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This year, Netflix's CFO Spencer Neumann said when asked if the company would stick to its ad-free subscription service for a long time. "Don't say never." This means that the era of Netflix membership, which continues from 1999 to the present, is coming to an end.

In response, Netflix's CEO Reed Hasting explained: "although I have always opposed complex advertising and advocated simple subscriptions, I respect consumers' choices more." This paragraph actually reveals two signals: 1. High membership prices lead to the loss of users; 2. A single membership system can not maintain the continuous growth of the number of users.

A few years ago, Netflix was still very popular, and its success attracted many newcomers to join the track. Major media groups in the United States launched their own streaming channels, Disney launched Disney+, Warner and HBO Max, and Amazon launched streaming studio Amazon Prime Video. In the business model of these streaming platforms, the paid membership system dominated by user demand was once the norm.

The turning point came in the first half of this year, when the number of Netflix members continued to decline and the stock price fell accordingly. This sudden dilemma makes streaming media players have to re-examine the subscription mode of operation. In order to stabilize the situation, many players begin to look for a new way out. Take Netflix as an example, on the basis of member differential pricing, the advertising model has been incorporated into the new payment system.

In 2018, Finance and Economics V Wu Xiaobo predicted: "membership will become the most popular consumer relationship model." At that time, Netflix was growing into the world's largest streaming service provider with this set of rules. Now, however, in the era of membership, Netflix, as the leader of the industry, is the first to launch self-reform. This is the question we are going to discuss today: what is wrong with membership and what is the future of the streaming industry?

01. The trap of membership system: we can only see the increasing number of users, ticket subscription membership service and value-added subscription membership service, which are two common membership modes in the streaming media industry. The former is represented by Netflix, subscribing members can watch the content, while the latter is represented by Hulu, subscribing members can be exempt from advertising.

Under the ticket-based subscription membership service, business income = number of members x membership fees. In order to increase business income, one is to increase the number of members; the other is to increase membership fees, but the relationship between the two shows an inverted U-shaped curve.

With the increase of membership fees, the growth rate of membership slows down until it approaches zero, and then decreases when it reaches its maximum: since 2011, the Netflix streaming service has experienced a total of seven price adjustments, during which the growth rate of members has declined significantly. At the end of last year, the number of members peaked at 220 million. Since the beginning of this year, the number of members has experienced a negative growth, with a total decrease of 1.17 million.

If Netflix subscribes to the user data source and draws new eyes according to the logic of the traditional ticket membership system, we are easy to fall into a misunderstanding, that is, user scale = operating income = operating profit = enterprise development prospect. Generally speaking, the continuous growth of users can show that the enterprise has a good development prospect. once the users begin to lose, it is as unstoppable as the flood that opened the floodgates. If the loss can not be stopped in time, the recession will be the only way out for the enterprise.

To take a simple example, with the growing number of members, the previous Netflix made a lot of investment in the capital market, providing continuous financial income to Netflix to support the investment in content. Between 2017 and 2020, Netflix spent an average of $10 billion a year on content production, accounting for 65 per cent of total revenue.

At first, the effect of this investment was significant, and with the release of the 2020 results, Netflix's free cash flow was positive again after nine years, giving a boost to the capital markets. So it once made everyone think that Netflix successfully ran through the business model of "burning money for users and harvesting sustainable profits", and various streaming media platforms began to emulate one after another.

The problem came at the end of last year, when negative free cash flow and negative growth in the number of users caused Netflix to suffer in the capital markets, with its share price falling more than 70 per cent year-on-year to less than $162m. In the view of the capital market, the decline in the number of users is a sign that Netflix has fallen to the altar.

There is a trap of membership system itself: under a single membership system, user input is the only source of enterprise income. If enterprises want to continue to operate, it must require the continuous growth of member investment, but the total number of users that an industry can obtain is bounded, and there is no sustainable growth in the number of users. After the number of users is saturated, enterprises are bound to change their development ideas and seek new growth paths.

02. Where is the increment of Netflix users? Amazon, the world's largest e-commerce membership platform, has 170 million prime members, but it can still maintain a growth rate of 30 million people a year, and its users are so sticky that about 93% of its members are still willing to renew their members after a year, according to data from CIRP, a research firm. Such a high user retention rate is mainly due to Amazon's fine express network and high-quality delivery services.

On the other hand, Netflix, known as the "Amazon of streaming media", has 220 million users worldwide so far, but it is unable to maintain user stock and user stickiness. Nearly 1/4 of Netflix users want to cancel their subscriptions by the end of the year, according to the latest survey conducted by reviews.org, a US rating website. Among them, 2% of respondents said that high fees were the main reason, while 1% of respondents said that Netflix content was no longer attractive, with 30% of respondents wanting to switch to other streaming service providers. The results of this survey show the current operational difficulties faced by Netflix.

