Netflix Company’s Monopolistic Tendencies

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Table of Contents

Introduction
Monopoly and Oligopoly in the Modern Age
The Present-Day TV Market
The Development of Netflix
Conclusion
Bibliography
Footnotes

Introduction

The modern world is profoundly influenced by capitalism. One of its core characteristics is the presence of competitive markets: every economic realm is supposed to have multiple agents that enter into rivalry with each other in order to attract customers and gain benefits. However, this model does not always correlate with practice. In this context, the phenomena of monopoly and oligopoly seem to be challenging. Monopoly and oligopoly can be considered the opposite end of the market structure spectrum from perfect competition.¹ The USA is not an exception since some spheres tend to be controlled by one or a few companies.

In this regard, the example of online television and streaming media is illustrative. Recently, it has been discussed whether this market may be described in terms of monopoly and oligopoly and what position Netflix, one of the most successful and big companies associated with this field, holds. Although the majority of the nowadays studies that pertain to monopolies in digital media cover Google, Microsoft, Amazon, and Apple, Netflix has also become the object of growing interest among researchers.² As a rule, the materials containing information about the current state of affairs, ups and downs, and management strategies are found in different web sources.

The purpose of the present paper is to examine if the Netflix’s tendencies to monopoly are increasing. The characteristics of monopoly and oligopoly in the modern setting are given. Further, the American audience’s preferences and the Netflix’s key competitors in the TV market are explored. Later on, the brief history of the company under consideration is described. Finally, monopoly tendencies and up-to-date situations are investigated.

Monopoly and Oligopoly in the Modern Age

The small number of sellers or goods in an industry may be described in relation to three key theories. One of them is the theory of monopoly. The term “monopoly” refers to the market situation when there is a single market entity that is the only provider of a product within a certain industry. Another assumption is that this firm produces goods that have no close substitutes; as a result, there is little, if any, competition.³ Finally, as the sole firm controls the production branch, it installs barriers to entry. Legal barriers, economies of scale, and a firm’s exclusive possession of some scarce resources account for the impossibility of entering the market.⁴ Because the barriers are high, new firms, the potential competitors, are unable to enter the industry and develop.

Apart from the theory of monopoly, there is also the theory of monopolistic competition built, again, on several assumptions.⁵ First and foremost, multiple sellers and clients are involved. Then, the offered goods and services are almost the same: they differ a little in terms of trade names, decoration, advertising, salespersons’ attitude, and so on. The quality and function of the products are similar. As for the entry process, there are no hindrances to start acting in a particular sphere or quit.

The third theory that should be mentioned touches upon oligopoly. Although the universally accepted theory has not been developed yet, it is possible to describe three assumptions. There are few interdependent sellers: in this case, each marketeer’s actions make an impact on the other. The firms produce and put up for sale either homogeneous or differentiated products; finally, the barriers to entry are significant.⁶ As the cartel theory predicts, sometimes oligopolistic companies may act as if they were one firm.⁷

Speaking of the present-day situation in the USA market, one can state that pure monopolies are quite rare, for instance, public utilities and amenities area and the U.S. Postal service. Monopolistic competition is much more frequent: various services, such as restaurants and cafes, clothing store business, and computer programs, demonstrate it. Oligopolies are also common, for example, airlines or movie studios spheres. In terms of the whole economy, there is a consistent tendency for monopolistic competition in America.⁸ At the same time, mass media communication and entertainment providers are inclined to oligopolies.

The Present-Day TV Market

In the age of the Internet, people’s love of TV content has not decreased. Television remains one of the most popular media in the United States. However, traditional linear television is becoming less popular. Nowadays, the constant interest takes the new form of Internet television, and the TV market tries to correspond to the needs of customers.

Linear and Internet Television

As the term implies, linear TV provides programs at a scheduled time on non-portable devices. In other words, programs follow each other, and a viewer is de facto chained to their TV screen. Obviously, such immobility cannot satisfy them now when people need the liberty of movement and flexible services assessable at the proper time.

Responding to these requirements, the biggest linear TV companies provide their programs via devices of different kinds. Internet television becomes ubiquitous. There are several reasons for this trend:

Nowadays, the Internet has become faster and more trustworthy; besides, smart TVs and other gadgets are more widespread;
A user enjoys the opportunity to watch programs on demand and choose what suits their tastes;
TV equipment and applications are frequently improved and updated;
One can access a program as many times as necessary; consequently, the experience is more individual and bright;
In general, there are few advertisements, and they are targeted;
There is a transition from a passive process of watching to more active content producing and content sharing.

Linear and Online TV Consumers in America

In spite of the fact that the Internet is becoming more popular, the Americans’ love of television lingers. In 2016, it was estimated that an average American person spends more than ten hours consuming media daily, and watching TV adds up to five hours; approximately half of the audience has subscription services, such as Netflix.⁹ Still, in comparison with previous years, these figures are lower.

