【passionhd com】专题Is Netflix success only because of burning cash?

Many post-80s and post-90s love to say they owe a movie ticket to Stephen Chow and a concert ticket to Jay Chou. In fact, many people also owe membership fees to Netflix. Although the “404 Not Found” blocks out Netflix but cannot stop the curiosity of people. Good movies are stored in the hard disks and can also be a multi-player sport —— exchanging them with roommates.
I’m not talking about the good movies that reflect your loneness, but those produced by Netflix, like Black Mirror, House of Cards, The Irishman and so on. Type 1 if you guys have watched them. Of course, we didn’t watch the HD ad-free version but the Macau Casino Ad version, but what else would you ask for without paying the membership fee. Netflix’s market value has gone from less than $500 million in 2002 to more than $180 billion today. Purchasing Netflix’s stocks at that time is more profitable than investing a house in Beijing. A lot of people claim that the success of Netflix is due to its willingness to burn cash to produce films and TV series. Is that really the case?
I’m Danny, I talk about tech and cars. As usual, all information used in my video is authentic and first-hand. You’re welcome to disagree with my arguments, but don't doubt my sources.
Conclusion goes first. Netflix is successful not only because its huge investments in content creation, but because of its three crucial business transformation: streaming, original content and international market. Well, I know some of you may disagree by saying that the original content creation is just the same as burning cash for content production.
Well, that's fine. But I’d like to emphasize that don’t just focus on WHAT did Netflix do, but do consider HOW did Netflix do it, and WHY it did so. I’ll introduce you the Golden Circle model from my previous column article, “Expand or Profit, Which Is More Important?” to help you understand this.
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The Golden Circle Model
The Golden Circle consists of three circles, What, How and Why. Most people can only see the What, but they’ll not delve into the Why. For example, someone enjoys being the Asian Dance King and then an athlete. But most people can't figure out why he became an athlete.
Let's continue with the Golden Circle model to see the three major transformations of Netflix.
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01 Streaming
Let's start with the first point, streaming.
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In fact, Netflix endured temporary pain in each transformation, just like the pain in Luo Yonghao’s career path. From an English teacher to a mobile phone provider, and then to a live broadcasting host selling competitors’ mobile phones, even if he’s upset, his hawking will never stop. One’s career transition is painful indeed, let alone a large company.
If we now look at transformations of Netflix from the omniscient view, they are of course very successful. For example, when Netflix was founded, it used a new business model to overturn Blockbuster, which was then hundreds of times larger than itself and almost bought Netflix.
Here I'll give a brief introduction for those of you who aren't familiar with Netflix. Just now I said that Netflix used a brand-new business model. This is not the streaming membership business model that you see now. Streaming media is to watch videos online. For example, watching "The Story of Chuaner" and following the new seasons of animation on Bilibili are all streaming mode.
But rather than starting as a streaming media company, Netflix started its business with the model of mailing DVDs. You may now think there is nothing impressive about mailing DVDs, but at that time, the vast majority of Americans watched movies mainly by going to the offline store, Blockbuster, to rent DVDs.
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Just like you used to go to the supermarket to shop for groceries. Netflix’s mailing DVDs resembles using online platforms, JD or Fresh Hema, to buy food with delivery service. Please type 1 if you agree that JD and Alibaba should pay me for this ad.
We’ve been familiar with the hairdresser Tony's most recommended membership system, JD's overnight delivery and so on. But in fact, Netflix already started to do this more than 20 years ago when mailing DVDs. And there are also "3 NO" VIP monthly service – no rental period, no shipping fee, no transaction fee.
Netflix was a step ahead of Blockbuster's when it came to membership and mailing DVDs, but it still stepped to the transition to streaming in 1997, as early as its founding. Even if the Internet infrastructure at the time was still immature – slow and expensive, Netflix was still determined to do so.
As Reed Hasting, the CEO of Netflix, once said:
We cannot afford to use the crutch of DVD now because pure streaming works and so we wanna win as the best place to do pure streaming, not be the best place to do hybrid, because that wasn’t a long-term benefit.
Netflix is the one who overturns itself.
Why did Netflix is determined to transit to streaming media? This is also the Why of the Golden Circle model.
The essential logic behind the transformation includes two points – 1. efficiency improvement; 2. user experience improvement.
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For efficiency improvement, described in plain financial language, is the improved inventory turnover rate. Like Cook, the CEO OF Apple CEO, is a well-known expert in supply chain inventory management. As for user experience improvement, it can contribute to improve profitability. in my previous DannyData episodes, I talked about Apple's gross margin is as high as 38% or so, much higher than Xiaomi's 14%.
