Hey everyone, hello! Last week, we talked about HBO’s reluctance to dive into the online streaming platform too early, and the quite rational reasons behind this decision. However, these reasons might have been precisely what Netflix anticipated about HBO, thus using these “rational” reasons to dominate the online streaming platform alone. For those who wish to revisit our previous newsletters, you can click the link provided.

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The Masterstroke: Counter-Positioning

What exactly is “Counter-Positioning”? In simple terms, it occurs when a startup adopts a business model that is “opposite” to that of the established market leader, in such a way that if the market leader were to follow suit, it would damage its existing business. This often leads the incumbent to make one of three decisions:

  1. Delay adopting the new business model,
  2. Implement it half-heartedly,
  3. Or a combination of both (delaying the decision and then implementing it half-heartedly),

Eventually, this leads to a gradual decline in market share, inability to counteract the startup, and finally, the incumbent decides to align with the startup’s approach—usually too late.

Why, then, if counter-positioning is so disadvantageous, are market leaders reluctant to change immediately?

The hesitation often stems from several factors:

  • Investment in Existing Infrastructure: Market leaders have heavily invested in their current operations, and a pivot to a new model might mean writing off those investments.
  • Brand Perception and Customer Expectations: Changing the business model might confuse customers or dilute the brand’s perceived value, especially if the brand is associated with a particular service quality or product type.
  • Internal Resistance: There can be significant internal resistance within large organizations against drastic strategic shifts, especially from those whose positions or departments might become less relevant.
  • Financial Risk: The uncertainty of success with a new model presents a financial risk. Market leaders running profitable operations might be particularly risk-averse, preferring the status quo to the uncertainty of a new venture.

Netflix’s strategic use of counter-positioning effectively capitalized on these hesitations, positioning itself in a way that made it difficult for HBO to directly compete without jeopardizing its existing business model. By the time HBO and other traditional media companies recognized the inevitability of online streaming, Netflix had already established a dominant position, illustrating the effectiveness of counter-positioning as a competitive strategy in the fast-evolving digital landscape.

The reluctance of market leaders to change, despite the evident need to adapt to new business models, primarily stems from two reasons:

Reason One: They’re Still Making Money!

Why change something that’s currently profitable? The biggest hurdle for market leaders when considering a shift in strategy or entering new markets is the risk associated with moving away from a model that is still generating profit. The concern is that any change might lead to decreased profitability, or worse, losses. This mindset is particularly prevalent in companies like HBO’s parent company, Time Warner, which had significant investments in cable companies and other cable TV channels. The business model was straightforward: more cable TV and premium channel subscriptions equated to more money, and it was lucrative. Moving HBO to a primarily online platform risked cannibalizing its own cable business and harming the revenue of other cable channels under Time Warner, including CNN, which benefited from cable subscriptions without requiring additional fees.

Reason Two: Corporate Management Cares (Can Only Care) About Current Profits!

Senior corporate managers, though operating at executive levels, are essentially high-level employees. Their job security and compensation are directly tied to the company’s current financial performance. Good performance can lead to bonuses and job security, while radical changes that result in short-term losses can lead to dismissals. Even if management recognizes that failing to adapt might spell regret in 10 to 20 years, the immediate consequences of change deter action. Given the uncertainty of whether they will still be in their positions in the distant future, managers prioritize current success and compensation. Without the mandate to sacrifice short-term profits for long-term viability, there’s little motivation for them to undertake significant changes.

This dynamic underscores a fundamental challenge within many established companies: the tension between short-term profitability and long-term strategic positioning. While startups like Netflix can maneuver with agility and adopt disruptive models without the burden of existing profitable operations, legacy companies struggle with the inertia of their success, often leading to delayed responses to market shifts until it’s too late.

Market leaders are more inclined to embrace change when they see profitable opportunities combined with a pressing need for transformation.

Recognizing Profit Potential: Initially, when Netflix’s monthly fee was only $7.99—significantly lower than the $15 HBO could charge its subscribers—HBO didn’t see the value in entering a seemingly unprofitable market. However, as Netflix gradually increased its monthly fees—$7.99 to $8.99, then to $10.99, $12.99, $13.99, and finally $15.49—without losing many subscribers and actually gaining more, it became evident to incumbents like HBO that change was imperative. Especially as Netflix continued to expand its profitability.

Forced to Change: The sale of HBO’s parent company to AT&T in 2016 marked a turning point for HBO. The new ownership was not satisfied with HBO’s slow pace in the online streaming arena, prompting HBO to accelerate its efforts in online streaming post-acquisition.

HBO in the Post-Counter-Positioning Era

Despite HBO’s eventual full commitment to online streaming around 2018, Netflix had a substantial head start, having launched its streaming service in 2007. This decade-long gap has left HBO in a continuous game of catch-up, with no end in sight. As of 2023, Netflix reported a net profit of $5 billion, while HBO’s parent company was still operating at a loss.

Netflix, intentionally or not, utilized counter-positioning by anticipating HBO’s reluctance to enter the online streaming market prematurely. This strategic move effectively restrained HBO, transforming it from a market leader in the film and TV industry to a follower.

Counter-positioning stands out as a fascinating tactic because it turns a market leader’s strengths into insurmountable obstacles to adaptation. The big question now is whether any new startups will use counter-positioning to challenge Netflix in the future.

This strategy highlights the dynamic nature of competitive markets, where today’s innovators must continually adapt or risk being outmaneuvered by tomorrow’s disruptors.