What type of television is preferred depends on the characteristics of people who watch it. In this respect, there is nothing surprising. Persons aged 50 and older predominantly use linear TV services.¹⁰ The younger generation, as expected, is drawn to online TV. Apart from the advantages of this form described above, it is challenging because one should have enough skills to orientate themselves in thousands of channels, programs, episodes, and so on. Younger people are usually more advanced in this respect.

Finally, a typical TV consumer in America, similar to viewers all over the globe, is subject to binge-watching: an individual watches a new season of a TV show very quickly. On average, it takes five days: two hours of watching per day.¹¹ All in all, TV plays a significant role in people’s lives regardless of their form.

Online TV Market in the USA and Netflix’s Competitors

At the present-day moment, Netflix remains the biggest subscription services provider in the online TV area. However, it does not mean that there are no other similar companies. In light of the previous information, one may argue that either a monopolistic competition or oligopoly model may be applied to the sphere of Internet television. There is no consensus among researchers; still, most of them consider Netflix to be the biggest monopolistic competition company.¹² From time to time, one may encounter newspaper articles that use the term “monopoly” in relation to Netflix¹³. Strictly speaking, it is a misuse. Technically, one may discuss the monopolistic tendencies that take place in the online TV market because some other marketeers are present.

Amazon and Hulu Plus are two biggest companies that are notable for providing almost the same services. Still, there are slight differences. Amazon has a more direct overlap in contents with Netflix; Hulu concentrates on TV content, provides TV shows the next day after they are broadcast and sets aside some other shows and movies.¹⁴ One can state that Netflix has the most diverse contents. Moreover, Netflix also leaves its competitors behind in terms of market share. In the U.S. households, these indexes are 36%, 13%, and 6.5% for Netflix, Amazon, and Hulu correspondingly.¹⁵ While these data and figures show that Netflix is powerful, its present-day position is not, to some extent, favorable. The reasons for concerns will be described below in the context of the current situation assessment.

The Development of Netflix

The History and Strategies of the Company

Netflix’s history began in 1997 when CEO Reed Hastings got the idea for the DVD-by-mail service after paying a $40 late fee for Apollo 13.¹⁶ In those times, VHS format was predominant, but Hastings and his friend Marc Randolph realized that DVDs were going to oust it. At the early stage, the company did not offer subscription: it was launched only in 1999. The first profit was made in 2003 when Netflix reached one million subscribers; in 2007, after the company had reached more than 6.3 million customers, Netflix introduced streaming services.¹⁷

Sometimes, Netflix managed to achieve its goals sooner than expected: for example, the number of subscribers was to be increased to 20 million by 2012, but it happened earlier since the services were brought to Canada. Later on, quarterly sales topped $320 million by the end of 2008, followed by $394 million during the first quarter of 2009.¹⁸ These results are especially impressive because the company gained success when the whole movie rental sphere met with an 8% sales decrease. Stage by stage, Netflix managed to attract many clients from Ireland, Great Britain, the Caribbean, and other countries.

The key factor that endured Netflix’s early success is the accurate evaluation of the future technological development: when the company chose to work with DVDs, the majority of the American households did not own DVD players. Because of DVDs space effective size, the U.S. Postal service became a feasible way to send movies to customers. Netflix formed strategic relationships in the expanding DVD market: for instance, cross-promotional agreements with DVD hardware manufacturers and studios were reached, and the company offered free rentals with purchases of DVD players from Toshiba, Hewlett-Packard, Pioneer, Sony, and Apple.¹⁹ This agreement was equally beneficial for DVD players manufacturers and Netflix since it provided people with the new equipment and turned them into potential clients. Other actions taken by Netflix were teaming with studios in order to promote high profile films and collaboration with online movie information providers to funnel movie-interested Internet traffic directly to Netflix.²⁰

The company’s well-handled optimizing distribution was also the advantage. In 2002, ten additional warehouses throughout the country were open: the location for each of them was chosen to cover as many customers as possible.²¹ What is more, the location of these warehouses was secret: the company workers even had to sign nondisclosure agreements if they wanted to be employed.

In the course of time, rental services have lost its significance. At this moment, Netflix concentrates on digital services. However, this sphere is characterized by the presence of similar companies. Consequently, Netflix finds itself in a new position.

The Current Situation Assessment and Recommendations

One of the presumably advantageous strategies is offering original products. The exclusive programs and shows are supposed to raise people’s interest: Netflix invests large sums of money in content. It is unknown whether this strategy will work. If the best happens, people will not only have to subscribe because they wish to watch a certain show but also do it eagerly since the offered programs will be to their liking.

