Category and Competition

Category

Initially starting out in the film rental industry, Netflix pursued a unique business model that made it difficult to compare with existing firms in the marketplace. By moving ordering online with a subscription service, it separated itself from competitors. Then, when it pursued streaming in a risk to innovate, it pioneered the online distribution channel to deliver mainstream film and television to the masses. This was the dawn of streaming. Because a new entertainment market was created independently of the entertainment industry, Netflix does not primarily compete with other entertainment companies, though a few have offered services like HBO Go and BBC iPlayer. In Netlix's still-existing DVD market, it competes with RedBox and local rental stores.

OTT Streaming

More interesting is the still-growing competition in the over-the-top (OTT) streaming market. After the creation of the streaming industry, new entrants to the market were largely comprised of tech companies with existing infrastructures; as opposed to than media companies. In the growth phase, Netflix competes with the likeness of Hulu, Amazon (Prime Instant Video), Google (YouTube Red and Rentals), Apple (iTunes Rentals), and of course, piracy (HTTP streaming and BitTorrent). A marginal portion of the market is subscribed to alternative services like Sony's PlayStation Vue and Dish Network's Sling TV.

The reason for Netflix’s popularity among online users — despite the new competition — is its original programming. In 2Q15, around 90% of Netflix subscribers viewed the company’s original content. Netflix’s popularity among users has also been due to the company’s $8.99 plan that lets users access HD (high-definition) streaming on two screens concurrently. Netflix offers plans that range from $7.99–$11.99 per month, which is less than HBO Now.

Industry Innovation

Netflix (NFLX) differs from linear networks in terms of flexibility. Netflix subscribers can watch any show on demand for hours at a time. They can stream content on any screen, including a laptop or tablet. This kind of hyper-consumption works for Netflix and has encouraged the company to produce original content. The company expects to spend ~$5 billion on content acquisition in 2016. Content licensing is usually for a fixed number of years, and Netflix pays for an exclusive SVOD (subscription video-on-demand) license for a given title. But content providers may prefer other cable and broadcast networks and other OTT (over-the-top) players over Netflix. In order to avoid a particular player’s monopoly over content, numerous licenses can be issued for the same content.

This is one of the reasons Netflix prefers original content produced exclusively for the company over content licensing. Original content also gives Netflix global distribution rights, which could add to its revenues in the long term.

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