January 23, 2020

The Netflix fox

It's hard to think of another media company that has been so consistently ahead of the technological curve as Netflix. Founded in 1997, less than two decades later, Netflix went from tech startup to putting its biggest competitor out of business. And then having almost completely cornered the market, it abruptly pivoted to the nascent video-on-demand model.

By 2011, CEO Reed Hastings was chomping at the bit to spin off the mail order DVD business and focus on streaming (partnering on the hardware side with a company called Roku). This first attempt was met with howls of protest. Though quickly walked back, Hastings didn't abandon the goal. I didn't see it at the time (which is why I'm not CEO of a big media company). But as my brother pointed out, "However screwed up NetFlix is, the networks and movie studios are worse."

Well, at least I was right about the value of maintaining the Netflix DVD brand even while the mail order business entered a slow (yet profitable) decline. In fact, Netflix continues to tout it on the streaming side.

On the DVD side, Netflix focused its shrinking attention on common-denominator bestsellers, understandable given its shrinking audience (the backlist is slowly shrinking too as damaged DVDs are not replaced, but it's so big it can shrink for a long time). I've also come to realize, however, that I have little interest in most of what Hollywood has to offer. And when I do, a one-off rental from Amazon Prime or buying the DVD will do.

I tried Hulu and wasn't that impressed. Hulu struck me as designed for the "like cable only different" audience. So I figured it was time to give the Netflix streaming service a spin around the block. I was already a Netflix DVD subscriber.

As it turns out, something interesting happened to Netflix in the meantime. The long tail lives!

Today Netflix is the world's biggest streaming service, with 160 million subscribers and a truly worldwide reach. Netflix has thus far shared the streaming space with competitors like Hulu and Amazon. But Hollywood has awakened to the streaming challenge. Disney+ debuted in late 2019 and WarnerMedia will introduce HBO Max later this year, each service bringing along enormous catalogs of content.

This is where Netflix's global footprint creates the unexpected twist. It's a business, after all, and would like to produce a lineup of fat-tailed hits everywhere it has a presence. So in Japan, Netflix produces dramas and reality series that would be competitive on any other Japanese network, and outbids its competitors abroad for production rights to series like Violet Evergarden from Kyoto Animation.

Chris Anderson was right all along. Netflix is still in the long-tail business.

If all Netflix did was produce fat-tail hits in every market it operates in, the end result would still look like a bunch of long tails to everybody else. Which is why hand-wringing business analyses about competition from Hollywood behemoths like Disney and WarnerMedia largely misses the point—unless Netflix makes the mistake of thinking that it is in competition with these Hollywood behemoths too.

According to Japanese mythology, the more tails a fox has, the more powerful it is. Anderson's model does need a bit of revising. Rather than relying on one big long tail, Netflix has built a business based on a whole bunch of tails for completely different audiences. Netflix has essentially become a global version of MHz Networks (which will abandon its broadcast network and transition to a streaming-only platform this March).

Netflix and MHz—now that'd make for an interesting partnership.

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Navigating Netflix
Netflix in Japanese
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The streaming chronicles
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