Can Subscription Commerce Strategies Outperform the Big Four Networks?

Jun 21 2013

netflix-on-tvImagine you’ve created a product, based on a concept no one else has tried in the long history of your industry.  Your product quickly becomes so popular that your direct competitors won’t even go head-to-head with you, essentially ceding you that share of the market.  Slowly, you reach a saturation level and your consumer base slips a bit as your competition finally begins to create similar products, but your results are still the standard against which all other products are measured.  Then, after 10 solid years, somewhat suddenly and definitely without warning, your customers start walking away, dropping by almost a third over the course of a single year.  A year later, you lose another 30% or more of your audience — even though you’ve been giving your product away for free the whole time!

Now imagine that, even after this steady erosion, your product still ranks in the top 10 of your industry.

Welcome to the weird world of “American Idol” — and the even weirder world of network TV these days.  The Big Four networks — ABC, CBS, Fox, and NBC — can still reach much wider audiences than their cable counterparts, but their dominance is diminishing at an astonishing rate, even though, as noted above, all of their programming is still available free to almost the entire country (for the moment, anyway).

“American Idol” isn’t alone in experiencing such a drop-off; click here to see how extensive the erosion was this year for returning network shows.  The reasons behind these plummets are widespread and obvious (i.e., better cable TV content; an increasingly fragmented media landscape that rolls out new entertainment choices almost every day; the rise of DVR and other delayed-viewing opportunities; and, let’s face it, questionable programming decisions by network honchos), but the solutions might not be quite as easy to find, at least for the Big Four.

Fortunately, most companies aren’t in the broadcast TV industry, so they have obvious counterforces to help maintain and grow their audiences.

Clarus-Netflix-SubscriptionWe recently discussed Netflix’s foray into content creation with “House of Cards,” a move designed to expand and solidify its subscriber numbers.  Not coincidentally, just as the 2012-13 network TV broadcast season came to its dismal close, Netflix offered viewers yet another reason to tune in and try out its online video-streaming offerings.  On Sunday, May 26, Netflix released the much-awaited (by certain fans, at least) new season of “Arrested Development,” the critically-acclaimed but low-rated series about the dysfunctional Bluth family — and offered all 15 episodes, along with the rest of the Netflix inventory, to their subscription base.

Reviews of the new season were mixed among TV critics, which caused Netflix stock to drop by more than 6% on May 29, the first day of trading after the release.  Wary investors may have missed the point, though:  Netflix’s principal mission is to build its appeal among the massive pool of entertainment consumers across the country, not to impress the miniscule pool of paid television reviewers.  Feeding the virtually insatiable hunger of “Arrested Development” fans may (and we stress “may”) help lift Netflix’s new-subscriber numbers to a new level.

Preliminary numbers regarding the “Arrested Development” release, unearthed by Procera Networks, which digs through Internet traffic data, were promising:

  • 36% of the devices on one DSL network tuned into at least part of one “Arrested Development” episode on the release date, more than tripling the number reported for “House of Cards.”
  • Approximately 10% of all viewers made it through all 15 episodes the first day.
  • One cable network saw a 10% lift in Sunday Netflix traffic peak volume, compared to the previous Sunday, and an 8% increase in the number of subscribers accessing Netflix.

Netflix’s last quarterly filing showed that, as of March 31, 2013, Netflix had a total of 36.3 million subscribers, including 2 million new U.S. customers and another million new subscribers outside the country who’d signed up in the first quarter of the year.  We’ll have a better measure on the success of Netflix’s strategy in late July, when it releases its second-quarter numbers.

Netflix isn’t content to sit on its hands until then, though.  Even as it was rolling out the new “Arrested Development” episodes, it was looking for additional ways to expand its inventory.  On Monday, June 17, Netflix announced a blockbuster deal:  A multi-year agreement with Dreamworks, which will create over 300 hours of commercial-free, child-oriented original programming for Netflix.

This deal helps explain Netflix’s outward indifference to Viacom’s recent move to Amazon after its deal with Netflix expired.  At the time, Netflix’s loss of Viacom content angered many subscribing parents, who valued their immediate, round-the-clock access to “Dora the Explorer” and other kids’ shows.  Whether they’ll be content to stay onboard until the first Dreamworks series premieres in 2014 is an issue worth watching.

In the meantime, investors who fled Netflix after the “Arrested Development” launch appear to be having second thoughts:  After closing at $213.99 on Friday, June 14, Netflix stock the following Monday morning was up to $226.69, and it remained in that range as of Thursday, June 20.

What Netflix is doing — what the Big Four networks seem to find it increasingly difficult to do — is applying the primary rule of subscription commerce to the entertainment industry.  The rule is simple:  If you want to maintain and increase your audience, give your customers what they want, and reward them for their loyalty.

We’ve been working to perfect that approach at Clarus for a dozen years now, helping our clients broaden their audiences and their bottom lines by exceeding their customers’ expectations.  That’s why we’re keeping a close eye on Netflix’s efforts — it’s always nice to see further proof of concept.