Subscription as a service: The Netflix playbook

There are umpteen instances worldwide of companies failing to strategically pivot themselves while cosmetically dressing themselves up till they become irrelevant with their legacy models. BlackBerry, the original smartphone which lost out to Apple and Samsung, and Sun Microsystems are a few examples.

Netflix is the exception to this. Founded in 1997 as a humble alternative to the video store as a DVD-by-mail service, Netflix pivoted several times before finally streaming online in 2007.

Netflix’s glory lies in institutionalising pivoting-on-the-go: originally with the subscription model (throwing brick-and-mortar king ‘Blockbuster’ out of business—a company to whom the now $150-billion Netflix offered itself for acquisition for $50 million in 2000), then using technology and analytics for sharpening the content-recommendation engine while using streaming as the new pivot.

The year 2013 marks an important milestone for Netflix; it is the year it released House of Cards, its first original content. The rest is history.

Just before the release of House of Cards, in Dec 2012, Ted Sarandos, the chief content officer of Netflix, asserted: “The goal is to become HBO faster than HBO can become us”. No one took Netflix seriously, because HBO was HBO and then Game of Thrones happened.

Yet, Netflix would surpass HBO in subscribers, content budgets, and Emmy-award nominations in the years to follow.

Netflix's story of pivoting from a DVD-by-mail service to a subscription model for the service, then to streaming over the Internet, and now to a full-fledged modern TV network played out in just a decade.

Subscription-as-a-service

‘Renting software’ became a way of life for companies after Mark Benioff of Salesforce revolutionised the IT industry by pioneering and making ubiquitous SaaS (Software as a Service). That Salesforce achieved it in a B2B industry is a testimony to Benioff’s genius and vision.

It is as if Netflix was waiting for inspiration to take a leaf out of this development. Netflix became a challenger in the media industry by offering content without advertising, in the process, shaking the industry out of slumber and in the process, unleashed ‘unbundling’.

Just as SaaS removed the hurdle of managing software installations—what historically accounted for building Microsoft’s dominance in enterprise software—is how Netflix cracked the disruption of distribution in the media industry.

The on-demand model combined with a subscription business model by using Internet technologies enabled Netflix to digitally deliver content to multi-platform consumers across an ever-expanding range of devices.

Subscription: Old wine in a new bottle

A business model is more than just a monetisation strategy—it is about how consumers access your product or service and how you create an ecosystem for value creation for several stakeholders. It is also about consumer ownership and engagement through understanding their inclinations and matching viewers and content.

Technology does not disrupt, business models do. Yes and no.

The viability of old business models to new industries with technology enablement created the Netflix juggernaut. Not to forget that the on-demand business model works, first owing to the Internet, then the speed of the Internet, then data and more. The uberisation of services economy then leads with options of flexibility on time and place to watch for the subscriber.

The age-old subscription business model has got no innovation–it is the successful application of it in a different context that carries the day for Netflix.

GE, one of the 12% survivors from 1955 Fortune 500 list generates its bulk revenues today from digital subscriptions such as data services as different from its original avatar of being a manufacturer of light bulbs and fixtures. IBM at the 34th rank today from 61st in Fortune list in 1955 has transformed itself to offering IT and business subscription services from selling commercial scales and measuring equipment back then.

Back home, Tata Power has recently announced its intent to transform from a utility play to a customer-focused business with its ‘power-as-a-service’ foray. Almost simultaneously, M&M has announced its passenger vehicles on a subscription model in Sept 2019 targeting users preferring an asset-light lifestyle and wanting to rent for a shorter duration.

The tech industry is completely transformed with the subscription-as-a-service model. The next holy grail is going to be for manufacturing companies to become the ultimate as-a-service business with IoT (Internet-Of-Things) enablement for continuous monitoring and updating of products in real-time. Everyone realises the power of owning the consumer as the new established mechanism to extract value.

The Netflix effect

Netflix successfully modularised content, allowing it to integrate production with subscription and distribution. All the modern-day success stories of platform ecosystems do the same – modularization of production/delivery of services to allow them to move closer to the customer.

