Last week, Netflix’s shares plummeted 10% after the streaming video company reported disappointing subscriber numbers for its latest quarter. Analysts are wondering if the stock is overvalued and if Wall Street’s romance with the company is over.
Such speculation is premature given the strength of the Netflix brand, the popularity of its platform, and its rapidly expanding global footprint. But the company will need to make some fundamental changes to its service in order to maintain its market power and reassure investors.
For one, it should expand the release window for its original shows. Netflix releases its original shows in one shot. While this creates tremendous buzz leading up to the release and has made the brand synonymous with the binge watching phenomenon, it also compromises the shelf life of the shows and potentially hurts subscriber retention. The company should increase its hold on subscribers instead by releasing episodes weekly, similar to regular television, which would lock down viewers for months instead of just a few weeks.
This would also keep Netflix shows in the news much longer and generate the type of morning-after water cooler conversations that promote viewership. For example, HBO’s Game of Thrones enjoys plenty of buzz throughout its season, which has arguably made it an even bigger hit. By contrast, House of Cards vanished almost completely from the news shortly after its release, most likely because most Netflix subscribers saw the entire show in the first weekend and so there wasn’t much left to talk about. That’s a lost opportunity for Netflix to keep its brand in the public eye.
It should also create better content. Over the past few years, Netflix has considerably expanded its range of content, from Oscar-bait movies like the recent Beasts of No Nation, thought-provoking documentaries like The Square and sci-thrillers like Sense8. But laudable as this type of programming is, it’s a far cry from crowd-pleasing hits like House of Cards and Orange is the New Black that put Netflix’s original content on the cultural map and expanded its subscriber base.
Netflix needs to go back to basics and create more shows with widespread (or at least cult) appeal. Intellectual or quirky movies and shows that win awards have their value, but profits come from mainstream entertainment that can sell globally. There are signs that the company realizes this. This week, Netflix announced a planned revival of popular television show Gilmore Girls after having done the same with ‘80s hit Full House (expected to air in 2016).
Adding a premium tier to its service could also make Netflix more competitive. A common complaint is that its offerings tend to be outdated. Most television shows don’t show up until several months after their latest season and current movie selections are sporadic at best. Amazon’s video service, which is also Netflix’s biggest competitor, has a much better track record in this regard. Even though many current offerings are pay-per-view instead of being included in Prime, the point is that they are available. YouTube also offers current programming much faster than Netflix.
To be fair, Netflix’s all-you-can-eat subscription model is more cost-effective for consumers than Amazon (AMZN) or YouTube’s pay-per-view option. But without relevant content, it’s useless.
Netflix (NFLX) can fix this problem by adding a premium tier to its service, which would enable viewers to obtain more current content – for a price. This would give subscribers more choice and also eliminate one of Amazon’s major competitive advantages. From a financial standpoint, Netflix could defray the higher costs of acquiring the latest movies and shows by charging a higher price for the premium tier.
Over the summer, Amazon announced that it would allow its customers to download video content for offline playback on airplanes or wherever a fast Internet connection is unavailable. Netflix, on the other hand, refuses to provide this feature, partly due to technological difficulties. While it’s unclear whether a downloading option will be a major attraction for consumers, it’s yet another arrow in Amazon’s quiver in its war with Netflix, and so Netflix’s stance makes little sense. If Amazon can do it, it’s hard to imagine why it wouldn’t be feasible for Netflix.
There’s also the consideration that Netflix currently accounts for more than one-third of all Internet traffic at peak times due to its high bandwidth streaming content, which ironically can slow down access for its own subscribers. As usage grows, this bottleneck will become tighter and downloading at non-peak times could be a good way to alleviate some of the traffic congestion and ensure a smoother viewing experience for users.
Netflix may be down but there’s still plenty of upside in its future. It’s amassed a huge market share in the U.S. and its international expansion could yield big dividends in the future. Its latest quarter may have been lackluster but that’s partially due to inflated expectations. But having said that, the company needs to adapt to changing market conditions and increased competition in order to get back on top.
S. Kumar is a tech and business commentator. He has worked in technology, media, and telecom investment banking. He is not an investor of Netflix, Amazon or other companies mentioned in this article.
