Netflix Knows What You Want … Before You Do

In 1997, a tiny company in Scotts Valley, Calif., came up with a radical business model. The big idea was to use data to change the way average people consume media.

That company was Netflix (NFLX). Founders Reed Hastings and Marc Randolph started with a humble DVD rent-by-mail website. It took off. However, growth caused a dilemma: It didn’t have enough new releases in its inventory. So, Netflix developed an algorithm based on members’ interests that de-emphasized popular titles.

By 2006, new releases represented less than 30% of its new rentals.

That’s the power of the New Gilded Age. Data analytics and predictive modeling empower entrepreneurs to build new business models with greater certainty. They deftly navigate traditional bottlenecks as competitors become stuck.

Jonathan Cohen, principal brand analyst at Amobee, a global technology marketing firm, points out that Netflix’s success stems largely from “using analytics to understand audiences” better than less-savvy competitors. And as the company made the transition from rentals to streaming media, it pressed those advantages.

If you’re a fan of classic Western movies like Virginia City, then Netflix will find a way to make money with that data.

When I’m chilling on the sofa, scanning my Netflix queue, ecosystems are the furthest thing from my mind. But Netflix knows what summaries I’m reading, how long I spend surfing titles, what I ultimately watch, and for how long.

It’s using all of that network data to keep me engaged and to enhance my experience with recent favorites like the Mexican political thriller Ingobernable, the British police procedural Paranoid,  the animated spy spoof Archer, and the animated Hollywood spoof BoJack Horseman.

It’s also using that data to develop, license and market new content. That’s where Ted Sarandos comes in. He’s the chief content officer. He knows network data is invaluable because it allows Netflix to build a business model around narrow-casting, a personalized experience for each of its subscribers. It doesn’t need blockbusters like ad-dependent networks.

That creates a lot of leeway.

Even when it spent $100 million for 26 episodes of House of Cards, Netflix knew the deck was stacked in its favor. The political drama could be marketed to fans of the original British show. It could also be sold to the network’s built-in fan bases for director David Fincher and actor Kevin Spacey.

Netflix understood what its viewers wanted before they knew.

It’s an unconventional calculus Sarandos used to build a wildly successful content portfolio. In March he extended the network’s four-picture deal with Saturday Night Live alumni Adam Sandler.

Recently Netflix crossed 100 million subscribers. That is roughly a threefold increase since the original House of Cards content deal in 2013. Since that time, sales have increased from $4.37 billion to $8.83 billion.

And Netflix has become a powerhouse in the motion picture business. It will spend $6 billion on content in 2017. That is second only to Disney-owned sports broadcaster, ESPN. More telling, it is an important part of the secondary market for episodic content.

Off-beat shows that originally aired on other networks like Mad Men and Breaking Bad gained cult followings on Netflix. And that success allowed the independent network AMC to do more edgy content like The Walking Dead.

That’s a long way from a tiny company that shipped DVDs by mail.

Netflix’s algorithmic recommendations and personalized queues are now widely copied. In 2017, they’re standard procedure for doing digital-media distribution.

The New Gilded Age is an exciting time for investors because so much is possible. Makers are not bound by old business models. Data analytics allows them to dream up new ones.

I spend much of my time researching data scientists at companies that have cracked this code. They are taking products or services and reimagining what they could be when looked at through the lens of proven preference.

The good ones see the future. And I recommend those to my members.

“We could see that eventually AMC was going to be able to do its own on-demand streaming,” Netflix CEO Hastings told the New York Times in 2016. “We knew there was no long-term business in being a rerun company, just as we knew there was no long-term business in being a DVD-rental company.”

Best wishes,

Jon Markman

 

 

 

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One comment on “Netflix Knows What You Want … Before You Do

  1. Stephen May 4, 2017

    Well, they SURE MISSED THE MARK on me with ‘The Santa Clarita Diet’ – a spoof on cannibalism no less! There are some things that people like me just don’t find funny – in any form – and are sickened by this cultures propensity to take any subject – no matter how taboo – and try to make it ‘funny’. I cancelled my membership over this insult!

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