Some researchers assume that Netflix will eventually climb down, and it will happen relatively soon. The orientation towards subscribers’ statistics is considered to be the strangest feature of the company’s strategy. If subscriber growth does not match investors’ expectations, the stock will take a tumble.²² Still, the number of customers is not changing upward. According to the up-to-date information, the additions within the USA have dropped by nearly half.²³ Some reasons are connected with domestic and foreign policy, historical events, and culture, such as Brexit, restrictive European regulations, and the Olympic Games in Rio de Janeiro; however, apart from short-run or external factors, there are also inner prerequisites that help identify the current status of the company.

What usually is not discussed is the Netflix’s debt load: free cash flow falls, but the debt remains the same.²⁴ Despite the unfortunate tendencies, the company is reportedly planning to raise even more debt. It is highly probable that the debt-to-equity will easily climb from its current 1.33 to 1.50 at the end of 2017; these intentions are not praised because a company that has found its capacity to hasten growth crippled is not raising capital to leverage its low efficiency.²⁵ Netflix faces not only the expansion challenge but also management problems: while it is obvious that the company urgently needs to concentrate on organizing its balance sheet, the management ignores it.

Under these circumstances, the task of paramount importance is to realize that Netflix is not the growth stock anymore. There are several reasons that prove this statement:

According to the statistics given above, the number of new customers is declining not only in the U.S. but also all over the world now;
Netflix’s technologies used to be disruptive innovations, but nowadays one perceives them as something familiar. The company used to demonstrate that people need to be in step with the times and choose Netflix. However, since these innovations have become a part of the routine, the attention is drawn to the market share.
The company has probably reached its optimal level of scalability because those who needed online TV services have already subscribed to Netflix or one of its competitors.

In this context, Netflix needs to revise their policy and goals. Subscriber growth should become less important. Several concepts, such as lifetime customer value, operating margins, and customer retention, are more significant for the company.²⁶ To succeed, it is vital to shift from quantity to quality commitment.

Conclusion

To sum it up, capitalist setting theoretically implies the existence of competitive markets where all market entities regard each other as opponents. However, theory and practice sometimes differ. In the USA, one may find examples of monopoly, monopolistic competition, and oligopoly. In general, monopolies marked by the presence of one seller are scarce: they pertain to public utilities and services and the U.S. Postal service. Unlike monopolies, monopolistic competition companies and oligopolies are of frequent occurrence, and sometimes it is not easy to tell them apart. Speaking of entertainment and mass media, oligopolies are more common.

An American consumer is known for their passion about watching television regardless of their age, gender, ethnicity, and other characteristics. In the era of digital devices and rapidly changing technologies, this habit reshapes. While linear TV has begun to take a backseat, online television services are currently needed. Such tendencies are not surprising since the modern world requires freedom of movement, fastness, and on-demand services.

In this context, Netflix is one of the most successful companies that provide access to the Internet television. While the company initially concentrated on DVD rental services, it eventually developed the modern approach and met the expectations of consumers. Nevertheless, it cannot be considered a monopoly: one should discuss the monopolistic tendencies that, indeed, take place. In comparison with the key competitors, Amazon and Hulu Plus, Netflix is more prevalent and covers about 36% of all American households. However, as it has been examined, the present-day management is far from being perfect: instead of improving the quality of its services, Netflix focuses on market share and attracting new consumers. Because the market demand is lower now due to the external factors, this strategy is unlikely to bring profit.

Overall, Netflix has never been a monopoly in the strict sense of the term. The company’s past is marked with monopolistic tendencies, but on the present stage of its development, Netflix is becoming one of the equal companies that provide consumers with online television services. Unless Netflix takes action and changes its administration, it is most likely to continue to lose ground.

Bibliography

Arnold, Roger A. Microeconomics. San Marcos: Cengage Learning, 2013.

Ferrel, O. C., and Michael Hartline. Marketing Strategy, Text and Cases. Mason: Cengage Learning, 2013.

Koblin, John. “How Much Do We Love TV? Let Us Count the Ways.”The New York Times. Web.

Verial, Damon. “Netflix Has Lost Its Monopoly.” Seeking Alpha. Web.

Footnotes

Roger A. Arnold, Microeconomics. (San Marcos: Cengage Learning, 2013), 242.
O. C. Ferrel and Michael Hartline. Marketing Strategy, Text, and Cases. (Mason: Cengage Learning, 2013), 151.
Arnold, Microeconomics, 242.
Ibid.
Ibid., 264.
Ibid., 268.
Ibid., 269.
Ibid., 277.
John Koblin, “How Much Do We Love TV? Let Us Count the Ways,” The New York Times.
Ibid.
Ibid.
Ferrel and Hartline, Marketing Strategy, Text and Cases, 479.
Damon Verial, “Netflix Has Lost Its Monopoly,” Seeking Alpha.
Ferrel and Hartline, Marketing Strategy, Text and Cases, 476.
Ibid., 477.
Ibid., 471.
Ibid., 472.
Ibid.
Ibid.
Ibid.
Ibid., 473.
Verial, “Netflix Has Lost Its Monopoly.”
Ibid.
Ibid.
Ibid.
Ibid.

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