The Netflix Situation: Is It All About the Value Equation?

Much has been made of Netflix’s recent Q2 earnings. The company reported a loss of 126,000 domestic paid subscribers and missed its forecast for global subscriber growth, sending news outlets and market analysts into a frenzy. According to t...

Much has been made of Netflix’s recent Q2 earnings. The company reported a loss of 126,000 domestic paid subscribers and missed its forecast for global subscriber growth, sending news outlets and market analysts into a frenzy.

According to the CNBC article linked above, the company blames price increases, a weaker slate of content, and its strong Q1 growth for its Q2 performance. Journalists and analysts, meanwhile, have tacked on the ideas of increased competition and announced departures of mainstays like Friends and The Office over the next two years as possible reasons.

And this all made me think about some research we did back in June 2018, where we examined the phenomenon of “cord-cutting” and perceptions of streaming and traditional cable providers. I wanted to look back and see if there was anything in there to point to potential reasons and maybe even try to predict what may be in store for Netflix in the future.

While this should all be looked at as a hint of what’s happening and what’s to come (since this research is a year old and this market is constantly changing and this wasn’t focused squarely on perceptions of Netflix itself), there are some nuggets in there that may help shed some light on the matter.

Cost and content are often part of the same value equation

As mentioned, Netflix has blamed cost increases for its Q2 performance. And sure, cost increases are always risky. But is it that simple?

After Invoke ran the Cord-Cutting session, I wrote a blog post detailing some of the findings. And one piece of data that stuck out to me was that it wasn’t just about cost for viewers when it came to considering cutting the cord. It was about value.

As I note in that original blog post, users are conducting a value analysis when they are deciding between services such as traditional cable and streaming. The post makes the point that traditional cable providers are often not delivering on this feeling of value – offering decreased content for an increased price.

The chart below illustrates how viewers think both traditional providers and streaming providers have changed over the past three years (as of June 2018) and you can see streaming providers are perceived to have improved big time, with 71% saying that have improved a lot or somewhat while over a quarter of viewers saw traditional providers as getting worse (Figure 1).

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Figure 1 – How have these providers changed over the past 3 years? (n=90)

Obviously, viewers have an increasingly more positive attitude towards streaming providers than they do towards cable/fiber/satellite providers. And the most common reason for a declining opinion of traditional providers? A feeling of increased cost and decreased benefit (essentially, declining value.)  And content is often where these viewers are defining value:

“They keep jacking up the prices and no new channels for the higher prices.”

“The cost[s] continue to rise and the channels you want are not always in the most affordable package…”

Streaming providers could face that same scrutiny if they offer up a proposition of less content and higher costs.

So perhaps both Netflix and the press are right. It is about increased costs, but it’s also about content. As Netflix rolled out what they perceived as a weaker slate of content, announced the departure of two frequently watched shows, and increased their prices, this may have caused subscribers and potential subscribers to come to a negative value equation when evaluating Netflix in Q2. 

Original programming can help bring about a positive value equation

According to reports, Netflix is forecasting robust growth in Q3. The company is expecting to have 7 million paid net adds and revenue of $5.25 billion. And it appears they are basing this largely on a stronger original content slate. They have already rolled out their newest season of Stranger Things and new seasons of both Orange is the New Black and The Crown are to follow. All of which are very popular shows for the provider.

And based on the research from June 2018, the company may be right to place their hopes for Q3 in the hands of Eleven, Piper, and Queen Elizabeth. Take a look at this blog post based on the same bit of research.

As you can see from the chart below, over 2/3 of viewers say it would be important for a streaming provider to offer original programming. Streaming providers such as Netflix have created the desire for this type of programming and it is expected they will continue to provide it.

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Figure 2 – How important would it be for a streaming on-demand provider to offer original programming? (n=90)

But even beyond that, original programming has a strong association with streaming throughout the data from that research. For example, going back to the question alluded to in Figure 1 (How have these providers changed over the past 3 years?), the 71% that think streaming providers have improved very often point to the original, unique content they provide:

“I think they have improved a lot.  There is more original programming offered.  There is also more variety with both new and older programs available.”

“Providers such as Netflix are offering their customers special programming that you can only get if you subscribe to them. Others are doing the same thing to keep their customers.”

Netflix is specifically associated with original programming very often. When asked to rank streaming providers, Netflix was most often ranked #1, compared to all other streaming providers (with 60% saying this). And the network’s original programming was most often cited as a reason for this high ranking:

I love all of the original programs they have some of the best.

I ranked Netflix as number 1 because they offer the best original TV shows and I like the variety and quality of movies and shows they offer.

So will Q3 prove out to be a successful quarter for Netflix? Based on this data, the company’s original programming could help to better balance out the viewer value equation so as to increase subscriptions so I am optimistic about it. But interesting times are ahead for streaming providers with increased competition coming in later in the year and into 2020.

That’s why it’s important for these providers to stay on top of what their viewers want. The best way to do that? Listen. Listen to your viewers and potential subscribers through sound market research. And hey, if you’re looking for a company to handle that, I may know of one.

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