Patricio Castro

STRT 431 - Business Strategy

Section 33
From the perspective of profitability, Netflix and all the streaming services have two main levers
to pull to achieve it. First it is growing a customer base and the second is to bring content that
attracts new customers to the platform. As we know from the reading, Netflix has achieved one
of the highest subscriber growths among all its competitor and this growth always comes after
the releases of successful shows. For example, when Netflix released House of Cards and Orange
is the New Black, they almost doubled its customer base.

So, it became clear to Netflix that to generate constant revenues they need to grow its subscriber
base and the best strategy to do that is to bring new content that is attractive to them. In order to
bring content to the platform, there are two big ways to do it.

One alternative is to pay other content-producing companies huge licensing fees to have the
rights on a determined show or movie. This is usually the easiest and fastest way to get content,
but not the most efficient nor the most profitable. In first place, there are many types of
agreements, you can have an exclusive or non-exclusive one. If it is exclusive, the agreement is
more likely to pay off if the show is a success. Furthermore, this type of agreements tend to be
really unprofitable because it is not a fixed, but a variable cost. In other words, Netflix must pay
to the owners per each reproduction of the content so there is no scale of costs. And finally,
content producing companies, tend to not share their bests shows or movies, so non original
content are not always of the top quality.

The other, and more profitable alternative if successful, is to create original and exclusive
content so no licensing fees are required and creating value for the industry. Original content (if
successful) is the best competitive advantage an OTT can have because it gives them cost
scalability: they can grow its clients base with no variable costs. So the hiring of Shonda Rimes
to create original content of ownership for Netflix will most likely bring more profit because she
has a track record of successful shows that should keep going under Netflix productions. In other
words, she will help Netflix to create value (and profits) by producing shows that no one can
produce and being of property of Netflix, to grow its subscriber without increasing their costs.