slate of TV shows and movies. However, predicting how much new content will drive growth is still more art than science. Whether a show will be a \u201CSquid Game\u201D or \u201CCooking With Paris\u201D requires a well-calibrated Ouija board.
But in 2008, as Netflix\u2019s core DVD by mail business became profitable, Reed Hastings, the CEO, decided to kill advertising. The rationale was that Netflix needed to stay focused on personalization and maintain a simple experience. When Reed relayed his decision to me (I was VP of Product), he asked two questions:
There was pressure from both Netflix employees and consumers to offer more, but Reed felt it was essential to keep the service as simple as possible and for each of the three companies to stick to their \u201Clanes.\u201D We were careful not to force members to make additional choices about whether they wanted to pay more for a new release download or pay less for an ad-supported plan. This approach worked well for fifteen years.
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