Netflix’s next step: becoming Disney?

Netflix is starting to learn from Disney. Just when Ai YouTeng is still fighting with the short video industry, Netflix, which has long been profitable, launched Netflix Shop, entering the e-commerce field for the first time.

Netflix Shop is currently selling a limited number of goods, but 18 kinds. Among them are up to $ 135 robot alarm clock, there are also $ 30 T-shirt, but mainly in the price range of $ 30 to $ 80 clothing. In the future, Netflix will also launch a series of merchandise such as “Stranger Things” and “Demon Hunters”.

What these items have in common – they are all peripheral products of Netflix’s IP.

It’s hard not to think of Disney, the top player in the IP licensing market. According to the International Licensing Industry Association (LIMA) data, global sales of licensed merchandise in 2019 in order to $ 292.8 billion. The first place Disney accounted for $54.7 billion, a figure that is twice as much as Netflix’s full-year revenue in 2020.

Obviously, Netflix aimed at the IP licensing cake. Behind this is Netflix’s hidden worries, and ambitions.

Netflix’s hidden worries

2020 is almost the best year since the birth of Netflix. Because of the epidemic home, many people’s entertainment activities have shifted online. netflix also grew by 37 million paying subscribers, breaking the company’s growth record, and the total number of paying subscribers exceeded 200 million in history. Accordingly, profits rose 76 percent for the year.

The company, which was founded as a DVD rental business, made a timely shift to the streaming business at the end of the golden age of television. Since then it has achieved double-digit growth in paying subscribers year after year.

As a company with a market cap of $230 billion, Netflix’s business model is extremely simple – produce quality content and attract consumers to pay for subscriptions. 98.52% of Netflix’s revenue in 2019 came from membership fees. In analogy to the domestic long-form video platform Aikiy, membership fees only account for about 50% of its total revenue, with the rest coming mainly from online advertising and content distribution. It can be said that the growth of Netflix’s revenue depends entirely on the growth of users. The flip side of this statement is that Netflix’s business model will be in crisis once paid subscribers fail to grow consistently.

Netflix, the pioneer of streaming platforms and the one with the largest number of subscribers, may hit the user ceiling even earlier. Streaming platforms are essentially stealing subscribers from pay TV. The U.S. pay-TV market, for example, has declined year by year since 2011, when it peaked at 101 million paying subscribers. Netflix currently has about 67 million U.S. subscribers, meaning that more than half of potential subscribers are already paying for Netflix. In the first quarter of 2021, Netflix added just 4 million subscribers, below expectations of 6 million, and Netflix’s stock price fell 11%.

One quarter of poor performance is not a serious problem for Netflix, what really hurts is – Netflix’s market share may be being eaten by competitors.

Netflix’s membership fees have risen five times in response to the pressure on revenue from slowing subscriber growth. Most recently, in October 2020, the base package remained unchanged at $8.99, while the standard and base packages increased by $1 and $2 to $13.99 and $17.99, respectively.

That’s not much different from Netflix’s over-decade-old main competitors HBO NOW ($14.99 for ad-free) and HULU ($11.99 for ad-free), but it’s not much of an advantage over the ambitious new generation of entrants like Disney and Apple. Disney+ costs just $7.99 a month, and Apple TV+ costs even less at $4.99.

The past year has been almost a warring era for global streaming, with giants Disney, Apple and Paramount entering one after another.

When asked at this year’s first quarter earnings analysis conference what he thought of the current competition, Netflix founder Reed Hastings responded: “Obviously, there’s always been new competition. But when we look at past numbers, the company has been growing because we’re also confident.”

The confidence of the founders is one thing, but the cannibalization of Netflix by the giants is also real. 2020 saw Netflix’s market share of original programming drop to 50% from 56% at the beginning of the year.

Netflix's next step: becoming Disney?

Global original programming market share. Data source: Parrot Analytics. image credit: New York Times

Behind this is Netflix’s content loss. Because of the launch of Disney+, Netflix took down a series of Disney IP content. HBO, on the other hand, got back the rights to Old Friends, The Big Bang Theory, Studio Ghibli and other works. Likewise, the old sitcom “The Office” was taken back under the NBC banner.

Of the hours watched by subscribers, Netflix’s own shows account for only 30% of the total, with the rest coming from outside rights. The top three Netflix airtime titles in 2018 were none other than The Office, Old Friends and Grey’s Anatomy, according to Firstrade. New content may be the key to pulling in subscriber growth, but for veteran viewers, they are more inclined to choose works they are familiar with.

Netflix, which has been making a push for original content, has withdrawn most of its production plans because of the epidemic. Currently, Netflix does not have any major returning series.

Netflix’s model is more or less like a one-shot deal. Netflix’s Stranger Things and House of Cards have a large, die-hard fan base, but a single subscription payment model does not fully exploit the value of these IPs. This has led to a strange phenomenon: on the one hand, there are fans with money in their hands screaming “Shut up and take my money”, and on the other hand, there are officials who are “indifferent”.

Netflix's next step: becoming Disney?

Image source: memegenetator

Last year Netflix’s self-produced documentary “King of the Tigers” was watched by 34.3 million people in 10 days online, making it Netflix’s most successful series. Immediately on the e-commerce brand Esty appeared a large number of “King of the Tigers” around. But none of them are listed, they are all copycats.

Netflix's next step: becoming Disney?

