Why is Netflix so successful?

Instrumental to Netflix’s success is the superiority of its offering versus the incumbent Pay-TV operators and DVD rental services. Netflix has been able to disrupt Pay-TV operators so effectively because it offers a non-linear service. By allowing customers to curate their own TV, Netflix and other VOD services have a palpable advantage over linear TV services. Where a linear TV service must select programming that appeals to the widest audience (and consequently leave some customers underserved at any given time), VOD services are able to satisfy all users at all times. By connecting the users directly to content and giving them the ability to watch it at their own pace, streaming not only serves customers better, but also allows companies to monetise otherwise unprofitable / niche content. The advantages of Netflix versus DVD rental are even more evident. Because streaming provided a frictionless way of gaining access to video content, it erased the need to have specific equipment (i.e. DVD or Blu-ray players), got rid of the lag time between the wanting to view content and being able to view it, and gave consumers access to a content library far superior to that which could be housed in any single store, moreover it eliminated a lot of the hassle related to DVD rental (returns, late fees etc.).

In addition to the advantages of streaming as a content delivery mechanism, the lethargic reaction of competitors (Blockbuster etc.) allowed Netflix to establish dominance in this new segment with relatively limited hindrance. Where content creators could have limited Netflix’s access to their libraries, thus reducing the attractiveness of the platform, they instead licensed it content that they were unable to monetise effectively themselves (due to the linear nature of Pay-TV). In essence “networks [were] far more concerned with protecting their lucrative paid-TV revenue than with propping up their streaming initiatives”. By allowing VOD services to populate their libraries with their content, networks unwittingly allowed Netflix and its ilk to gain control of their end users.  This ultimately created a virtuous cycle for VOD providers as, having ceded control of their end-users, the networks became increasingly dependent on licensing revenues where previously they would have relied on subscribing customers.

For cloud-gaming, however, questions remain around the chances of there being a disruptive service in the current market conditions. Currently the market is largely dominated by the traditional business model where players buy the games they want to play outright. Even though there is an ongoing shift from physical to digital ownership, the way games are monetised has not changed much, other than disintermediating third party retailers. For the most part, forays into subscription based models have been carried out by the traditional console makers (although Nvidia has also been active in this area), however, such ventures have largely been bundled with other services or have been positioned as a supplementary offering. Analysis of the gaming services that have sprung up in the wake of the media streaming revolution, shows not only that cloud-gaming is a long way from truly disrupting the traditional distribution model, but also that there are some significant barriers in the industry’s structure that significantly reduce the likelihood of successful disruption going forward.

The services currently on offer

Nvidia’s subscription GeForce Now cloud-gaming service most resembles the video gaming equivalent of Netflix. The service allows subscribers to stream a library of 100 games without the need for installations, discs etc., but with the caveat that one of Nvidia’s Shield boxes is necessary to do so. While the service is promising from a quality standpoint, allowing 4K gameplay, the platform faces significant structural difficulties around content and user acquisition. Versus Netflix or Spotify, it is difficult for Nvidia to acquire subscribers via traditional means (discounts, trial periods etc.) as the service is only available on Nvidia hardware. A prospective subscriber must first get over the $200 cost of the hardware before then paying for the monthly streaming service. Couple this prohibitive upfront cost with Nvidia being relatively unproven as a console maker, and the platform’s limited library versus the traditional consoles (the platform currently has c.100 titles), and it becomes hard to see how Nvidia will be able to convert users to their platform. These user acquisition problems simultaneously make it difficult to gain content, as developers have no incentive to expend time and capital making games for a little used platform, creating a vicious cycle limiting Nvidia’s prospects of success with their cloud gaming platform.

Nvidia’s underlying problem is that it does not ultimately have control of the user, that control is currently vested in the incumbent console makers and publishers. Publishers (as a class) have control over the end-user because they ultimately create the product that users desire. However, their individual power is limited by the fact that they don’t control the means of play, for example it would be absurd for a publisher, even one the size of Activision, to move to exclusively support a platform with few users. In a similar vein, console makers capture the consumer by providing the means of playing games, but given that this control is predicated on having games, console makers are only powerful when they have sufficient pull to ensure that most games are published on their platform. The more users a console has, the more power accrues to it in the publisher / platform relationship, at critical mass it becomes asinine for a game publisher to not release a game on that platform (at least in absence of external factors like exclusivity deals). Thus, Nvdia’s and other prospective cloud gaming platforms are faced with a barrier to entry in that they need content to gain users and yet simultaneously they need users to gain content (at least in absence of paying a significant amount of money to for it). Consequently, without deep pockets – to pay developers for content, the chances of a cloud-gaming giant emerging independently of the big 3 console makers (who already have the users) is bleak. Analysis of these console giants’ forays into cloud-gaming / alternative distribution models, therefore, will provide a great indicator of the likelihood of a cloud-gaming or similar subscription-based platform becoming the dominant business model.

PlayStation Plus is a subscription service providing customers with the ability to download selected games each month (the service currently adds access to 2 new games monthly) which are retained for the lifetime of the subscription. This service, however, is not cloud-gaming, as the user still must download a game to play it and the library of available games is extremely limited compared to the range on streaming services. Moreover, Plus’s main value to users is in providing access to PlayStation’s online multiplayer platform; the purpose of the free games is largely to make the bundle more attractive. For these reasons, it does not make sense to view it as an alternative to the traditional model, but rather as a supplementary service. Xbox Live Gold is essentially the same service delivered on Xbox hardware and consequently is disregarded for the same reason.

