Introduction
This article will summarize Netflix’s 20 years of innovation and explore how, after two decades of transformation, Netflix reinvented itself once more, identifying its next revenue growth engine.
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Netflix’s 20-Year Growth Journey
Let’s quickly review Netflix’s 20-year growth journey—a textbook-worthy example of constant innovation and change:
- Netflix initially offered unlimited DVD rentals with extensive selection, introducing a business model entirely different from the dominant player, Blockbuster. This helped Netflix build its user base, brand recognition, and financial strength.
-> Blockbuster’s original profit model charged per video rental, with steep late fees for overdue returns. However, Netflix’s innovative approach carved out a successful niche in the DVD rental market. - Realizing DVD rentals might not be sustainable long-term, Netflix leveraged its existing user base and capital to negotiate with major copyright holders for online streaming rights to popular movies and shows, launching a service distinct from cable TV networks. This expanded Netflix’s audience, transformed its brand, and enhanced its ability to acquire more show content.
-> Netflix introduced a new business model that disrupted its own DVD rental service, offering on-demand streaming content for a low monthly fee, accessible anytime, anywhere, without additional cable TV costs. - With a massive user base and strong finances, Netflix began investing in original programming, gaining full control over content creation. This allowed for the continuous production of entire seasons without relying on copyright holders, enabling global distribution.
-> Previously, purchasing content rights was limited by copyright holders, who set different licensing fees by country, potentially restricting global availability. By producing original content, Netflix overcame geographic barriers, maximizing content investment returns and offering paid services in any country with internet access.
So, What’s Netflix’s Next Step?
Along this journey, Netflix cleverly built on its strengths, using each milestone as a foundation for the next, accumulating growth continuously. This is a remarkable achievement, making it nearly impossible for future competitors to challenge the current Netflix.
However, after years of rapid growth, Netflix faced challenges post-pandemic. By 2021, it had reached 200 million global paid subscribers, with growth slowing. Those willing to subscribe had already done so, while those who hadn’t likely had reasons (e.g., password sharing, high costs, or difficulty promoting subscriptions in lower-income countries). Where would Netflix find its next revenue growth driver?
If You Were Netflix, What Decision Would You Make to Stimulate Growth?
In 2022, Netflix turned to advertising. This broke its long-standing self-imposed restriction—having rejected ads for years. Facing its first subscriber decline, Netflix considered an ad-supported tier within six months and attracted over 5 million new users to this tier within six months of its launch.
Why Is Netflix Suited for Ads Now?
Netflix is highly suited to introduce an ad-supported model. Let’s break it down step by step:
Previously, Consumers Subscribed to Netflix’s Ad-Free Plan to Solve “Watch What You Want, Anytime, Anywhere” and “Quality Content + Affordability”
Cable TV offers more channels and content, with hundreds of options available anytime, including news, talk shows, series, and movies. So why would consumers pay for Netflix?
Netflix’s key advantage was enabling users to watch their chosen content on demand, completing entire series in one go, anytime, anywhere. Plus, its price was lower than a cable TV subscription plus HBO channel fees.
However, with the rise of streaming platforms like HBO Max, Disney+, and Hulu—offering on-demand services and similar or cheaper subscription fees—why should consumers choose Netflix now?
Now, Consumers Subscribe to Netflix’s Ad-Free Plan to Solve “Exclusive Content Only on Netflix”
Netflix’s edge lies in content uniqueness. When exclusive shows like *Squid Game*, *3 Body Problem*, *The Glory*, or *One Piece* (live-action) are only on Netflix, users opt for it. Otherwise, if other platforms offer better or more discussed content, consumers might flock there.
Having cultivated original content for years, Netflix knows how to invest in diverse programming, leveraging unique local talent and material globally. Yet, producing better or equally compelling content requires constant funding, especially to outbid other streaming platforms for top scripts, themes, and talent!
This is a positive feedback loop, but it could turn negative if Netflix fails to secure better content, stalling or reducing user growth. A conservative strategy might follow, but that could hinder access to premium content, potentially trapping Netflix in an unsolvable dilemma.
How Does Introducing Ads Address These Issues?
Ads Solve Netflix’s Revenue Growth Challenge
From Netflix’s perspective, ads provide a new revenue stream. With subscriber growth saturating and the U.S. facing high interest rates, raising monthly fees or borrowing more isn’t viable. Ads are a better option.
Ads Address Price-Sensitive Consumers
As noted, for lower-income countries, price-sensitive users, or infrequent viewers, Netflix’s ad-free plan is too expensive. Paired with its crackdown on password sharing, Netflix can shift shared-account users to a cheaper ad-supported tier. These consumers, accustomed to ads on YouTube or TV, are likely to accept this option.
Ads Meet Mid-to-Large Brand Advertising Needs
Platforms like Facebook, Google, YouTube, Instagram, Xiaohongshu, and TikTok are ad-heavy and profitable, excelling at targeted ads, customized audiences, and tracking clicks or purchases—ideal for small brands. However, large brands need more than precision; they seek brand awareness. This explains why TV ads and large event billboards persist despite digital ad dominance.
Event sponsorships and TV ads, though hard to measure for direct purchases, effectively plant brand seeds in consumers’ subconscious before buying decisions. Think of brands like Nationwide Electronics.
Early 2024 financials for 2023 show Netflix’s revenue and subscriber growth exceeding 12%, a significant jump from 4% in 2022.
Reflection
Netflix operated ad-free for over a decade, sticking to this model pre-pandemic, only reconsidering it when revenue growth stalled. Abandoning a principle held for years—one that sparked discussion and growth—was no easy task. Many companies, after success, cling to past winning strategies, turning them into rigid doctrines that become shackles. Netflix, however, broke free from its own success to embrace this change.
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