This article synthesizes 20 years of innovation at Netflix and explores how, after two decades of continuous innovation, Netflix has once again reinvented itself, identifying its next engine for revenue growth.

Quickly looking at Netflix’s 20-year growth journey, which can be considered a textbook example of relentless innovation and change:

  • Initial Disruption
    Netflix initially broke into the market with an unlimited borrowing and extensive selection DVD rental service, offering a completely different business model from the then market leader Blockbuster. This helped Netflix build a user base, brand recognition, and financial strength.
    -> Blockbuster’s original profit model involved charging per individual movie with additional hefty fees for overdue returns. However, Netflix’s innovative business model successfully carved out its niche in the DVD rental market.
  • Disruptive Streaming
    Knowing that DVD rentals might not be sustainable, Netflix used its existing customer base and financial strength to negotiate for online streaming rights for popular movies and series from major rights holders, launching a service completely different from traditional cable TV networks. This expanded Netflix’s user base, transformed its brand, and continued to enhance its ability to acquire additional series.
    -> Netflix launched a new business that would disrupt its original business model by directly offering online streaming content, with a low monthly fee, allowing selection of favorite series or movies anytime, anywhere, without the extra cost of cable TV, providing an emerging profitable model.
  • Investing in Original Content
    With a large user base and strong finances, Netflix began investing in original programming, gaining full control over its content, capable of producing entire seasons of programs without having to cater to the whims of rights holders.
    -> Previously, purchasing broadcasting rights was limited by rights holders who would set different licensing fees for different countries, potentially preventing Netflix from broadcasting the same content globally. However, by producing original content, Netflix broke through geographical restrictions, allowing content to be broadcast globally, magnifying the returns on content investment. Netflix can thus offer paid services in any country on the planet through the internet.

What’s Next for Netflix?

Along its journey, Netflix has skillfully leveraged its strengths, building each new step on the achievements of the previous ones, continuously accumulating growth and progress. This remarkable achievement makes it nearly impossible for future competitors to match the current Netflix.

However, the once rapidly growing Netflix faced challenges post-pandemic. By 2021, it had reached 200 million paid subscribers globally and began to see a slowdown in growth. After all, those who were going to subscribe likely already had, and those who hadn’t subscribed probably had their reasons (such as opting out due to password sharing, high costs, or the challenge of promoting Netflix subscription fees in lower to middle-income countries). Where would Netflix find its next revenue growth stimulant?

If you were Netflix, what decisions would you make to stimulate growth?

In 2022, they turned their attention to advertising. This marked a significant departure from Netflix’s past self-imposed limitations, as the company had refused to introduce ads for many years. However, during the first decline in subscriber numbers in 2022, they began to consider an advertising model and successfully launched it within six months, attracting over 5 million new subscribers to the ad-based plan within six months of its rollout.

Why is Netflix now suitable for utilizing advertising?

Let’s break down why Netflix is currently well-positioned to integrate advertising into its service:

  • Consumer Choice and Convenience: Previously, consumers subscribed to Netflix’s ad-free plans to solve specific needs: accessing content anytime, anywhere, and enjoying high-quality content at a low cost.
  • Competition with Cable TV: Cable TV offers more channels and a wider range of content, including news, talk shows, series, and movies. Yet, consumers chose Netflix for the ability to binge-watch series on demand and for its cost, which was lower than a combined cable TV and HBO subscription.
  • Rise of Competing Streaming Platforms: With the emergence of platforms like HBO MAX, Disney Plus, and Hulu, which all offer on-demand services and similar or cheaper subscription fees, why should consumers choose Netflix now?

The introduction of ads into Netflix’s model addresses several strategic needs:

  • Monetization of Non-subscribers: By offering a cheaper or free tier with ads, Netflix can monetize users who are not willing to pay for a premium subscription.
  • Market Differentiation: While other platforms also offer low-cost options, Netflix can leverage its vast content library and high-quality original programming to offer value that differentiates its ad-supported tier.
  • Expanded Reach: Introducing ads helps Netflix reach a broader audience, especially in markets where the subscription fee is a barrier.

