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The entertainment industry has changed over the years as a result of technological advancements and the development of mobile devices that enable video streaming and global purchases on a global scale. Netflix is one of the primary video streaming firms, and its success and willingness to adapt to consumer trends, as seen with the transition from DVD sales to video streaming in 2011, has established it as a credible force in the entertainment business. Its ambitious growth strategies and potential have left local and global film industry players nervous, as the firm earns a prestige only equal to monopolistic business systems. Netflix has not only managed to increase sales in the United States and other western countries but has also expanded to different continents earning it a prominent position in video streaming across the globe and also stemming its services as the market leaders in the video streaming industry.
Why Netflix is a Monopoly
According to Bumas, there are two types of monopolies including natural and unnatural monopolies where natural monopolies exist due to the firm’s ability to exploit increasing returns to scale over the entire range of market demand characterized by lower prices to preclude entry by rival companies (219). Some of the features associated with natural monopolies include their ability to increase economic efficiency that offers a fall in per unit costs of operation by expanding in size, fostering economic growth by speeding technical progress and innovation, ability to maximize returns from both local and international markets, and improving coordination of the economy by reducing market uncertainties associated with its operations (Tisdell and Hartley 209).
Netflix has managed to increase its market share by providing efficient and innovative services targeting different market segments which have further strengthened its economies of scale that limit competition from rival companies. Netflix adopted the creative destruction commonly known as the “Netflix Effect” in the year 2011 when it moved from a predominant DVD subscription firm to engage in the mobile and internet-based video distributions (Perry n.p). The move from traditional video offerings to match the market needs has led to its exponential growth and the decline in competitor bases and market shares. Perry reports that video tape and disc rental industry experienced declining market provisions from the year 2000 exemplified by an employee base of over 170,000 people to fewer than 11000 employees in 2015. Netflix which was valued at $50 million in 2000 has managed to grow to a market leader worth over $50 billion. The company’s year-to-date revenue for 2015 was 157 percent compared to its closest competitor Disney that reported a 15.3 percent of the year-to-date revenues (Perry n.p).
Comparing the market base, a report published by Molla indicated that most Netflix customers do not make subscriptions for other streaming services compared to the reciprocal service offerings. Based on the study, only about 22 percent of Netflix customers subscribe to other streaming services which is lower than the 61 percent of Hulu customers subscribed to Netflix, 55 percent of SlingTV subscribed to Netflix, 59 percent of CBS clients, 62.3 percent from HBO now, and 50.95 percent from Direct TV who also subscribe to Netflix. In the article, Molla states that Netflix has a market penetration of 25.33 percent compared to the closest rival, Hulu with 7.12 percent. The vast market share allows the company to implement lower prices to prevent competition from rival firms as is characterized by natural monopolies compared to other companies with economies of scale due to brand names such as YouTube TV and Apple. The company has further diversified its content offering by not only providing content from other producers but also investing heavily in buying new materials while at the same time challenging major cable and production companies. According to Levy, both Amazon and Netflix which specialize in internet offerings have intensified their investment on original shows to increase their consumer base and gain content monopoly to some of the most viewed and admired shows. While Netflix’s investment on new shows ranged at $4.96 billion lower than those of Disney, NBC, and CBS, it had the highest investment ranking in internet broadcasting compared to the second rival Amazon that invested 2.64 billion dollars (Levy n.p). Netflix originals rose from one to 30 between 2013 and 2016 and currently produces more programming than any individual network or cable station giving it disproportionate control over the industry (Elder n.p). The move by Netflix meets the third and fourth requirements for natural monopolies that provide a stable and favorable client service provision through innovative and unique offerings that eliminate uncertainties regarding the innovativeness and continuity.
The company’s natural monopoly position causes both adverse and positive economic effects. One of the most significant concerns with monopolies is their ability to use resources or economies of scale to prevent competition or destroy competitors. The company, as indicated, has driven employment down in the traditional video tape and disc rental industry as more people move towards internet-based content reducing the labor demand in the previous market structures. Unlike rental and videotape companies, Netflix is an online-based service provider which does not involve a labor-intensive approach but rather a capital-intensive method that does not accommodate employees of previous businesses. As such, the company’s growth and powers have reduced employment rates and contributed to lower purchasing powers among the raid off employees which drives the economy down. However, their increased sales and revenues increase government taxes which can further increase the government’s purchasing power and deter the adverse effects associated with the laying off of over 200000 employees at a micro level. The results are favorable to the macroeconomist but unfavorable to the microeconomist dealing with the interests of particular buyers. Netflix has further invested in the international market which translates to improved revenues and economic expansion in the United States due to foreign revenue from subscribers.
The competition has to contend with Netflix’s economies of scale and invest significantly in challenging Netflix’s market lead and increasing their chances of meeting their breakeven to stay profitable. According to Perry, companies such as Fox and Time Warner have had to make massive investments with an attempt to challenge Netflix’s superiority which has led to a negative year-to-date returns running at -22 and -21 respectively compared to 157 percent made by Netflix. Other companies such as Amazon have tripled their investment in the acquisition of new original shows to attract new clients and prevent their clients from moving to the rising Netflix that is leading in new original shows release in the year 2016 and 2017 (Levy n.p). Additionally, competitors have to restructure to meet the changing market demands and avoid losing their clients to Netflix and other Internet-based providers who are accessing more content from their portable devices leading to higher internet subscriptions and lower rental and cable service demands. Netflix has shifted from being a content aggregator and is now a high-quality content producer which further eliminates its reliance on linear and traditional competitors who once earned revenue from content displayed by Netflix and other online providers.
Bumas, Lester. Intermediate Microeconomics: Neoclassical and Factually-oriented Models. Routledge, 2015.
Elder, Robert. “Hollywood is Scared that Netflix will Become a Monopoly.” Business Insider, http://www.businessinsider.com/hollywood-fears-the-netflix-monopoly-2016-9?IR=T. Accessed 18 December 2017.
Levy, Nat. “Amazon and Netflix Challenge Major TV Networks in Spending on Original Shows, Study Says.” Geek Wire, https://www.geekwire.com/2016/amazon-netflix-challenge-major-tv-networks-in-spending-on-original-shows-study-says/. Accessed 18 December 2017
Molla, Rani. “Most Netflix customers don’t pay for other streaming services. But Hulu and HBO Now subscribers do.” Recode, https://www.recode.net/2017/10/23/16488506/netflix-streaming-services-hbo-hulu-subscribe. Accessed 18 December 2017.
Perry, Mark. “The ‘Netflix Effect’: An Excellent Example of ‘Creative Destruction.’” AEI, http://www.aei.org/publication/the-netflix-effect-is-an-excellent-example-of-creative-destruction/. Accessed 18 December 2017.
Tisdell, Clement, and Keith Hartley. Microeconomic Policy: A New Perspective. Edward Elgar Publishing, 2008.
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