On April 19 the business world was shocked to hear that Netflix had lost 200,000 subscribers in the first quarter of 2022. Many predict that the company will lose a further two million subscribers by the second quarter. This came after Netflix had announced that it had grown during the COVID pandemic in 2020 and was looking at the potential growth in international markets for the upcoming year. (Shareholder report, April 19, 2022) It begs the question of why did the number of subscribers decrease and what does it say about the near and long-term future of streaming, not only for film/TV but for music as well.
Some of the theories put forward, not only by analysts, but Netflix itself, seem to point to the saturation of a market that once held long term potential. Netflix has maintained that since its launch in 2007 internet-delivered (on demand) entertainment had the potential to grow on an international scale. The proliferation of broadband and cellular systems would continue to drive this potential well into the near future. However, several factors have inhibited its growth. First, the adoption of on-demand entertainment coupled with data costs has slowed the development in new markets. Combined with this is that the company in primary markets has held steady over several years. Netflix has indicated that account sharing has made it difficult to increase paying membership and has begun to develop programs to curtail this practice. Thirdly, over the last three years traditional entertainment companies have entered the streaming industry, namely Disney+, Paramount as well as other streaming companies as prime video, YouTube and Hulu. Finally, macro factors, including sluggish economic growth, increased inflation and geopolitical instability have had an impact on the organization.
One factor that mainstream news outlets have commented on is the change in how the company actually does business. Netflix was created as a distributor of DVDs via the mail. This provided to be so successful that it changed the video rental market and ended two of the largest companies in that sector, Blockbuster Video and Hollywood Video. Soon the company moved to streaming video content as a means of competing in the market. This was at a time when many movie studios were willing to license their content to Netflix. However, to maintain market leadership, the company began creating its own content, along with expansion on an international level. This proved to be highly successful, even as new entrances began to establish themselves in the market place. In many respects it also offset the loss of licensing agreements with major studios, who began developing their own online distribution models. The creation of Disney+ in 2019 began the decline in licensed material on Netflix and precipitation the company’s move toward original content. In 2018 the company indicated that over the following year increase original content to 50% of the total material on its platform.
Content is certainly a very effective method of attracting and retaining subscribers, as well as developing a distinctive product in a saturated market. However, creating that content and ensuring its popularity is a challenging proposition. This view not only subscribes to the film industry, it is very much at the heart of the music industry. During the early part of the millennium, many analysts in the music industry expected the then largest music distributor, Apple to eventually create its own content. This never eventuated, and subsequent streaming platforms have stayed away from the risks associated with content creation. Nevertheless, success in business often spurs imitation, and market share is a fickle partner. Simply distributing content can easily and in many cases be done cheaply by organizations with much larger budgets. Simply relying on a catalog to do so is a recipe for disaster (think about Disney in the SVOD market). Fortunately for Spotify the major labels (Sony, Warner, Universal and Merlin) are invested in the organization and provide not only new content but a deep back library. This works well for the company, as it relies on subscriptions and advertising to generate its income. To enhance their position Spotify has successfully diversified its content in other non-music areas to include pod casts, other audio content and most recently the announcement of video. Nevertheless, Spotify has run a deficit annually since its inception.
There is always a question of what would happen if the major labels, like the movie studios, decide to create their own streaming platforms. Early in the development of the online music industry, labels did try this with little success. Apples iPod/iTunes revolution provided a solid financial answer to an industry lost in customer litigation and hemorrhaging revenues. Spotify has run into controversy with artists (Neil Young, Joni Mitchell, India Arie, etc.) over the “Joe Rogan Experience”. A wider encompassing controversy that embroils the major labels could ignite a change. One of the current major tech companies could begin a bidding war designed to lure labels to defect Spotify. If these cases are possible, would that force Spotify to take up a music content creation role?
As we can see from Netflix and organizations like Tidal, relying on original content is no panacea to the changing entertainment environment. Yet, in an unstable world, external pressures can make organizations change and adapt to a new scenario. Those that are not willing to embrace change are often doomed to extinction. Many of us still remember the days when Amazon was just an online bookstore. How times have changed.
The Analytical Musician 