Netflix has been on a tear the past few years. Since 2015, the company has spent nearly $20 billion in developing exclusive, original content for its streaming service. That’s an incredible amount of money! However, Netflix has also accumulated more than $20 billion in debt from content obligations and gross debt. That can be a bit misleading, since only $5 billion of that is real debt, and Netflix is worth over $100 billion. Nevertheless, why does Netflix seem to be spending money with such reckless abandon?
The company is in a war with the entertainment industry. Netflix disrupted the entire industry when it launched its original series House of Cards back in 2013 and blockbuster movies like Bright in 2017. Netflix has become a creator and the distributor of content, flying in the face of Hollywood’s sacred movie theater model. As more and more movies continue to flop, it seems Netflix may have a golden opportunity to take over entertainment.
Can Netflix break Hollywood before the company goes bankrupt? All signs point to yes, and it may happen quicker than you think.
The Movie Industry Is a Slow-Moving Behemoth
To understand how Netflix is winning the war on Hollywood, we need to examine the reasons why people are slowly pulling away from the movie industry.
Movie budgets have been growing larger and larger every year. The latest Marvel movie, Avengers: Infinity War, cost Disney $321.2 million to make before marketing and promotional costs. This is a far cry from 1991, when Terminator 2 was the most expensive film ever made at $100 million.
Movies are more expensive to make, so there are fewer being made and fewer risks being taken. Movie studios now rely on superheroes and sequels to their current intellectual properties to push massive box office returns. Every tentpole blockbuster is a swing for the fences, with studios conflating more money and higher quality.
The quality of movies has changed as well. To stretch marketing dollars further, many studios opt for appealing to the masses—and explosions, robots, and superheroes translate more easily to Mandarin than American comedies and dramas.
The Chinese market is now considered a major market for movie studios. Even if a movie performs poorly in the North American market, studios can easily make up profits in the Chinese market. This means more spectacle over substance.
What’s the biggest problem for movies? Netflix. The company completely changed viewers’ expectations of how content should be received. Now viewers expect content to be delivered to them, not vice versa.
Netflix’s Brand Strategy
Netflix doesn’t just want to build its subscriber base. It wants to become a vital part of every TV viewer’s diet. The company has always been a polished content aggregator. Their business model is predicated on licensing old TV shows or movies and then streaming them on their web service. What happens, however, when networks and movie studios decide they no longer want to stream their content on Netflix?
Ted Sarandos, Netflix’s chief of content, started planning for this very question over five years ago. When Disney announced that they would be pulling their content from Netflix at the end of 2019 and launching their own streaming service, Sarandos simply shrugged and said, “What took them so long?”
Back in 2013, Sarandos’s answer to the content question was simple: If Netflix could create its own content, then it could control its future. It wouldn’t have to rely on licensing contracts from major networks and movie studios to survive anymore.
Sarandos’s ultimate goal is to have 50 percent of all Netflix content to be original by 2018. With over hundreds of original series already released or planned and three major motion pictures (Bright, Death Note, and Cloverfield Paradox), Netflix is well on its way to defining its own brand. Netflix will no longer be known for just old TV shows and movies, but for its original series as well.
Netflix Uses Big Data to Target Consumers
Gone are the days when running an effective movie marketing campaign meant print advertising and plastering major TV networks with commercials. Just like our viewing options, marketing channels have diversified greatly. That means costs have risen as well. It cost a studio $4.3 million on average to market a movie back in 1980. Today budgets often exceed $40 million for medium-sized movies.
Marketing a movie takes a huge amount of money out of the studio’s pocketbooks. This is why Netflix is winning. Instead of advertising across other mediums, Netflix can roll out their latest series or movie on their own platform. No giant posters. No huge TV commercial campaigns. Netflix has a user base of 118 million people globally. They simply fire up their custom algorithms and send out the right content to the right people.
Take Cloverfield Paradox as a prime example. Netflix ran only one advertisement: a $5 million, 30-second ad during Super Bowl 52. Instantly, the entertainment blogosphere went into full gear due to the completely unexpected nature of the movie’s release. This provided free advertising across thousands of entertainment platforms and social media accounts. The most interesting part? Netflix knew this is how people would react based on their own data.
Another excellent example is the Brazilian production 3%, produced in Portuguese but translated into English. The entire cast is Brazilian, yet millions watch the show in the U.S. Movie studios simply can’t target international audiences while simultaneously targeting U.S. audiences as efficiently or elegantly as Netflix does.
Netflix Already Won
In our competitive business world, sometimes what’s best for the customer is not always the best thing for the business. Netflix is faster, lighter, and giving the consumers what they want. Hollywood continues to hold onto the same branding and content creation strategies that, more often than not, disappoint.
Hollywood has already lost the war. Netflix isn’t competing with Hollywood or TV networks anymore. Netflix is competing with the likes of Amazon, Apple, Facebook, and Google. All of these companies are competing for your attention. Netflix is destined to be bigger than the big screen. That doesn’t mean Hollywood must fall—but it will need to change with the times.
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