Wednesday, April 19, 2017

Netflix in the face of emerging disruptive trends

In "The Innovator's Dilemma", Christensen describes how companies can suffer from failed ventures by not properly learning their market and/or sticking to faulty predictions. He recommends using an adaptive strategy that incorporates customer feedback when foraying into disruptive technology or trends: learn a plan based on customer and market discovery, instead of implementing a set course of action [1]. In this post, I examine how Netflix can take advantage of the disruptive trend of accelerating technological changes in the developing world.C

Reports published by McKinsey suggest that technological change is accelerating at an incredible pace in developing countries [2] [3]. Based on the 2015 Mobility Report from Ericsson, there are 2.6 billion smartphone users globally; however, this number is predicted to increase to 6.1 billion globally by 2020 (representing 70% of the global population), with emerging markets such as Asia Pacific, the Middle East, and Africa accounting for 80% of all growth. This means that video streaming/downloading services will be accessible by 3.5 billion more people in the next half decade. Moreover, the report suggests that by 2020, 80% of mobile data traffic will be from smartphones, with video accounting for 60% of that traffic [4]. Currently, Netflix is already aware that more than half of its users globally stream media using their smartphone apps. Smartphone media streaming is increasing rapidly due to the decreased cost and increased accessibility of 4G data in developing countries (especially India), and Netflix should address this quickly.

Despite its competition with Amazon Prime Video, Netflix is still has the majority market share by a wide margin at 51.8% versus Prime's 24.8%, according to a Digitalsmiths study [5]. Interestingly 36% of internet-media-streaming users choose a streaming service based on its original content, and Netflix has addressed this trend by investing $6 billion this year in new original content, compared Prime Video's investment of $4 billion, based on a 451 Research Survey [6]. A 2015 study by ConsumerReports found that of the 130 streaming devices tested, Netflix was embedded and optimized on 88% of them, while Prime Video was only available on 68% of them [7]. In fact, Prime Video still does not have a functioning app for Windows Phone OS. Netflix is therefore still the market leader in developing original content and it is currently easier to use across multiple platforms compared to Prime Video.

Given these facts, I feel that Netflix can position itself advantageously in emerging markets by partnering with manufacturers of smartphones and tablets that are popular in developing countries (Chinese-manufactured phones and tablets are getting increasingly popular for their affordability). Netflix can use its expertise in software and its popular reputation to target new smartphone customers by creating easy-to-use and data-efficient video-streaming apps to be pre-installed into those devices. Additionally, Netflix can partner with Indian telecommunication companies to allow unlimited mobile streaming, as they have done with T-Mobile in the US (non-exclusively). Lastly, Netflix could use its expertise in media development to create appealing local content. While all of these strategies are clever based on the facts above, we can only know how well these plans might work once Netflix does more consumer testing. To stay ahead, Netflix will have to be flexible with its plans and implementations for the developing world.

[1] Christensen, C., The Innovator's Dilemma (1997), ISBN 0-87584-585-1
[2] National Intelligence Council, Global Trends 2030: Alternative Worlds (2012)
[3] McKinsey Global Institute, Ten IT-enabled business trends for the decade ahead (2013)
[4] TechCrunch, 6.1B Smartphone Users Globally By 2020 (2015)
[5] Cord Cutters News, Netflix is Losing Market Share as Amazon Prime Video Continues to Grow (2016)
[6] Investors Business Daily, Netflix International Growth Numbers Likely to Surprise (2017)
[7] ConsumerReports, Video streaming face-off: Amazon Prime Instant Video vs. Netflix (2015)

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