In fact, whether applying the mailing DVD mode or the later streaming mode, for Netflix, it is an improvement in both efficiency and user experience. For example, the mailing DVDs can be done at home, and the Netflix membership saved overdue fees. At that time, Blockbuster only supported offline return and required a large amount of overdue fees.
The streaming mode takes a step further. Such as the binge-viewing, which even eliminates the wait for mailing, helping everyone manage their time. And the fact that Netflix has adopted the binge-viewing mode rather than releasing one episode a week, makes the customers quite satisfied.
The fundamental for Netflix successful business transformation is improving user experience and efficiency.
Just as Hasting said:
“We always conceived of DVD by mail as a digital distribution network with high latency. And someday we’d use the internet to take the latency out.”
In summary, not all transformation can be effective. It is futile for an Asian Dance King to transform into an athlete. The effective transformation should be supported by the improvement of efficiency or user experience, just like the essence of information technology which I mentioned in the second episode about Meituan.
The improvement of efficiency or user experience is something requires deep thinking in the dawn of 5G era. Details can wait until I talk about 5G later. Are you guys interested? Danny, the "Digging Madness", you are familiar with, is back.
02 Original Content
Continue with the second, the original content.
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To be honest, compared with Bilibili's annual prime membership fee of 148 yuan, Netflix's is not cheap. In the U.S, Netflix's lowest charge is 8.99 dollar per month and in Japan is 800 yen per month. Netflix's price in a quarter is more than a year's worth of Bilibili's prime membership. Even the monthly mobile subscription plan of 199 rupees (about 20 yuan), which promoted to expand the India market, is more expensive than a whole year Bilibili prime membership fee.
Someone may say, ''Danny, if you think Netflix is expensive, it's not their problem but yours." I can only respond to such remarks in four words: "You are totally right." Although the membership fee of Netflix is not cheap, it is a fraction of the tens of billions of dollars that Netflix spends on its own original content a year.
I don't need to say more good words to the excellence of Netflix original content. Black Mirror, House of Cards and so on have become household names. Netflix, which started much later than HBO in TV series production, has been nominated for 112 Emmy Awards in 2018, outperforming HBO, the TV giant that has dominated the Emmy Awards for the past 17 years. We can only describe this with "ferocious".
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Emmy Awards Illustration
Although Netflix's success doesn't need my emphasis, in fact, Netflix's road of original content is not smooth.
For instance, after shooting House of Cards, Netflix invested 200 million dollars on Marco Polo, benchmarking Game of Thrones of HBO. Now you probably know who killed the Night King, but not that Marco Polo has traveled in China, in the large country and in the super-giant country. Maybe it would be more famous to shoot Mark Lao Luo asking for the Tall, Grande and Venti cup. Do you think it is sophisticate enough?
Self-produced original content contains great risks. When Netflix decided to get involved in this field in 2013, the outsiders were not very optimistic. They thought that you are a Silicon Valley company, why the sudden passion for original content? That was the work of Hollywood mates, you coders should not test the water.
Facts show that Netflix did succeed in filming. Where did Netflix fall, it learned to lie down again.
But why?
Netflix has no advertisement, so all its revenue comes from membership fees.
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Revenue of Netflix
Netflix's ad-free strategy is more restrained than Bilibili’s, which I mentioned in the last episode. Everyone has praised Bilibili as a "conscience enterprise" for not having roll ads. Netflix is completely ad-free, and its audience experience deserves lavish compliments.
This is one major difference between Netflix and YouTube. Netflix is like a Sony TV, more expensive with no ads, and YouTube is like Xiaomi, saving money on buying TV but more ads must be tolerated.
Since all income of Netflix comes from membership fees, increasing its income has only two ways to go: raising membership fees or attracting more subscribers.
Netflix had a radical price increase in 2011. It split the original $10 DVD plus streaming package service into $ 8 for each service. However, this radical price increase made users and investors very unhappy. In two months, Netflix lost 800,000 users, and the stock price fell by 80%, which is comparable to the consequence of Luckin Coffee’s financial fraud.
On January 15, 2019, Netflix announced another price increase only to U.S. users. The monthly subscription price of the entry package rose from $ 7.99 to $ 8.99, and the monthly price of the most popular mid-range package increased by two dollars to 12.99. The price of the premium package, which can support simultaneous viewing of four devices and ultra-clear picture quality, has also increased by $ 2 to $ 15.99.
As a result, in the second quarter of 2019, Netflix's U.S. domestic users decreased by 130,000. This is also the first time in eight years that Netflix has experienced user churn. In July 2019, Netflix's share price fell by 15%.
