by Kenneth Rudich
In a recent post titled Redbox’s Growth (and even Survival) Facing Strong Headwinds, we observed firsthand how a failure to negotiate a greater measure of market entrenchment in timely fashion can cost a company not only its enviable market position, but also put its future at risk.
This is especially true in the rapidly changing world of technology-based services, where doing nothing is tantamount to falling behind.
Netflix appears acutely aware of this threat, and it’s working hard to avoid becoming a victim of it. Clearly, it doesn’t want to be the next Redbox, and it surely doesn’t want to be the next Blockbuster (which was down to limping along with a mere 51 U.S. stores in 2015).
With this in mind, the company is trying hard to firm up its present market position in three significant ways.
The first is to better differentiate itself with exclusive and original programming.
The second and third are to differentiate itself with technology-related changes. One of these directly improves the quality of its streaming service, and the other aims to protect its partnerships with content suppliers.
Though speculative in nature, it’s also marketing 101: if Netflix can get customers to prefer it, in part because of exclusive and original content, then this helps to stage a competitive advantage over others who are unable to provide the same.
In 2014, Netflix hit pay dirt with the production of original content after winning 7 creative Emmy Awards for House of Cards and Orange is the New Black. [source: Netflix Media Center]
This sort of spectacular windfall affords additional bonuses for a company to leverage.
First, content that is worthy of highly esteemed industry awards such as these carries tremendous promotional value; and second, the production of successful original content saves the cost of having to secure licenses for it, with all the complexities that that can entail.
Netflix owns the rights and will profit from them for as long as it can. This tactic represents a bold move to forge a more dominant presence in the content delivery pipeline. It’s commonly referred to as vertical marketing.
Netflix Reworks Streaming Strategy
As reported by Variety, “Netflix has been working on this new technology since 2011, when members of its video algorithms team realized that they had gotten it all wrong.
Like practically everyone else in the online video world, Netflix had been preparing its video files for streaming based on the bandwidth available to consumers. Some Netflix subscribers were accessing the service with slow DSL connections, others had faster cable connections, and a lucky few were already online with super-fast fiber speeds.”
But in 2011 came the realization this practice doesn’t make sense. “You shouldn’t allocate the same amount of bits for ‘My Little Pony’ as for ‘The Avengers,’” explained Netflix video algorithms manager Anne Aaron.
Upon closer inspection, these two titles have different streaming bit requirements.
The first title can get by with a smaller allotment than the second, and the second necessitates considerably more. This is because “The Avengers” contains greater complexity, nuance and density in its imagery, which translates into a need for streaming a much larger amount of bit information.
The older encoding method is a one-size-fits-all approach. Consequently, “My Little Pony” will be allocated more streaming bits than it actually needs. Such a circumstance unduly taxes the Internet and creates cost inefficiencies for Netflix (in both streaming and storage costs). Conversely, “The Avengers” will be allocated too few bits, which leaves artifacts and other problems that impair the quality of the stream once it reaches the viewing device.
The new algorithm enables a responsive approach that customizes the encoding process according to the needs of the title — not too little, not too much, but just right, for each and every property in the catalog.
This newer method boosts streaming quality for all users while also giving the Internet a lighter load to handle. This is particularly important in new markets that require better-looking videos at slower speeds.
At present, Netflix is re-encoding its entire catalog.
Variety notes, “If all goes according to plan, the switch could help consumers get better-looking streams while also saving up to 20 percent of data — which is significant in North America, where Netflix usage single-handedly accounts for more than a third of all data consumed during peak times, and an even bigger deal in all those countries with relatively slow internet speeds that the company is looking to enter in 2016.”
Inhibiting Digital Piracy
Writer Yoni Heisler offered a revealing look at this on the BGR blog. “Due to complex licensing issues with content providers,” he explained, “the library of programming available to Netflix subscribers varies wildly from country to country. As a result, many enterprising users employ proxies or full-fledged apps like Smartflix in order to gain access to Netflix content they would otherwise be restricted from viewing.”
Basically, it’s a form of digital piracy.
Netflix has long been aware of this practice and has indicated in the past that it has no plans to ban individual users caught engaging in such behavior. What it will do, however, is take steps to make it much more challenging for users to skirt around regional content restrictions.
Netflix’s VP of Content Delivery Architecture, David Fullagar, wrote in a blog, “We employ the same or similar measures other firms do. This technology continues to evolve and we are evolving with it. That means in coming weeks, those using proxies and unblockers will only be able to access the service in the country where they currently are. We are confident this change won’t impact members not using proxies.”
To be fair, Netflix is handcuffed here. While the company said it’s working diligently to have its content be universally licensed across the globe, it’s being undermined by an antiquated geography-oriented licensing system that wasn’t designed for the digital age.
One respondent in the comments section of this same blog post wondered, “Why would they even do this? It’s completely stupid! Blocking proxies won’t bring any cash in, it might just lead to some people unsubscribing from Netflix!”
The answer is that Netflix wants to protect its relationships with content suppliers, which are crucial for current and future success.
If Netflix fails to show good faith on their behalf, content suppliers may be inclined to negotiate harsher terms, increase prices, impose greater restrictions or opt out altogether – perhaps even give a competitor exclusive rights instead.
This could leave Netflix viewers with fewer programming choices and/or paying higher prices.
It’s only wise for the company to be proactive now rather than reactive later.
All three of these moves are consistent with the notion of managing the marketing strategy all across the value chain – which is to say, smartly structuring these interdependent components to produce the best possible outcome from a value proposition standpoint.
This is an example of a multidimensional approach for improving and/or securing a stronger market position (a.k.a., market entrenchment).