Having all but saturated the American market, Netflix now has its sights set on doing the same everywhere else consumers stream entertainment. It’s already well-established in countries like France, Germany, Spain, and Japan, and in many smaller markets, it has virtually no other significant competition.

But the coronavirus quarantine has restarted the US market—temporarily

In the first two months of 2020, Netflix said its US growth was the same as it had been in several previous quarters—that is, almost nonexistent. But then, in March, after much of the US economy began to shutdown and many states issued stay-at-home orders, it added a ton of new subscribers. In a letter to shareholders, Netflix said it expects that growth to come back toward previous levels as soon as home confinement ends.

Netflix’s content spend is ballooning every year, with no sign of stopping

It’s unclear how Covid-19 will affect Netflix’s content spend this year and moving forward. In 2020, the company will assuredly spend less than projections. But once global film and TV production is safe to resume, some analysts think Netflix could increase its content budget even more than expected to make up for lost time.

Its revenue and profits are growing, but it’s also taking on more and more debt

Netflix was cash flow positive for the first time since 2014 in the first quarter of this year. Its executives say that trend will continue, with the goal of becoming annually free cash flow positive within the next couple of years. The company reported a free cash flow loss of $3.3 billion last year—though it expects that number to improve to a $1 billion loss this year because coronavirus-induced production shutdowns are delaying some production costs to future years.

The more it spends on content, the more accolades it receives

Winning Oscars is very much a part of Netflix’s overall growth strategy. It’s great publicity, of course, but it also attracts more stars, which in turn helps bring in new subscribers, which generates profit. And it also lends a sense of a legitimacy and prestige to a company that for a long time was not known for its quality content, aiding the streaming service in its battles over talent with the likes of HBO, Amazon, Disney, and others.

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New competition

The story of Netflix has always been one of disruption. Launched in 1997 as a DVD-by-mail service, it sought to offer a more consumer-friendly alternative to brick-and-mortar video rental stores like Blockbuster. As the technology developed, it started streaming video in 2007.

It entered Hollywood in 2013 as the new studio on the block with the release of the prestige drama House of Cards. But now Netflix is the Hollywood establishment it once sought to disrupt, and it has inspired a wave of competitors looking to do to it what Netflix did to the old guard seven years ago when it began making original content. Several longtime members of that old guard—Disney, Warner Bros, NBCUniversal, and others—are launching their own streaming services in part to loosen Netflix’s foothold in the US and, increasingly, the rest of the world.

For the first time in its history, Netflix is on defense. While its international presence continues to grow rapidly, its growth in the US has subsided. (In Q3 of 2019, the company actually lost US subscribers for the first time ever.) Its executives are admitting that new competition from the likes of Disney is contributing to the anemic growth.

Netflix got so big, and changed the industry so much, that it forced rival studios into the streaming game, where they are now slowly but surely pulling all of the content they own off of Netflix and putting it onto their own streaming services. For a while, Hollywood studios were happy to let Netflix pay them for the rights to stream their movies. But now they need that content back in order to survive.

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The Mouse Trap

Disney entered the streaming arena in November with the launch of its highly anticipated platform, Disney+. Of all the companies pivoting to streaming, Disney is the best suited to challenge Netflix on a global scale.

Disney+ was immediately a hit. The service added subscribers much faster than anyone—Disney included—had anticipated. It acquired 30 million subscribers just three months after launching. As of May 5, it had 54.5 million subscribers, well on its way of reaching Disney’s goal of 60 to 90 million customers by 2024. Hitting the lower limit of that forecast is a certainty, while the upper limit probably needs to be increased.

“I’ve been so impressed with Disney+’s execution,” Reed Hastings told Netflix investors on an earnings call earlier this year. “I’ve never seen such a good execution of the incumbent learning the new way and mastering it.”

