In 2007, JPMorgan analyst Barton Crockett issued a statement stating that Netflix was facing tougher competition from Blockbuster than originally expected. In 2007, Netflix was facing a peculiar crunch situation. And after this news came out in Reuters, the stock price of Netflix fell down by 5%. The market, in general, became extremely skeptical about Netflix’s future prospects. However, Netflix managed to strategically navigate this situation in such a way that, over the next 10 years, it became one of the best-performing stocks worldwide. Netflix’s stock gave out a return of more than 10,000% from 2007 to 2018.
The story of Netflix dates back to 1997, when the very popular Blockbuster downfall saga actually began. Blockbuster, back then, was a movie rental service with physical stores across the United States. The American tradition at that time was something like this: you rent a movie on a Friday and give it back the next Monday. Blockbuster wasn’t just another company at that time; it was a billion-dollar company, with more than 6000 stores in the US alone. It also had a revenue of $3.91 billion. However, the issue was that 16% of that revenue came from late fees, which annoyed many of Blockbuster’s customers. During this period, one particular customer was fined a ridiculous amount of $40 in overdue fees, which annoyed him so much that he went on to start his own company. Can you guess who this man was? This man was none other than Reed Hastings. And the company he founded is known today as Netflix.
Initially, Netflix started out as a subscription-based DVD-by-mail service. This meant if you wanted to watch a movie, instead of going to a Blockbuster store, you had to make a list online and send it to Netflix. They would then deliver the DVD to you within 2-3 days. This new home delivery service was being offered at an affordable subscription fee. The defining X factor behind this success turned out to be the mindset that Netflix held at that time. On one hand, Blockbuster was extremely rigid about keeping its late fees and made millions of dollars out of the suffering of its own customers. While on the other hand, Netflix leveraged the same undesirable situation to build a multi-million dollar business. Within the next seven years, it achieved a whopping $500 million in revenue.
Netflix in the World of OTT Platforms
You might have often heard that whenever people talk about platforms like Netflix, Amazon Prime, or Disney+ Hotstar, they refer to them as OTT. This OTT is an abbreviated form of “Over The Top.” But have you ever wondered what this actually means? In which sense is it over the top? To understand that, we have to go back to the time when Web 2.0 was first introduced. This term was widely used to refer to the second generation of web-based applications, such as social networking sites, blogs, etc. During this period, exponential growth was seen in social media websites. And along with them came the OTT platforms.
If you compare the present with the era of cable TVs and DTH, a vast difference will be seen. Back then, we had to depend on middlemen, our local cable TV distributor, or set-top box companies. But today, you can watch films directly using the internet. Since these OTT platforms reach the viewers directly, they are known as “Over The Top.” They cut the middlemen out of the picture and serve the customers in a B2C method.
By the late 2000s, Netflix was no longer a new company; it had been in the market for over a decade. Netflix was always two steps ahead in its innovation. At this point in time, Netflix had understood that the business of selling or renting CDs and DVDs wasn’t sustainable in the long run. Although laptops and computers were using CDs and DVDs at that time, with the speed at which technology was advancing, CDs and DVDs were soon to be obsolete. Netflix knew that in the coming years, people would prefer streaming their favorite movies online instead of renting or going to the movies. This is why in 2007, Netflix wanted to create a service that would allow one to go online and stream their desired films.
Netflix’s Initial Brand Partnership Strategy
2009 was the year when Netflix began forming partnerships with smart TVs and gaming consoles. TV giants like LG brought Netflix, LEDs, and wireless connectivity to its 2009 TV lineup. By 2010, Netflix had begun making deals with major film production companies. Among these companies, Sony, Paramount, and Disney were at the front line. Netflix paid these production houses to buy their films so that they could stream the films on their own platform.
But soon Netflix realised that they needed to stop buying films from the big production houses. Instead of relying on these companies, they could save money by making their own films. As a result of that, in 2013, Netflix launched its original TV series. Shows like House of Cards and Orange Is the New Black were among their first original TV shows. These shows came to be so successful that they led Netflix to realise that making original shows was actually a massive advantage. Now they could satisfy all kinds of audiences on their own by making content in all genres, without giving an extravagant amount of money to the big production houses.