PlayStation Now, on the other hand is an actual cloud-gaming service, allowing users to stream around 500 PS3 titles to their PS4 or PC. Now, however, is clearly limited in its scope – firstly 500 games is hardly an expansive library when compared to analogous services like Netflix, especially given that the service has had 2 years to build its library. Secondly in providing access to PS3 games only (note that PlayStation did recently announce it was going to begin adding PS4 games to its library), the focus seems not to be on providing access to the latest content but rather on monetisation of their back catalogue. Thirdly in being limited to two platforms the service is clearly different from Netflix which provides significant value to users by being platform agnostic. The last point is especially damning as I believe that there is no realistic prospect of PlayStation extending the service to many non-Sony platforms (in fact Sony actually removed support for the PS3, Vita and other Sony products). This is because, as a console maker it would make no sense to provide a service that eliminated the need to purchase your hardware. The presence of the service on PC, though contradictory to this, seems to be a thinly veiled attempt to monetise PlayStation’s exclusive content amongst die-hard PC gamers rather than a bona fide attempt at creating a platform agnostic service; requiring subscribers to use a PlayStation controller, for example, does not look like the behaviour of a company serious about fostering a platform agnostic streaming ecosystem. It does, however, look like the behaviour of a company focused on hardware sales. The combination of these limitations renders it is unlikely that Now, at least in its present iterations, is gaming’s answer to Netflix.

Xbox’s upcoming Game Pass service largely mirrors Playstation Now in its model with the caveat that rather than streaming games, Game Pass users will have to download the games their subscription gives them access to. Another difference is that the service will be launched with a library including both Xbox 360 and Xbox One games, indicating some willingness to provide reasonably recent content. Despite some differences, many of the limitations to PlayStation Now are equally applicable here. Firstly, Game Pass is to launch with a limited library (just 100 games) secondly, I believe it unlikely that the Game Pass will ultimately be platform agnostic for the same reasons that PlayStation Now isn’t and thirdly, unlike Now, by requiring users to download the games that they wish to play, Game Pass adds a layer of friction not seen in streaming services like Netflix and Spotify.

Conclusions

In summary, the none of the subscription services offered by console makers are likely to become gaming’s Netflix if they maintain their current form. Where Netflix offers vast choice, these services offer a limited selection of games, where Netflix offers frictionless access to content only PlayStation Now and Nvidia provide access to games with without the need to download, where Netflix allows users to access their video content regardless of the device they are using, these services are intimately tied to specific consoles. In a nutshell these services will need to significantly improve to provide the same level of attractive value to users seen in video and music streaming services. While it is entirely possible for console makers to improve the quality of these services to the point where they offer a superior user experience to the traditional model, I believe it unlikely for them to do so in the absence of a pressing incentive. Although a shift to streaming rather than downloading is a plausible improvement that console makers would be willing to implement, making such a service platform agnostic would be self-defeating. As outlined briefly above, it would self-defeating for businesses focused on the sale of hardware to offer services which render their hardware obsolete.

Even if one were to somehow eliminate the inherent conflict of interest between platform agnostic streaming and console makers, other significant barriers exist making the development of a successful cloud based gaming platform difficult. One such area is content, where games publishers are unlikely to offer up their most lucrative new intellectual property for streaming. Publishers of best-selling games will be unwilling to cannibalise revenues from direct sales of their most popular franchises by making them available more cheaply elsewhere via a subscription model. Consequently, any streaming platform seeking a library filled with top content will likely have to pay the likes of Activision and EA an unsustainable amount for the right to stream the latest iterations of their premium franchises. Moreover, even some of the premium older content will be expensive to gain the rights to, given that publishers have historically been able to monetise their ‘classic’ content by re-releasing these games at full price.

While this problem is analogous to the problems faced by VOD providers as the transition to streaming began (in that their libraries were initially populated with older video content) the specific dynamics of video game industry make this a much sturdier barrier to entry than in the TV industry. A key reason for the success of Netflix despite an initial lack of access to the most recent TV content was the fact that TV content retains value to users for a long period of time. Old TV shows and music maintain value better than video games because of the nature of innovation in those industries. The differences between new television versus older content are predominantly around qualitative factors (though admittedly there is some difference in technical areas such as video quality) while for games, because of the technology driven nature of the industry, many more factors separate old games from new. For example, a new game will likely have far superior graphics to an old game as the capabilities of gaming devices have expanded, similarly new games also have features that did not exist previously such as online multiplayer. A game from even 5 years ago will struggle when compared against a game released now on several factors in a way that a 5-year-old TV show wouldn’t. Consequently, launching a cloud-gaming platform with a library of only old games would be like Netflix launching with a library populated with black and white films. In such a scenario, the product offered by the games streaming service is clearly inferior to the traditional offering which will significantly hinder its ability to attract users. Where Netflix could capture the user using older content to compete with linear TV (weakening the traditional players by diverting users away from linear TV) and subsequently gain access to newer content later at a more reasonable rate having weakened the incumbents, old games cannot capture the gamer as effectively as old TV captures the viewer. Thus, it is unlikely that a cloud-gaming platform will be able to overcome the hurdle of intransigent content publishers, who benefit significantly from the status quo being maintained.

On the surface the rise of cloud-gaming seems inevitable, however, after careful analysis of the industry’s structure and the attempts made so far it emerges that the structure of the industry itself is a key barrier to such a company emerging. The grip that major console makers and publishers collectively have on the end-user significantly hampers the ability of an outside actor to gain traction, while in the case of the incumbent console makers and publishers there is an absence of incentives support a shift to a business model that will likely reduce their revenues. The combination of these factors mean that the advent of gaming’s Netflix is likely far further away than one would initially expect.

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