A search for “King Tiger” on Esty still yields 8,195 results. Photo credit: Esty

It’s easy to see why Netflix is launching an online store. In the official Netflix blog, Josh Simon, head of the Netflix Shop and vice president of the consumer products division, wrote this, “We love seeing good stories transcend the screen and become a part of people’s lives.” “We’re always thinking about how we can expand our world of stories for fans, from costumes and toys to immersive events and games. That’s why today we’re launching Netflix shop as an exciting new destination that combines curated products and rich storytelling in a unique Netflix shopping experience.”

It says one thing between the lines: We want to be Disney!

Disney Magic

In 1929, a man approached Walter Disney at his hotel with $300 and asked for an image of Mickey Mouse to be printed on a writing table. This $300 became Disney’s first “franchise” income. Nearly a century later, that $300 became a $54.7 billion business.

Turning over Disney’s IP list, you will find that it is almost a long bottomless list. In addition to its own original IP, such as Mickey Mouse, Winnie the Pooh, Disney Princesses, The Lion King, etc., Disney in the first 20 years of the 21st century also crazy acquisition of Pixar, Marvel, Lucasfilm, Twentieth Century Fox. In other words, in addition to Mickey Mouse, you are familiar with the Avengers, Star Wars, Avatar, Toy Story, all of these IPs belong to Disney.

Netflix's next step: becoming Disney?

Family portrait of Disney’s IP characters. Photo credit: psu.edu

According to TitleMax in 2019, eight of the world’s 20 most profitable IPs are from Disney, with a cumulative economic value of $35.182 billion. Among them, Winnie the Pooh, Mickey Mouse and Star Wars are ranked 3rd, 4th and 5th respectively. These more than 40 years or even nearly 100 years of old IP, still exploded with amazing vitality.

Netflix's next step: becoming Disney?

The remaining Top 20 Disney IPs are Disney Princess at No. 7, Marvel Universe at No. 11, Spider-Man at No. 12, Cars at No. 18 and Toy Story at No. 19. Photo credit: TITLEMAX

In Hollywood, there is a famous locomotive theory: the movie itself can be unprofitable, but it must drive the development of related products. Walt Disney obviously understands this. As early as 1957, he drew a sketch that clearly described the business model of Disney.

Netflix's next step: becoming Disney?

The Disney business model as drawn by Walt Disney. Image source: kottke.org

In this sketch, the movie studio is at the clear center, with music, television, licensed merchandise, theme parks and publications all surrounding it. In the case of the magazine, the film provides the content for the magazine’s articles, and the magazine gets to promote the film and Disneyland. Each part was closely linked, complementing each other.

To this day, the Disney Company has not departed from the underlying logic of this model. Disney never sees the animated images it creates as a one-time consumer product, but rather as a goldmine to be consumed for a long time to dig deeper.

When Disney makes a movie, the company doesn’t just think about the movie itself, but how to translate the story into merchandise, services, experiences and other derivative products. As Jay Rasulo, Disney’s former chief financial officer, put it, “Every aspect of the company is geared toward brands and franchises.”

In today’s world, this model for Disney is called revenue rounds.

First, Disney would release a film with an IP story at a high cost, earning the first round of revenue through the box office. Then, Disney would sell the film rights to streaming platforms to earn a second round of revenue. At the same time, Disney will add corresponding new characters in the theme park for each new movie launched, earning the third round of revenue through Disney Parks.

Finally, the fourth round of revenue is earned through franchising, publishing, retailing, etc.

Through these four rounds of revenue, Disney clearly “drained” the profits of each IP. These various profit channels give Disney a key advantage over Netflix and extend the life of its IPs even more.

Building love for stories, turning love into money

Unlike Disney, Netflix does not have plans to build offline stores. Currently, Netflix has signed licensing agreements with retailers such as Target, Walmart, Amazon, H&M and Sephora for hundreds of peripheral products.

Netflix has also developed an online mall system with e-commerce platform Shopify. Previously, Shopify has provided technical support for Allbirds, Kith, The New York Times and Kim Kardashian’s brand Skims.

And Simon, the project leader for Netflix Shop, spent six years at Disney Studios as director of production and development.

All this information seems to indicate Netflix’s determination: “Hey! We’re not playing around, we’re serious!”

For years, Netflix has avoided whether it is an entertainment company or a technology company. Just recently, Netflix founder Hastings declared, “We’re really an entertainment company.”

In essence, according to Matthew Ball, a former Amazon Studio executive, an entertainment company does only three things.

Create/tell stories

Build love for those stories

Turning love into money

By this standard, Disney is undoubtedly the best company on the planet at what it does. Think about it: How many little girls want to wear Elsa’s blue dress when they visit Disneyland? And how many parents would pay for that?

Netflix has done a good enough job at telling stories and building love, but can it turn that love into money?

Mark A Cohen, director of retail research at Columbia Business School, expressed doubts: “Most of them [Netflix’s hit shows] have a short shelf life, unlike Disney’s IP, which is a generation long journey.”

Despite the very high level of uncertainty, the current moment is undoubtedly Netflix’s best year financially. The company has borrowed a total of $16 billion in the last 10 years. Late last year, Netflix said in its fourth-quarter earnings report that it no longer needed to seek borrowing to fund the company. In other words, Netflix has become a truly profitable company.

Its other streaming competitors, meanwhile, are all still losing money, including Disney.

This article comes from WeChat public number: Geekpark (ID: geekpark), author: Tang Yitao

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/netflixs-next-step-becoming-disney/
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