Netflix’s move to incorporate advertising is not just about tackling slowed growth; it’s about evolving with consumer behavior and competitive pressures. This strategic shift reflects Netflix’s agility in adapting to market dynamics and its commitment to exploring new revenue streams without compromising the core value proposition to its existing subscriber base. This decision exemplifies how Netflix continues to innovate and redefine itself in the ever-changing media landscape.

Why Consumers Subscribe to Netflix’s Ad-Free Plan

Consumers now subscribe to Netflix’s ad-free plan primarily because they want content that is available exclusively on Netflix.

The Draw of Exclusive Content

Netflix’s compelling reason for consumers to choose their platform lies in its content exclusivity. When Netflix is the only platform offering hit shows like “Squid Game,” “The Three-Body Problem,” “Queen of Tears,” and the live-action “One Piece,” users will choose Netflix. However, if other platforms offer better, more discussed content, consumers may flock to these new platforms.

Netflix has been deeply involved in creating original content for years, thus understanding how to invest in diverse content, how to utilize unique materials and talents from various countries to produce more and better films. However, producing better or equally good content requires continuous investment, and even more funds than many online streaming platforms to secure good scripts, themes, and talent!

The Positive Feedback Loop

This investment is a positive cycle; however, it can become daunting if reversed. If Netflix cannot secure better content, leading to stagnant or declining user growth, they may need to adopt more conservative strategies. However, such conservative strategies might not secure better content, potentially leading Netflix into a challenging dilemma.

How Introducing Ads Solves Problems

Revenue Growth through Advertising

From Netflix’s perspective, introducing ads creates a new revenue stream. With subscription numbers nearing saturation and the current high interest rate environment in the U.S., continuously adjusting monthly subscription fees or borrowing money would not be viable options. Introducing ads appears to be a beneficial choice.

Addressing Price-Sensitive Consumers

As mentioned earlier, for countries with lower average income levels, price-sensitive consumers, or users who infrequently use the service, Netflix’s ad-free plan is prohibitively expensive. Coupled with Netflix’s policy to combat account and password sharing, shifting users who share accounts to a cheaper ad-based plan could be strategic. These price-sensitive or infrequent users might be more accepting of an affordable plan that includes ads. This mirrors the experience of watching YouTube or television, where viewers are accustomed to the presence of ads.

Advertising Solution for Major Brands

Facebook, Google, YouTube, Instagram, Xiaohongshu, and TikTok are all favored platforms by advertisers, thriving on their advertising revenues. The advantage of these platforms lies in their ability to precisely target ads, customize audience reach, and accurately measure ad clicks and purchase conversions. This is highly beneficial for small and medium brands, but for larger brands, these features alone may not fully satisfy their needs. Large brands often require “brand awareness” building, which is why, despite the prevalence of digital advertising, television commercials and large-scale event billboards continue to thrive.

Sponsorship ads at major events and television commercials, while not effectively measurable in terms of the direct purchasing effects they generate, successfully build brand recognition. They plant the seed in potential brand touchpoints, embedding the brand into the consumer’s subconscious before the actual purchase, like a nationwide electronics sensation.

Netflix’s Financial Growth and Subscriber Increase

By early 2024, it was announced that Netflix’s revenues and subscriber growth had both increased by over 12% for the year 2023, compared to just a 4% growth in subscriptions as reported in 2022.

Reflection

Netflix operated ad-free for over a decade and maintained this model up until the pandemic, considering it only when revenue growth hit a ceiling. Changing a principle that had been upheld for many years and had contributed significantly to the company’s growth and publicity was not an easy decision. Often, companies get caught in the “experience of success,” clinging to the principles that made them successful in the past and viewing them as unshakeable. This mindset can turn past successes into constraints. However, Netflix managed to break away from its past success strategies by introducing an advertising model, demonstrating its ability to innovate beyond its own success narrative. This move shows Netflix’s adaptability and willingness to reinvent its business model in response to changing market conditions and internal growth needs.