This new value is created through customer data: Airbnb commoditises trust for travelers, Uber commoditises dispatch and modularises cars for commuters and Netflix commoditises time and distribution for content-seekers enabling it to integrate production and customer management.

Smart companies are increasingly realising the power of subscription as a recurring revenue model to survive and to grow. Valuations are a direct function of increase in earnings. Subscription earnings are higher quality earnings for they are stable, safer, often contractual, recurring and ride out any market turbulence. These higher-quality earnings result in better valuation metrics such as price-to-earnings and price-to-book ratios which reflect the potential for future performance as a consequence of intangible assets (for example, customers, brands and market insights and expertise) rather than retained earnings from the past. Growth of these high-quality recurring earnings, coupled with an increase in higher price-earnings multiples, often results in quadratic growth in stock price.

Yet basic value is created with the fundamental core strengths of a business. In the case of media companies, that competitive differentiator seems to be content, content and more content – lethal, cutting-edge, state-of-the-art, differentiated, and engaging. That it doesn’t stop Netflix from today burning a near $15 billion hole when Amazon Prime and Apple TV+ intend spending around $6 billion each, points to this basic understanding.

Apple–having bled the device market dry–is getting into streaming video, gaming service, and its own credit card. Facebook is unleashing its e-commerce plans. Google has established itself as a challenger to Amazon and Microsoft in cloud computing and is getting into an online gaming service to cut into the game-console business of Microsoft and Sony.

Netflix, Amazon, Spotify, Uber and several others are spot-on in realizing that consumers are service-hungry and no longer want the hassles of ownership. They want the ride, not the car; the music, not the CD; the milk, not the cow. Access and service remain two stand-out points that endear customers to the new way of life. The net result? Higher utilisations of assets – be it hard assets (cars) or soft (music).

A wake-up call for media companies

The problem may then not be as substantive as a narrative one for the legacy media companies. The narrative–subscription-based service offering access to exclusive online content–could be the answer to the woes of media companies worldwide.

The big ones need to start flashing their global subscriber count and their ability to upsell a yet-higher-ticket-size for their streaming service offer. Netflix and Netflix-investors realise this and therefore back Netflix spending on user acquisition for the next 100 million besides content outlay.

Netflix seems to have hit the self-propel mode of other platform businesses like Amazon and Google.Netflix is the outlier media company of the 21st century.

Yet every player must contend with the challenges of content costs continuing to outpace revenues, declining y-o-y growth and increasing competition. Netflix could count on its generic leadership position, cutting-edge user interface, and its brand resonance. Or could good old advertising be the solution?

Netflix: Up for a challenge?

Harvard Business School professor Clayton Christensen’s ‘The Innovator’s Dilemma’ has played out its course for the media industry in favour of Netflix. The subscription pinch has been hard. The war is nearing again—Amazon, HBO Now, Hulu, Disney Plus, Apple, Comcast, Warner Media AT&T— it’s a mess out there!

Amazon has Alexa domination, all of the Prime benefits including delivery and100 million-plus subscribers. Apple has hardware dragons and a delighted and loyal customer base.

Much is up for change in the exciting interplay of media, telecom, and technology - IP monetisation, distribution, storytelling and more.

Netflix has been dubbed as ‘reruns television’ once by Comcast and as the ‘Albanian army trying to take over the world’ by Time Warner.

Will Reed Hastings’ strategy guru and Stanford professor Hamilton Helmer’s counter-positioning concept—“a newcomer adopting a new superior business model which the incumbent does not mimic due to anticipated damage to their existing business”—result in Netflix being on the other end of the stick?

Will the disruptor be disrupted? Only time will tell. But, logic will prevail.

Views are personal.

Rajendra Srivastava is the dean of the Indian School of Business (ISB) and the Novartis professor of marketing strategy and innovation.

Piyush Sharma is executive-in-residence at ISB and at UCLA. He is a global CEO coach and a C-Suite and startup advisor.