How Netflix Leveled Up

The Rise and Fall and Rise (Again) of Netflix

The year was 2014, and our team was tasked with developing a report of Netflix. Like most behavioural studies, our adventure started in the Ivey clad façade of Harvard University and took us all the way to the Malibu-style HQ of Netflix in Los Gatos. It was a great learning experience, with only the potential future sustainability and growth of Netflix at hand. No pressure (he said sarcastically).

Before this, the Netflix brand has risen to fame by providing not only online content for less than $10, but for also offering monthly DVD rentals for the same low cost. You’ve all heard the story of Netflix’s founder’s horrible service experience at a Blockbuster (there’s only one left in Bend, Oregon), only to devise a plan to compete. Did he ever! So, where did things go wrong in the early years?

All things go digital.

Seeing the writing on the wall (all things going digital), Netflix decides to lower its prices on a monthly subscription (amazing), but at the cost of removing the free DVD rental option and allocating this to its separate revenue channel. Since the majority of people using Netflix weren’t using the free DVD rental service, it seemed like a win-win. Except it wasn’t. During this transition, Netflix lost 1 Million subscribers within days. Everyone was outraged.

But why? This was no heinous scheme of world domination. They simply wanted to provide a better, cheaper service to those who didn’t need a service (the DVDs) that they weren’t even using. But by alienating customers and not explaining the reasoning behind it, people felt cheated and decided to leave out of spite (only eventually to return after Netflix put things back to the way they used to be). That was a learning moment; this time around, the stakes were even bigger: They had just joined with Disney to promote the Disney suite of shows on Netflix.

We worked on how this merger would function. Our report included some information pertaining to the specifics of the merger, the sharing of information with Disney, which Netflix hadn’t ever done before, and how the new shows (Marvel’s Jess Jones, Daredevil, Luke Cage and Iron Fist) would open up an entirely new avenue of subscribers. Punisher wasn’t even slotted in the original line up. We were happy to see the addition years later.

King of the digital castle.

At the time, Netflix sat on top of the subscription provider segment on the media world. We related them to the Ikea of online media. It was a love/hate analogy. Our report went off splendidly, we were praised, our professor congratulated us, and we got paid.

What wasn’t to love? We knew Netflix was going to be a success, but we still left things unsaid. Sure, our report examined the merger and illustrated the importance of Netflix creating their content to be able to circumvent the exorbitant cost of purchasing the rights to the content (an ever-increasing affair).

We knew Netflix made a deal of a lifetime with Disney and that the benefits surely outweighed any of the negatives. But something never sat right with me.

When threads unravel.

I love writing, reports, books, whatever. It’s cathartic. Sometimes I write simply to share my ideas. Often times, people don’t want to hear them, and that’s fine. But my brain works a little differently; I’m special that way. Because of my ASD, my brain connects things (colour-codes it) that I don’t often realize until I figure out what I am trying to tell myself. This case was one of those times. We had spent weeks circulating through revenue generation models, predictability analysis and behavioural profiling to determine a predictability model for subscriptions, a projected circulation timeline and obviously an estimated return on investment. But my brain was still telling me that something was missing.

During our analysis of Netflix, we reviewed their financial reports, conducted research and ultimately gave direction to where we see digital streaming and the Netflix powerhouse evolving. In late 2012, Netflix signed an exclusive licensing deal with Disney, through which it gained streaming rights to all Disney theatrically released films starting in 2016. Netflix gained streaming rights from 2013 to movies released directly to disk.

Netflix will now have all rights for content Disney, Marvel, Lucasfilm and Pixar. At the time, there had been a staggering 40% increase in streaming North American consumers. Exclusive access to Disney’s movies would enhance Netflix’s offerings and would enable the company to attract and retain Disney fans. We understood how herd mentality would drive Disney viewers to Netflix, how conformity would bring in the second wave of new subscribers and how the motivation of belonging would elevate the stature of Netflix and Disney. We had math (theoretical, of course) to prove it. Something just didn’t fit.

Show me the money.

In the movies, the protagonist wakes up in the middle of the night and starts writing a manifesto only to arise the next morning as the man who changes the world (in the unique premise of the movie, of course). Very Jerry Macguire-esque. I’m living proof that that does not happen in the real world. I mentioned to my team that something didn’t make sense days before our final presentation. We were exhausted, moody and slowly unravelling our team cohesion. In short, I was told to shut the #@$% up and stick to the plan. I didn’t push it.