With the entry of Disney+, HBO Max and Amazon Prime Video, the IP copyright previously licensed to Netflix has been withdrawn, weakening the advantage of Netflix content. In order to quickly expand the scale of users, the new streaming media platform chooses to charge lower membership fees. In the face of fierce competition in the industry, Netflix has to choose to increase its membership fees in order to maintain the investment in content. The combination of the two directly aggravates the loss of users of Netflix.

The loss of users is not the absolute value of the reduction in the size of users, but depends on the comparison between the number of new users per month and the number of unsubscribers. However, as the user scale of Netflix is close to saturation, the room for user improvement is limited in a short period of time. It also means that Netflix's user dilemma is likely to be an ongoing proposition.

All along, Netflix relies on high-quality original content to attract users, but high-quality output means a high standard of capital investment. Once users are lost, the size of users is reduced, and corporate revenue is reduced, the quality of content will decline and the loss of users will be accelerated.

Under the logic of membership, Netflix seems to be falling into an endless cycle. The root of the problem lies in the limitations of the streaming media industry. Different from the high-frequency demand of e-commerce platform, streaming media has the characteristics of low frequency and high demand. Consumers usually choose whether to open or renew membership according to whether the website has the content they are interested in or not. there is a strong mobility between platforms.

In the streaming media industry, that is, users are willing to pay for content, but content production takes time, and the time spent on large-scale production does not match the patience of the audience, which leads to an imbalance between the two sides of the deal. once the audience is unable to get the content they need on the platform, they will unsubscribe and switch to other platforms.

03. The road to demand-oriented change Yu Jun, a well-known domestic product manager, believes that "the product is the transaction". In fact, if the product is replaced with the service in the streaming media industry, it is also applicable. But this also raises another question: the services provided by Netflix have not changed. Why can't the same number of users increase in exchange for the same membership and the same content library?

If you are familiar with Netflix, it actually started to implement membership system in 1999. Since the membership fee standard was basically finalized in 2011, the streaming media market Netflix is almost the largest during this period. Until 2019 Disney announced the establishment of its exclusive streaming platform Disney+,2020 Warner established HBO Max, coupled with Amazon Prime Video and other platforms competition, the streaming media industry resource supply is no longer scarce.

Therefore, when consumers have more choice, when the price is not dominant, Netflix has naturally become the worst policy.

This year, Netflix, who has always been conservative, began to operate on himself. In April, the fees for members with advertising were officially announced, and then Netflix chose to join forces with Microsoft to try out the fees for members with advertising in six countries at the end of this year. According to Netflix, by then, there will be 40 million new advertising users worldwide.

This is undoubtedly a way to kill two birds with one stone by drawing a new view of the current charge map of Netflix. On the one hand, low prices can increase the number of users, thus increasing revenue; on the other hand, the introduction of advertising brings new revenue growth points to Netflix, which is conducive to the investment of follow-up content.

But reform is a combination of punches. Netflix also realized that a single membership division standard is difficult to meet the needs of all members, so it is difficult to obtain all consumer surplus. In order to deeply tap user value, strengthen its own brand image, and enhance user loyalty, Netflix actively adjusts its business strategy.

After all, in the case of a declining population base, any industry has its user scale ceiling, and continuous user growth is unrealistic. Then, how to maintain the scale of old users while grabbing new users has become the focus of enterprises' attention. We should know that the essence of any modern enterprise competition is the competition of user loyalty. Whoever wins user loyalty will be able to seize the opportunity in the future market competition.

Disney is the best example. Among the 25 most profitable IP counted by TitleMax, Winnie the Pooh and Mickey Mouse are the third and fourth respectively. They were born in the classic IP in 1924 and 1928 respectively, showing great vitality. Although there have been few new episodes based on the two IP for nearly a century, retail sales of licensed goods have remained high.

This also explains why the diversified business model with its own IP as the core has become a later shift for Netflix: in June last year, Netflix.shop officially launched in the United States, mainly selling dolls and clothing related to its well-known film and television series. In November of the same year, Netflix set up its own game development studio in Finland to extend the plot in the game.

The reform of membership system and the reform of business model are the changes made by Netflix. What we can know is that in this ever-changing era, under the fierce market competition, content is always the invariant of the streaming media industry. at the same time, it is also what every player has to do to seek change and breakthrough in the constant.

This article comes from the official account of Wechat: new eyes (ID:xinmouls), author: gu Yu, Editor: Sang Mingqiang

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