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Riding the Wave

Netflix announced another ridiculously good quarter on October 16, adding nearly 4.5 million more international subscribers (5.4m total additions), ballooning the SVOD leader’s total international subscriber base to 56.5m (109.2m overall). What is really driving Netflix growth, and are there any limits to that growth?

Read on.

1. Netflix Is Not Just An SVOD Service; It’s A Sociological Phenomenon
Brands do not exist in a vacuum. In an amazing 2004 book called How Brands Become Icons, Douglas Holt argued that the strongest brands intersect with deep-seated cultural needs at a particular moment in history. In the 1960s, for example, brands as varied as Levi’s (jeans), Volkswagen (cars), and Harley Davidson (motorcycles) tapped into the Baby Boom’s desire for mass symbols of individualism (which in the abstract seems like a contradiction in terms). In 1971 (in the midst of the Vietnam war), Coca Cola famously tried to teach the world to sing (in perfect harmony). More recently, Apple has become the global arbiter of cool design, causing people around the world to (literally) line up for its products. As these 20th century examples indicate, brand transcendence occurs when a product (along with its advertising and positioning) becomes not just a product, but a symbol (or icon) representing a particular set of (aspirational) values. Levi’s were not just jeans — they were the ‘uniform’ for a whole generation that was out to change the world. A Harley Davidson was not just a means of transportation. It’s a roaring symbol of American rugged individualist freedom and rebellion — the 20th century equivalent of a 19th century cowboy’s horse.

Where does Netflix fit within this matrix? I believe Netflix’s success internationally can no longer be explained in terms of the product itself, but must be understood in terms of the encoded meaning that the service conveys, particularly in international markets. Specifically, I think Netflix is becoming an icon that represents the value of home broadband Internet access to the emerging middle class around the world.

The logic is something like this:

(1) The Internet has become humanity’s nervous system;

(2) With very few exceptions, people around the world want to be connected to it;

(3) Smartphones are becoming accessible to all, but outside the US high-speed Internet at home remains a mass luxury available only to the urban middle class;

(4) Once people have broadband Internet at home, they need a service that symbolizes their membership in the global Internet-connected club.

(5) Netflix is that service.

The importance of this analysis is that it allows us to put Netflix’s success into a larger context. Netflix no more created the global demand for broadband Internet than Levi’s created the Baby Boom or the Vietnam War. In all of these cases, brands get swept up in a cultural (i.e., sociological) trend that is much larger than themselves. The resulting business success is real, but it’s largely a byproduct of a larger trend. The brand is the surfer, not the wave.

The utility of this analysis (and analogy) is that is provides some clues as to what might cause Netflix to ‘lose the wave’ at some point in the future, which leads to our next point.

2. Fiction Is Safer Than Reality, Up To A Point
A big part of the appeal of the Netflix brand globally is that it ‘just’ represents entertainment. Unlike CNN (or even Facebook), Netflix does not sully itself with the ‘real world’ of news, weather, and sports. As such, it is able to steer clear of real-world controversies and deal instead in escapism. This has certainly been one of Disney’s secrets over the years, and the basic logic is sound.

Unlike Disney, however, Netflix provides entertainment for adults, and adults have a tendency to want their entertainment to be ‘realistic.’ Netflix shows like Narcos (Latin American drug trade) and Beasts of No Nation (child soldiers in Africa) are obviously rooted in (grim) reality. This strategy provides marketing shock value today, but is riskier over the longer term. Fiction can easily slip into commentary, which leads inevitably to politics. Roots was just a historical series about slavery back in 1977, right? And Margaret Atwood’s A Handmaid’s Tale is just a dystopian science fiction story with no connection to today’s America. Yeah, right.

My point is simple. Providing edgy adult content in 100+ different countries is easier than providing news in 100+ different countries, but that doesn’t make it easy. Creating content that is globally compelling without actually offending anyone is actually pretty darn hard (just ask Disney). Netflix won’t be able to hide behind the veil of fiction forever. Crossing this line could easily result in a backlash against Netflix that ‘breaks the spell of coolness’ in one or more markets and bring the brand back to earth.

3. Relying On US Coolness Can’t Last Forever
The second risk is more subtle, but equally dangerous. Netflix’s success outside the US is heavily dependent on the service’s success inside the US. Netflix itself explained in its most recent shareholder letter that

We spend disproportionately in the US to generate media and influencer awareness for our programming, which we believe, in turn, is an effective way to facilitate word of mouth globally.

In other words, Netflix has to be cool inside the US in order for the brand to be attractive outside the US. Why is this so? This is a logical extension of the argument above.

The US (still) represents the center of global popular culture. To the extent that middle class urbanites want a brand that represents their aspirations to join the global conversation, a US service like Netflix is the logical choice. The same is true, by the way, for Facebook, Twitter, YouTube, HBO, and YouTube. Even the NBA benefits greatly from this association. Last time I checked, teens in Brazil weren’t walking around in jerseys from the professional basketball league in Italy or Turkey.

The problem, however, is that today’s connected global consumers are wicked smart and know what’s actually cool and what isn’t. The reason Levi’s is no longer an iconic brand is that Levi’s are no longer cool in the US. Nothing lasts forever. The 60s ended, the brand was commoditized, and today Levi’s finds itself selling Dockers at JCPenney. Useful, yes. Cool, not so much. Facebook faces similar challenges. US teens are leaving the service, which has been taken over by their parents (and grandparents).

The point here is simple. Though Netflix is still somewhat cool in the US today, it has in short order become a mainstream brand. Remember, cool is incredibly fickle, and it’s not at all clear that the next generation of kids and teens will be as impressed by Netflix as was the first wave of Millennials. Netflix may well become the service their parents use to watch boring shows. Live by the sword (of cool), die by the sword.

Netflix looks unstoppable because it is riding a giant wave of global broadband adoption. As every good surfer knows, however, no wave lasts forever. The cultural forces that make the SVOD giant so successful today could easily turn against it down the road.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.