Jeff Bezos once said: "Customers are very loyal until there is a better product." I make an adaptation here: "Customers are very loyal until there are cheaper products."
In fact, if you compare Netflix's membership fees to other streaming platforms in the US, Netflix's pricing is indeed not low.
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Monthly Subscription Costs for U.S. Major Streaming Services
So, I said that Netflix has no choice but to make original content.
Go further analysis, Netflix can only occupy more user time by relying on a wide range of original content. As Hastings has a very famous saying: “we ’re competing with sleep. ”
For all this time, Netflix has established its good reputation in the industry for producing original high-quality content, such as House of Cards, Black Mirror, Love, Death & Robots, etc. that I said earlier.
In addition to these great productions of broccoli, Netflix also has candies, that is, some light-hearted and enjoyable programs. Such as Netflix invested in the production of "Nailed It!" as a candy to its customers. To be frank, Netflix wants to occupy your time and compete with your sleep, by its broccoli and candies.
So, as long as it is a time-consuming company, it is Netflix’s competitor. Since the competition of users' time is the competition of Internet entry, which is why a large number of Internet giants have already entered the market of original content.
03 International Market
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Let's move on to the third point, the international market.
Netflix has spared no effort to pursue the international market:
“Netflix is racing to get as global as quickly as possible. We want to produce content all over the world to share with the world.”
For now, Netflix's competitors are no longer old-fashion companies like Blockbuster, AMC, etc., but supergiant’s like Disney and Apple. For example, in terms of content, Hastings believes that Netflix's biggest competitor is Disney. To enlighten green hands, Disney is not only Snow White, Mickey Mouse, and Donald Duck, but also includes excellent series IP like Marvel, Star Wars, Pixar, National Geographic, etc.
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The Intellectual Property of Disney
Disney launched the Disney+ streaming service on November 12, 2019. On August 6, 2019, Disney CEO Bob Iger said on the earnings call that during his 14-year term, the upcoming Disney+ "regarded as the most important product launched by the company." This is considered as a Disney’s declaration of competition with Netflix. I will talk more details when talking about Disney. There is one more hole.

Apple also launched Apple TV+. In 2020, Warner ’s HBO Max and NBC Universal’s NBC Universal will also enter the field, plus Amazon Prime Video, which has been launched before. This is really like a clash of the Titans.
In addition to the above domestic competitors, Netflix has an opponent that is easily overlooked, that is, Tik Tok, which is Douyin that you may be familiar with. This will be discussed in detail when I talk about ByteDance. Are you interested? "Digging Madness" Danny reappears.
Because of the fierce competition, Netflix has always spared no effort in original content production. In 2016, Netflix's content investment was $5 billion. In 2017, this number rose to $9 billion, and reached $12 billion in 2018 and then $15.3 billion in 2019.
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Netflix's Original Content Investment: 2016-2019
As you can see from DannyData, in recent years, the growth trend of the number of paid users of Netflix in the US market is significantly lower than that of the international market.
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Paid Membership at End of Period
And the average monthly payment amount of American users is higher than that of the global market. That’s also related to the fact that Netflix raised the price in the US.
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Average Monthly Revenue per Paying Membership
Of course, Netflix also needs real skills to open an international market. There are two major problems to be solved: talent and technology.
Let ’s talk about talent first. What does Netflix rely on to attract international talent?
Netflix's corporate culture can be said as a legendary in Silicon Valley. I have previously posted the Netflix Culture Handbook on Knowledge Planet of Danny. If you are interested, you can read it. I truly understand that many of you will feel uncomfortable when first read the Netflix cultural manual, because some of the words are tough. Like, "we are a team, not a family." This is entirely different from many traditional companies that love saying that "We are family.”
One thing in the Netflix culture is very eye-catching: "Only recruit adults."

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Therefore, Netflix lays off one-third of its employees every year, which is a routine for Netflix.
One-third layoff every year may seem cruel, but it is an excellent way to maintain talent density.
Let me talk about technology.
Solving problems through technology is what Silicon Valley people are best at it. Hastings once said:
“The real problem we’re trying to solve is, how do you transform selection so that consumers can find a steady stream of entertainment they love?”
As a technology company in Silicon Valley, Netflix can process big data that HBO and Disney can’t. Such as the recommendation system: Cinematch, which has a history of 20 years. Netflix even spent one million dollars in 2006 to hold an algorithm competition to reward the team that provides a solution that increases 10% in engine push accuracy. From the front-end, this sophisticated algorithm can filter out accurate, personalized pushes according to each user's viewing habits. Although itis not new now, Netflix has been doing it for 20 years.
