Netflix: Winds of change are blowing in streaming | Technology

This week’s Netflix stock market crash has put the entire industry on guard streaming. There are reasons for it. The Californian company has left tens of billions in capitalization after revealing that it lost 200,000 users in the last quarter. It is the first time in the last decade that it has not added new clients. And it expects another two million to leave it in the coming months. Investor panic also translated into falls in the shares of Disney (Disney+ offer) and Warner Bros Discovery (owner of HBO Max), two of its main competitors.

Are we facing a crisis exclusively for Netflix or at the beginning of a change in the entire sector? Most analysts point to the latter. Tell them if not to the channel streaming of CNN +, which has just closed after a single month of life. There is a series of problems that affects all operators equally. The first of them, with the permission of the growing competition, is the economic situation. Cut-price subscription business models suffer when they go wrong. Whoever has to tighten their belt will start there. The pandemic, the energy crisis, the war in Ukraine and inflation have been putting pressure on many pockets. The bleeding will be greater on Netflix because it is the one that accumulates the most clients, but no one will be saved.

Consumers have also evolved. A Deloitte report found last summer that young people, who are more sensitive to price as they suffer from more economic hardship, are capable of registering and canceling the same service several times in the same year. “Some mature users analyze their subscriptions month by month,” explains Rodrigo Miranda, general director of ISDI (Higher Institute for Internet Development). “This affects the platforms of streamingbut also to music or sports services”.

Another ingredient must be added to this cocktail. The model on which Netflix has based its overwhelming growth seems to be reaching the end of the first phase, that of attracting users with knockdown prices. Now it’s time to retain customers and make them profitable. For that it is necessary to fight the fiddle of passwords (Netflix executives estimate that there are 100 million users who share their passwords with friends and family) and look for new ways of monetization, such as introducing advertising.

This last route has been explored in the sector for some time. Amazon and HBO Max already put ads to whoever wants to pay less for their subscription. Disney+ has said it will. Netflix does not rule it out either, despite having always flagged the absence of commercials on its platform. Morgan Stanley estimates that the company stands to make billions a year from it. The arrival of advertising seems inevitable. “In many ways, we are seeing the television of the last half century now being reincarnated in the age of streamingJB Perrette, the Warner Bros Discovery executive in charge of video channels, said recently. on-line HBOMax and Discovery+.

runaway growth

Giving Netflix up for dead would be rash. It may have lost 200,000 users, but it still has 221 million left, and its revenue has continued to grow: it generates about $30 billion a year. It remains the undisputed market leader. His founder, Reed Hastings, made the decision to transform his DVD rental company into a platform for streaming at the beginning of the century, when the internet was far from working as it does today. Analysts called him crazy, the same thing that was said when he set out to become the largest audiovisual production company in the world. But he managed to convince investors and his growth was unstoppable. It is estimated that during the first year of the pandemic it was responsible for 11% of global internet traffic.

2016 was unforgettable for the company. That course made its great international leap, entering 130 countries. There are studies that indicate that it came to monopolize 40% of night traffic on-line of the USA. There were even those who proposed that the operators charge for abusing the installed fiber capacity. Everyone wanted to imitate that successful model. It was also that year when Hastings formulated one of his most iconic phrases: when asked if he was worried about people sharing passwords, he said that “we love that people share Netflix”. A few months before he said another: “Netflix will never put ads.” The two are today in question.

The loss-taking phase has come to an end. Until now, the company had not considered ways to make its customer base profitable simply because the new additions did not make it necessary. The time had to come when that curve began to flatten. “What happens with Netflix is ​​not new. We have already seen it in other subscription models such as insurers or mobile operators”, says Miranda. “The expensive thing, really expensive and difficult, is to get the user, and they have already done that.”

Now it’s time to retain customers. Either by way of prices, reducing them by advertising, or with special content. They could even offer new categories, such as video games, something that has been widely speculated about. “We have no plan to enter the video game sector,” Hastings himself told EL PAÍS Retina four years ago. He officially hasn’t changed his mind.

a data business

Netflix came to sneak into the Olympus of the big tech. Some US media have even reformulated the usual acronym to refer to them: from GAFA (Google, Amazon, Facebook and Apple) it became FAANG. This deference was not only intended to highlight its economic power (it came to exceed 300,000 million dollars in stock market value), but to include it in the club of companies that dominate the art of extracting and exploiting huge amounts of data from its users.

One of the keys to the success of the platform, they say, lies in its good handling of this treasure of information. Its content recommendation algorithm, based on viewers’ own ratings, has been extensively studied. Netflix also uses the big data in their productions. The company’s analysts, for example, saw that the British series House of Cards It was a hit, as were the movies by actor Kevin Spacey and those by director David Fincher. “They identified that at the intersection of those three elements was a huge potential audience,” data scientist Mark Tenenholtz said. To finish generating expectation, they served advertisements for their new series, an adaptation of the 1990 series, to those who came into contact with one of these three elements. The result was one of Netflix’s (and television’s) biggest hits to date.

The main platforms streaming (almost all except Apple TV) sell their customer data to third parties, as a Common Sense report showed last year. Their objective is to enrich and complement the profiles they create of their users. “At the moment that I am transferring the data to a third party, I can have a reciprocal equivalent. You gain usage, interest, or situation information that helps you hyper-personalize ads. Netflix customers could not stand to see conventional advertising, they need something super targeted, ”says Miranda.

Netflix has agreements, for example, with Meta. If someone puts on Instagram that they are sad, they may enter Netflix right after and melancholy movies appear. It will be one of those cases in which we suspect that the machines listen to us.