I instead began theorizing why Disney was so adamant about gaining data from Netflix. Netflix never sold its data to content developers. It was the biggest part of their strategy that I admired. You see, Netflix would buy 20 TV shows for $20M for one year.

Now in year 2, they want to keep those shows, but ABC production studios now have Netflix on the ropes. ABC says, “sure; those 20 shows this year will be $22M”. Meanwhile, ABC has started producing 20 new shows based on the sole fact that Netflix wants these shows (so they all must be popular, right?) Netflix decides, “Ok, we will pay $20M, but let’s drop these two shows.”

Netflix knows they weren’t as popular and were at best filler episodes. Virtually useless to their bigger strategy. But ABC never knew that, because Netflix wouldn’t give up that data. Until Disney. The night before the presentation, it hit me. Disney was paying to learn how the system works; Disney is going to build a platform to compete with Netflix. Disney is Netflixing Netflix. I emailed my prof with a call me now message. It took 47 minutes to receive a callback.

Hack the planet, with colours.

But that’s ok. I began writing. Colours were connecting; much like the scene in Hackers, numbers would float around in an incomprehensible array of imagery, only now I had a decoder and could piece it all together in a linear fashion.

By the time my professor had called, I had sketched out the entire plan of how Disney would develop their platform from harvesting data, how their deals would dissolve within approx. five years (enough time for a test) and how a launch would include a massive suite of episodes. I also made a note to the fact that Pulp Fiction and the Golden Girls were Disney owned content and if they would be on the new service. When my professor called, he could hear my frantic state. He said to relax and meet him for a drink. Being Eastern European, you’d never decline a drink, so I grabbed my notepad and left.

Know what to order and deliver (to your client).

In our meeting, I ordered a rusty nail. It was important to have a go-to-meeting drink, one that wasn’t overly arrogant, but also equally not juvenile. I loved the story of the creation of the Rusty Nail, so that was my go-to. In our meeting, I had explained how this deal was more than content and merging corporate entities; it was a potential take-over of an industry. My professor, polite as pudding, let me express my thoughts, connecting dots that had never been discussed before. He smiled, ordered another drink and kept listening. Never once interrupting me. I appreciated that.

When I finished my thoughts, he put his drink down and took a deep breath. “You seemed like you had a long few days. I remember when I first brought you onto this project. I thought to myself, well, he could either tank this project or make it spectacular. I’ve read through your work; it’s……. well above average.”

He didn’t say great, why didn’t he say great? The conversation that came next was probably the most valuable thing I learned while going to school in Boston.

“Your team put in a lot of effort, and the plan you’ve proposed works quite well. I especially appreciated the behavioural algorithm you devised. Crude, but fundamentally it works. I was impressed with your work.”

“How did you know I wrote it? It was a team effort.” It wasn’t. The team hated the idea.

“Your team reached out to me and said you should be taken off of the project. They felt your ideas didn’t align with their recommendations. They were wrong, I told them so and clearly you argued well enough to have your work included. Well, most of it anyways.”

Those #$%@^#. “Really? Those #$%@^# wanted to kick me out?”

“It’s ok, you are a team, succeed or fail, you will do it together. Your report is sound. The venture will prove extremely profitable for both parties. I agree with your annotations. Moving forward, Netflix will still need to produce its original content to stay relevant.”

“And Disney making a play on Netflix?”

“I think….” He just sat there and stared at his drink for almost 15 seconds. Enough to make the air in the room feel stale. Then he looked up at me. “You did great work, but sometimes it’s not greatness people want. Sometimes people simply want you to agree with them. Sometimes above average is all we need.” He looked deflated. For a moment, I felt like we were both defeated, yet we also achieved our goal. That feeling never went away.

We never disclosed my thoughts in the report. I do remember leaving the meeting though and letting it “slip” to one of the programmers. I learned a very valuable lesson that day, one that has shaped much of my career. I smiled and went to the closest bar and bought Those #$%@^# from my team a round of drinks.

Into the future.

Half a decade later, Disney Plus was created. It is still in its infancy and has recently signed a new “deal” with Hulu, so I anticipate more to this story.

To be continued?

How Netflix Leveled Up

The Rise and Fall and Rise (Again) of Netflix

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