Netflix has been taking a victory lap this week: Financial Times released a 2,400-word article on “How Netflix won the streaming wars”. On Tuesday, Co-CEO Ted Sarandos dared its competitors to be as transparent as Netflix with its latest “What We Watched” bi-annual report, which was released this morning.
A few subscribers asked why I have not discussed Netflix in my recent essays on cloud-usage premium video-on-demand (PVOD) models. They offered similar arguments: Netflix faces the same challenges with audience demand for “premium content” as legacy media companies so it also must pivot its model.
In response, I noted two pivots Netflix made between 2021 and 2022. The first was its cancellation of the $200 million budget show “Jupiter’s Legacy” in June 2021, only 26 days after its release. The show was the first major bet to come out of Netflix’s acquisition of its $50MM to $100MM acquisition of comic-book publisher Millarworld. By 2023, Netflix had stopped acquiring expensive IP and opted for games studios, instead..
The second pivot took place in April 2022, when a round of executive firings in Netflix’s Animation division brought an end to “a deeply chaotic period… which saw a boom of talent and creativity give way to corporate pressure, mixed messages and accusations of “staged data.’” Until then, Netflix management had been both coyly promising investors that it was building a Disney-like flywheel for the long-term.
In both pivots, Netflix ditched some of its legacy media DNA. It then built deeper into the more technological aspects of “consumer choice”—live streaming, games, advertising—to drive more engagement and consumer choice within its platform.
Today, Netflix faces a different challenge: It struggles to compete with YouTube because consumers seem to increasingly regard the quality of creator content as equal to, if not better and more relevant than, Netflix’s Hollywood and foreign productions.
Key Takeaway
The more that YouTube competes with Netflix on television screens worldwide, the more YouTube is proving that consumer “choice and control” over the medium of the internet means fans are the producers of the content they want to watch.
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More McLuhan Than Christensen
These two pivots echo my arguments in “Disney, Fox, Venu Sports, DirecTV & The Doom Loop of The Mogul” that walled gardens’ DTC offerings are the "wrong products". The business of distributing interactive content to billions of devices (mostly smartphones) over the internet is not the same as the linear distribution business model. Interactive content is not the same as static light signals sent via miles and miles and miles of fiber optic cable to a finite number of homes and businesses (over 100 million homes in the early 2010s and now 76 million).
In the latter model, there is a scarcity of supply (a finite number of cable channels) and demand (a finite number of homes with TV sets). Content needs to “wow” to grab audiences’ attention at scale. The more TV homes with cable access (a peak of over 100 million in 2012), the more recurring monthly revenues were generated. In turn, there was more budget to fund expensive shows and movies that could deliver this “wow” factor.
The irony of Netflix's two pivots is that it had built its streaming service over the previous decade with the television and movie content of Hollywood studios. But, by 2022, they had learned that the “wow” factor in internet distribution that could drive recurring subscription revenues lay more in technology and less in production quality.
In other words, they realized Marshall McLuhan’s “the medium is the message” was the better strategy over Clayton Christensen’s disruptive innovation theory. They zigged where their Hollywood competition zagged and “won the streaming wars”.
YouTube’s TV App
However, Netflix is still losing to YouTube.
Nielsen’s The Gauge for August 2024 reported that Netflix was down 0.5% month-over-month to 7.9% share of U.S. TV viewing time while YouTube was up 0.2% to 10.6.%. Netflix management has set the objective of surpassing TV viewing time in each country at 10%, but YouTube is the first streaming service to reach that benchmark in the U.S.
YouTube is beating Netflix with cheaper content that it hosts and indirectly subsidizes through the sale of ads. Audiences do not need to be wowed in their living rooms, they only need relevant content. More people will watch a three-hour interview by MIT Professor Lex Fridman (who has 4.2 million subscribers) than Kevin Costner’s new three-hour movie “Horizon: An American Saga” ($35 million box office since June) in their living rooms.
Christian Oestlien, VP of product management at YouTube, made this case to The Hollywood Reporter after yesterday’s Made on YouTube event where it announced “a major revamp” of its connected TV app. YouTube is giving its creators the tools to build Creator Show Pages because “a ton” of them are increasingly producing 20-to-40-minute videos with “kind of a season arc” and multiple episodes.
Those pages will look like its Primetime Channels experience, where consumers can subscribe to on-demand streaming TV services like Max and add-ons within YouTube like NFL Sunday Ticket. Oestlien used the notable example of HBO’s “House of the Dragon”, whose second season cost over $20 million per episode.
That user experience (UX) offers a “really rich, immersive channel page experience which people have come to expect around episodic content”. The objective is a “binge episodic experience” with creator content to which Oestlien believes “the lean back TV environment really lends itself.”
The New Producers
The takeaway is that creator content increasingly competes with professionally produced content. Consumers no longer perceive Hollywood’s content “quality” as an impetus for spending money on media or devoting time.
This reflects my argument from two weeks ago that YouTube’s huge marketplace for creators is “more McLuhan than Christensen: It has leveraged the invisible ‘groundrules [sic], pervasive structures and overall patterns’ of the internet to build a marketplace where creators have a more interactive relationship with their consumers.”
In February’s Medium Shift column, “The Media Revolution Will Be Prompted”, YouTube creator Samir Chaudry told me audiences are “connected and invested” in the human creators who make YouTube what it is. So, one way to read YouTube’s Creator Show Pages is as an acknowledgment that in the business of lean-back TV, millions of fans worldwide are replacing the select few Hollywood producers.
In McLuhan’s terms, the message of the internet medium is that the lines between the fans as consumers and fans as producers are blurred. What it means to be “invested” has evolved from something emotional into something financial.
YouTube has embraced and evolved this new dynamic: Fans either indirectly fund YouTube creators through watching ads or directly via subscriptions, merchandise and tips (all enabled by YouTube’s Partner Program). Whereas on Netflix the content is only funded by Netflix and/or third-party producers.
Notably, this echoes something that Reed Duchscher—CEO of Night, the creator talent management agency—wrote in a LinkedIn post: “Most top creators no longer view premium distribution as the ultimate goal”. I argued in July’s essay that YouTube’s “creator-friendly model” will “create more business opportunities like subscription fees and merchandise than an ‘A’ content streaming series, alone.”
The New Business of Living Room Content
Netflix management seems increasingly sensitive to this competitive dynamic.
On Tuesday, Ted Sarandos told an audience at the Royal Television Society’s (RTS) London Convention 2024 that “choice and control” are key in the streaming age. For this reason, Netflix must cannibalize its own business and “constantly challenge ourselves, to break [the business] and move our business forward on behalf of our consumers.”
This reads like another pivot, deeper than its recent innovations of live streaming, games and ad-supported streaming. It also reads (surprisingly) more Christensen than McLuhan.
But, the more YouTube competes with Netflix on television screens worldwide, the more YouTube is proving that consumers' “choice and control” over the medium of the internet means fans are the producers of the content they want to watch.
In this sense, Netflix must shed more of its legacy media DNA as YouTube proves there are more efficient models than traditional theatrical and television production models that can entertain audiences, at scale, in their living rooms.
We have little evidence as to whether it is making that pivot now. But, for it to truly succeed in delivering “choice and control” to consumers in a way that competes with YouTube, it will need to.