Monetisation Methods of OTT Platforms
Basically, OTT platforms have 2 ways of acquiring content. The first one is through buying the broadcasting rights to a film. If a production house has made a film, the OTT platform could pay to buy its streaming rights. This would mean that the film would become a part of their own content library. And the second method is self-production. When a platform starts producing films and web series themselves by investing their own funds, it becomes a self-producing platform. So, this is how films will become a part of your content library. But the question remains, how do we make money out of this arrangement?
OTT platforms generally have 4 models of monetisation. First is the advertising-based video on demand model (AVOD). In this model, customers can watch the films and shows for free. But they will have to watch ads on the platform in between their streaming sessions.
And if the platform has a large audience consuming its content, companies can be charged substantial amounts to run ads on the platform. The biggest user of this model is YouTube.
Another model is the subscription video on demand model (SVOD). If people want to watch something on the platform, they would have to pay a subscription fee. Usually, this is a monthly fee, and platforms that are well-established also offer yearly subscriptions. Well-established platforms such as Netflix, Amazon Prime, and Disney+ Hotstar follow this model. Because why would people pay for platforms that they aren’t familiar with? But the AVOD model is more popular than the SVOD model in the global context. 50% of the global OTT revenue comes from the AVOD model. While the SVOD model carries the revenue of 40%, if you take into consideration the per-user data, the SVOD model makes the most money.
The third model is the transactional video on demand model (TVOD), also known as the pay-per-view model. If the customer wants to watch something, they would have to pay a fixed amount of fee for it. iTunes is one of the biggest users of this model. And the fourth model is the hybrid model, where the three models are used in various permutations and combinations.
Netflix’s Approach to the Monetisation Models
Until very recently, Netflix relied primarily on SVOD. But after several discussions, Netflix is planning to expand into the AVOD segment alongside its existing SVOD model. Netflix claims that there is room to grow its subscriber base. And they believe advertising is the next wild card to that growth. But broadly speaking, there are only two ways of generating income from these platforms. One is from advertisers, and another is from the audience.
In their early stages, OTT platforms had to pay premium prices to acquire quality content and expand their content libraries. So that they became attractive to their subscribers/audiences. But eventually, they realised that the large amount of money they were spending on buying streaming rights wasn’t resulting in significant results. Soon, they shifted towards making original content. Apart from this strategy, Netflix had partnered with multiple advertisers across their ad-supported countries for the integration of the AVOD model.
The New Age of Successful Brand Partnerships by Netflix
As Netflix moves towards its third year since entering the ads business, it continues to see active momentum and growth across all areas of the business. Currently, over 50% of new Netflix sign-ups are for the ad-supported plan in ad-supported countries.
For the second season of Squid Game, Netflix partnered with multiple advertisers across its 12 ad-supported countries, including Kia in Korea. This marks Netflix’s first single-title sponsorship in the country. This monumental partnership aligned with the launch of Kia’s new crossover SUV, “The New Sportage.”
The core concept of Netflix’s strategy for brand collaborations is rooted in leveraging cultural relevance, storytelling, and real-life integration. Rather than treating collaborations as marketing gimmicks, Netflix becomes one with the brands it collaborates with.
Earlier in 2019, Netflix partnered with Coca-Cola to reintroduce “New Coke,” a product from the 1980s. This partnership was made using the Stranger Things franchise as the medium; the campaign aligned perfectly with the show’s retro theme. Throughout this campaign, fans could purchase special edition cans, which blended nostalgia with entertainment. This was one of the strongest examples of partnership-led brand amplification by Netflix.
What This Means for OTT Platforms Around the World
Netflix’s massive success indicates that OTT platforms are not just media distributors. They can also be channeled as lifestyle brands. OTT services can explore several scopes for effective partnerships, studying the cases of Netflix’s success in brand partnerships. The key takeaway is that authenticity is what truly matters. Consumers usually reject partnerships that feel forced or purely commercial.
Netflix certainly has redefined how brand partnerships can be executed in the OTT industry. They have shown that streaming platforms can become an integral part of daily life. The future of OTT platforms lies within strategic and culturally relevant collaborations that connect with the audiences. The platforms that are facing the pressure of rising costs need to understand that partnerships are not just add-ons; they are essential drivers of growth. The story of Netflix shows us that when done right, brand partnerships can transform the whole scenario of a platform’s performance.
Author: Irtiza Zaman