We shouldn’t be surprised. Under CEO Bob Iger’s leadership, Disney became a global entertainment behemoth in the last two decades, eating up its competition and dominating culture in a way we haven’t seen in recent memory, if ever. The owner of Marvel, Stars War, Pixar, and now 20th Century Fox, Disney controls more valuable intellectual property than it knows what to do with. And it is as global as media companies get, with footprints in every country in the world, and lucrative businesses on almost every content.

baby yoda mandalorian disney+
As popular as he is cute.
Image: Disney

But what makes Disney the most threatening to Netflix’s global streaming empire is its unique content ecosystem, which acts like a feedback loop, strengthening each of the company’s core businesses. Here’s an example: owning the Star Wars intellectual property allowed Disney to create a hit streaming show for Disney+, The Mandalorian. In turn, the show generated millions in merchandise sales (hello Baby Yoda!) and helped advertise Disney’s many Star Wars-themed experiences at its parks and on its cruises. And then it comes full circle. Park attendees inundated with Star Wars and other Disney content suddenly feel like they need to sign up for Disney+.

Netflix does not have any of this—yet. It’s still developing its consumer products business, hiring former Nike executive Josh Simon to oversee that division in February. Among Simon’s previous gigs was—you guessed it—serving as a director of production at Disney’s chief movie studio for six years. Netflix hasn’t done much with products yet (its biggest play thus far is probably its exclusive partnership with Target to sell Stranger Things toys and apparel), but the hire speaks volumes about the company’s ambition in this space.

The biggest issue for Netflix in rivaling Disney’s content ecosystem is not that it’s still a nascent, unproven operation. Rather, it’s that Netflix does not own much intellectual property that can be converted into products or experiences consumers want to pay for. Outside of Stranger Things, its hit shows over the years include House of Cards, The Crown, 13 Reasons Why, Ozark, Narcos, and Russian Doll. None of those exactly scream “plush toy” or “halloween costume” or “roller coaster.” In fact, some of the most marketable content on Netflix—its suite of Marvel shows (Daredevil, Jessica Jones, etc.)—are actually based on characters owned by Disney.

Netflix wants to change that as soon as possible. Its recent catalog of releases is filled with content that can be monetized outside of the streaming space—though many haven’t captured the zeitgeist in the way Netflix probably hoped. One that undeniably has is The Witcher, the fantasy-horror series based on the Polish book series of the same name. Netflix announced that 76 million users watched The Witcher within its first month of release, and while the company’s gaudy metrics are questionable (that figure counts anyone who watched just two minutes of the show), it does suggest Geralt, played by British heartthrob Henry Cavill, has a large, global reach. And better yet, his face, character, and job description (he hunts monsters) are all highly marketable across cultures.

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The Netflix creative culture

Netflix doesn’t operate exactly like every other TV network. It gives its creators creative freedom like they’ve never had before. That strategy has inevitably led to a few stinkers over the years, but it has also helped the company grow and attract talent from Martin Scorsese to Spike Lee. And it cultivates relationships for the longterm. The $15 billion Netflix now spends on content each year doesn’t only go to production costs—they are also investments in people the company wants to keep working with.

“I don’t have to worry about commercial breaks anymore,” Lauren Hissrich, executive producer and showrunner of The Witcher, told Quartz. “I don’t have to worry about pleasing advertisers. I don’t even have to think about that with my storytelling. It’s such a huge freedom.”

Hissrich came to Netflix from a career in network television, working on shows like The West Wing and Private Practice. Many shows on traditional US networks then, and still, require unwieldy, 22-episode seasons. Each of those episodes are written with ad breaks built into the scripts. Advertising controls not only the financial model, but the creative one, too.

But Netflix does things differently. They control every aspect of the process. “Netflix is the studio, they are the network, they are an all-encompassing package,” Hissrich said. “What that means to me as a creator is that I have a lot more freedom in terms of stories that I’m telling and how I want to tell them. There are fewer bosses to please. What happens when you’re doing network television is you have a group of executives at the network, executives at the studio, and in producing pods. You’re answering to a lot of different people. Occasionally, that can dilute your work. That is not the case here.”

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Image: Netflix

Streaming TV, built on the assumption that viewers will want to binge-watch chunks of series, has altered the creative process as well. Hissrich said she loves writing for binge-watchers, because it frees her up to focus on the storytelling. “I don’t have to repeat a bunch of things. I don’t have to constantly remind the audience what they saw two years ago, or two months ago, or a week ago. I can trust them to hang onto the story I’m trying to tell. It’s a really exciting way to do things.”

Some TV critics have condemned the binge model for that exact reason. Many streaming shows tend to lose all sense of “the episode” as a storytelling device, instead relying on bloated installments that bleed into one another. They put little value on self-contained stories—episodes that themselves have a beginning, middle, and end, a theme, and can be enjoyed independently of a full season.