From the backend, with the help of Cinematch, Netflix can fully grasp the user's usage habits, viewing preferences, and analyze where they end viewing, where they repeatedly watching. This helps Netflix better understand its users, to the extent of each second and each scene.
Each of your actions is being observed. Hence, Netflix can see where the marketing vacancy is for them to supplement, and which are the best scenes, movie lengths, and narrative styles to attract users.
Netflix is a good example to tell you how a robot understands you better than your mate. But of course, you must have a boyfriend or girlfriend in the first place. Sorry for hurting the feelings of single buddies like me.
To sum up, we talked about three crucial business transformations of Netflix in this video: streaming, original content, and international market.
Before you go, I'd like to share with you some of my personal insights.
In fact, not only for Netflix, countless doubts will be generated during each transformation. What really matters is that no matter how many doubts you are facing, you have the ability to always take the right path.
You might ask what is the "right path". That is a good question. To find the answer, we shall split it into two parts: the "right" and the "path".
Firstly, "right". Two abilities are necessary for leaders to constantly know what is right. One is the ability to foresee, and the other is the ability to see the big picture.
The former is easy to understand. An example is Reed Hastings's believing since long ago that DVDs will eventually be phased out:
“We always conceived of DVD as temporary, the internet streaming as the long-term.”
Having foresight is particularly important for entrepreneurs. Although people's doubts might be reasonable, the real opportunities often lie in the fields that are not favored by the majority. Chen Rui, the married man of Bilibili, has had a similar opinion: when you find a field that everyone is optimistic about, it is too late.
In addition to the ability to foresee, it is also important to have sophisticated big-picture thinking, with both the boldness of "sacrificing the short-term benefits for future"; and the cleverness to balance the multiple relationships of present and future, the investment and the revenue, the users' preferences and the self-realization. The "right" people are often egoists with idealism.
However, it is not enough to have the right decision. Paths are made by men. As the saying of our old friend Lu Xun that we often read in the textbooks:“There is no path in the world until people walk through."
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However, it is not to take one way directly to the end, but to constantly adjust and move forward in the frustration and other's doubts. For instance, to be more open and to clarify their strategy, in addition to the strong technical capabilities and corporate culture strategy as I mentioned earlier, Netflix also needs three kinds of mindset.
The first is insight. It is normal for attempts to be doubted and changes to be criticized. While people with insights can quickly identify the key points and iteratively optimize what being questioned. In the era of big data, technology can be a way to enhance insight. For example, the popular films made by Netflix are exactly supported by the big data about users. Another example, as a content creator, my insight is also enhanced by your bullet chats and comments. So please feel free to share your thoughts and leave your comments.
The second is to have a normal heart. It’s normal that people have doubts because everyone has “path dependence”. Even when I, such a small creator, try new styles of videos in DannyData, the audience will generate various doubts and indisposed feelings. Furthermore, people come from all kinds of backgrounds. The well-educated audience definitely has something to say when watching me, a bad learner "talking about tech and cars." As Gao Xiaosong said:
"Some take short-cuts, others do their best; some return to home, others travel all around the world."
It is the diversity of the world that makes this world colorful. And besides accepting the doubts of others, sometimes you even have to "look for trouble" and learn self-questioning from Reed Hasting: “You can never know anything for sure. Maintaining a reservoir of doubt is really important”.
When you habitually question yourself, it becomes easy for you to stay calm when facing other's doubts. Just like me, with a frequent self-mockery, I don’t care about those awful comments anymore.
The third and last, the confidence.
Lei Jun has a better saying than "are you ok": "There is no insurmountable obstacle. No matter what kind of crisis we are facing, confidence is always more precious than gold."
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For example, in the face of Coronavirus, no matter how the Western questioned our country's system of "concentrating forces on major tasks", let alone that they even proposed such a troubling idea of ”herd immunity”, we always stay firm in our faith and countless doctors and nurses fighting on the front line. As Stefan Zweig wrote in "Decisive Moments in History":
"Fate contemptuously shut the shrinking violets out. Fate, another god in this world, is only willing to raise the brave with his warm arms and send them to the paradise of the heroes."
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I think these doctors and nurses are exactly the heroes as Stefan Zweig described.
In the end, I'd like to end this video with the speech of Winston Churchill in the movie “Darkest Hour”:
"We shall fight on the seas and oceans; we shall fight with growing confidence and growing strength in the air. We shall defend our island, whatever the cost may be. We shall fight on the beaches, we shall fight on the landing-grounds, we shall fight in the fields and in the streets, we shall fight in the hills. We shall never surrender!"
The next episode is about Tencent. Don't forget to click the like button and subscribe to my channel.
Techs Never Die. See you next time.
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往期回顾
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