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5 Strategic Risks For Netflix: From Competition to Regulation

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While the COVID-19 pandemic has drastically boosted demand for video streaming services, Netflix’s market share has decreased sharply last year, as shown by new data. Netflix is still the leading giant of the US streaming market, but its share has dropped from 29% to 20%. Every strategic plan and action of Netflix will be essential to the company’s status and might adversely affect its value. We highlighted 5 key strategic risks faced by Netflix and why they are important to its global operation.

1. Strategy Risk

For a video streaming company, content strategy is really important for attracting and retaining subscribers. Netflix’s main content strategy focuses on providing original, timely, and interactive content. Netflix spent a significant share of its content expense on original content production — more than 80% of $15.3 billion meant for video content spending was allocated to original content production in 2019, and this spending is increasing year by year.

The 5-year compounded annual growth rate (CAGR) for spending on video content is about 20.25% while the 5-year CAGR for paid subscribers is only 17.98%.  This strategy did not help generate comparable growth in terms of subscribers. Despite the high spending on original content, Netflix still highly depends on third-party studios for licensed shows and movies, which accounts for the majority (63%) of Netflix’s viewing. Any changes in the relationship or agreement with these third parties would have a highly negative influence on Netflix’s operation.

Netflix’s pricing strategy could also have a significantly negative effect on its operation and company value. The company implemented two major pricing changes in the United States, in 2017 and in 2019. Both of them resulted positively and added company value, but Netflix should still have more considerations before making any decisions on price changing.

Risk related to pricing strategy is listed as one of the risk factors under Netflix’s annual report. As quoted in Netflix’s annual report, “We may, from time to time, adjust our membership pricing or our pricing model itself, which may not be well- received by consumers, and which may result in existing members canceling our service or fewer new members joining our service.”

2. Competitor Risk

As mentioned, Netflix is losing its market share and this is mainly due to new platforms entering the markets. Major competitors include HBO Max, Disney+, Amazon Prime Video, and Apple TV+.

Netflix’s penetration in the United States is quite mature. Less than 10% increase in US paid subscribers and more than 80% of paid digital video subscribers in the US are already Netflix’s users, according to a survey. Any actions or strategies of new entrants or existing competitors targeting its current existing market portion might significantly damage its company value.

Of course, Netflix, owning the biggest portion of the market share, is still in a great position, but the risk for future growth and development is a significant problem. Netflix’s global expansion is also slowed by many local streaming service companies who are more easily accepted by local customers and more favored by local governments.

3. Supplier Risk

Despite relying on third-party studios for licensed shows and movies, Netflix is also dependent on a number of partners to make its services available to consumers. As stated in their 2020 annual report, the agreements with these partners are mainly one to two years in duration. If Netflix can’t be successful in maintaining existing relationships and creating new ones with these partners, it might result in customer dissatisfaction and therefore adversely impact company value.

4. Regulation Risk

Any changes in regulations or laws concerning the Internet and online services might have negative effects on Netflix’s business. As the company is expanding to other countries, governments are highly likely to introduce new regulations or extend existing ones to Netflix’s services, such as new taxes or fees. Especially in many Asian countries, heavy restrictions on content strongly withheld Netflix from growing its subscribers and expanding its global reach.

5. International Risk

Netflix’s international expansion faces many challenges. Apart from the difficulties arising from the restrictions imposed by local governments, Netflix also needs to face the intellectual and economic challenge of creating regional content that could win the favor of local viewers. Language is one of the barriers for Netflix to attract local interest in some markets. Netflix’s main content is in English only and it would face high risk and high cost of producing non-English language content that fit the local market.

Pricing for the international market is also a deep problem. Due to content limitations and a lack of non-English content, many local customers are unwilling to pay the high subscription costs for a limited content library and prefer local service providers instead. Netflix needs to develop different pricing strategies and systems for different markets according to the regional average income level.

Searching for and building firm relationships with providers to get supporting devices, like TV with Netflix connection and devices that could download their app, to local markets is another challenge. Internet speed and quality differ across the world and failure to develop adjusted plans that consider local infrastructure quality would adversely damage Netflix’s competitiveness against local streaming service providers. Costs might be high to provide reliable broadband connectivity and stable networks in areas targeted for expansion.

References

Burch, S. (2021, April 5). Netflix Lost 31% of Market Share in the Last Year as Streaming Rivals Gained Ground: Charts. TheWrap. https://www.thewrap.com/netflix-streaming-us-market-share-chart/

Stoll, J. (2021, April 23). Netflix: video content budget worldwide 2021. Statista. https://www.statista.com/statistics/707302/netflix-video-content-budget/#:~:text=In%202019%20video%20streaming%20service,spending%20to%20original%20content%20production

Spangler, T. (2018, December 10). Netflix Original Series Viewing Climbs, but Licensed Content Remains Majority of Total U.S. Streams. Variety. https://variety.com/2018/digital/news/netflix-original-series-licensed-viewing-friends-the-office-1203085230/

Richter, F. (2020, January 17). Infographic: Netflix is No. 1 in the U.S. Statista Infographics. https://www.statista.com/chart/20540/netflix-dominates-digital-video-content/

Netflix. (2020, December 31). Form 10-k.

Yingxian (Winnie) Wu

Yingxian (Winnie) Wu

Born in 1995, she has a master's degree from Columbia University and a bachelor's degree from the University of Connecticut. She conducts academic studies on risk and risk-related subjects of media firms and industries. In 2021, she participated in Journo's New Horizons program, an internship for international students organized in partnership with Columbia Global Centers | Istanbul. The program aims to equip students from various academic fields with journalistic knowledge and skills.

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