The freedom Netflix gives its creators can—and has—resulted in fiasco. Take The I-Land, for instance—a cringeworthy Lost knockoff released last year that may very well be the worst TV series ever made. It’s a show that had no business being released into the world. Had it been filmed for a traditional network, it probably never would have seen the light of day. But Netflix orders most of its shows “straight to series,” rather than ordering a pilot and then deciding afterward whether it wants to move forward with a full show, as networks like HBO usually do.

Netflix’s deep pockets and hands-off approach created the unique conditions under which a monstrosity such as The I-Land could exist. And the more shows like that one that make it onto Netflix’s platform, the more ammunition critics have to accuse Netflix of being a mishmash of mediocre content in search of an identity.

Still, that isn’t deterring most creators—Hissrich included. She’s worked on four Netflix shows, and is now hoping to turn the The Witcher franchise into a lucrative global phenomenon to compete with well-known brands from Disney, WarnerMedia, and NBCUniversal.

“I trust them and they trust me and it really is a great collaboration,” she said. “There’s a reason I stuck with Netflix for so long.”

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The Netflix monoculture

Netflix would love to have a presence in every home on Earth, streaming all of its content directly to consumers around the world simultaneously.

It’s already on its way. Many of the most popular Netflix titles are popular across countries. And thanks to the pandemic, Netflix’s content is being watched by more people around the world than ever before—even things that you wouldn’t necessarily expect to become massive global hits. While Netflix’s viewership metrics are dubious, this is still a staggering number of eyeballs that have viewed Extraction, an action thriller starring Chris Hemsworth:

Even if only a fraction of those 90 million households finished the entire movie, the film’s global reach is vast nonetheless. In four weeks, that’s almost as many tickets as Disney sold to its 2019 reboot of The Lion King over its entire span in theaters. And Extraction is not nearly as popular as The Lion King franchise. No one knew what Extraction was before it showed up in their Netflix queues one Friday night.

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Choose your own adventure: Netflix and innovation

In recent years, Netflix has finally begun to tap into the interactive potential of streaming content with “Choose Your Own Adventure” stories, which allow users to, well, choose what happens in the content they’re watching. Its first big experiment with the technology was for Bandersnatch, a 2018 film installment of the dystopian tech anthology thriller series, Black Mirror.

Bandersnatch was mostly met with tepid reviews. Some critics admired Netflix’s ambition, while others criticized the sloppy execution. While Choose Your Own Adventure-type stories had been around in book format for decades, they had never been applied to the content of a major internet entertainment service, so Bandersnatch represented something of a trial-and-error phase for the streaming platform.

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Image: Netflix

But it learned some valuable lessons. During the production process, Netflix’s tech team created bespoke software called Branch Manager, a tool that allows storytellers to seamlessly map out every possible iteration of the story. Netflix has since used the technology on other content, including an episode of survivalist Bear Grylls’ adventure series You vs. Wild and, most recently, a special episode of the comedy Unbreakable Kimmy Schmidt.

The Kimmy Schmidt interactive was praised by critics for really leaning into the absurdity of viewers deciding how the story goes. And the content—a lighthearted, goofy show co-created by comedian Tina Fey—lended itself to viewer choice much more than than overly serious techno-thriller Black Mirror.

And that area might be where Netflix decides to continue giving audiences more power of the stories they consume. Seth Meyers’ stand-up comedy special on Netflix last year allowed viewers to opt out of hearing the comedian’s Donald Trump jokes—like a version of the service’s patented “Skip Intro” button, except for political content. While it was meant as a low-stakes gimmick, the technology highlighted exactly the kind of interactivity streaming content can have in the future. Imagine a button that lets viewers skip any type of content they want in real time, or one that lets them eliminate characters or plot lines from shows entirely.

In 2019, Netflix’s vice president of product, Todd Yellin, said the company was “doubling down” on interactive storytelling. That was not long after Netflix’s director of product innovation, Carla Engelbrecht, told the Hollywood Reporter the service had several interactive projects in development, across many genres. Netflix was committed to “continuing to unearth this iceberg of opportunity,” she said. If Netflix has just revealed the tip of its iceberg, the rest of the entertainment industry will be in for some very nervous sailing.

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