Founder: Turnaround Talk
Disclaimer: the movie below does not star Steven Segal in the leading role!
The narrative in the business world over the past two years is that companies have faced massive levels of disruption in the wake of the impact that the Covid-19 Pandemic has enforced on global operational models. Government implemented lockdowns have forced companies to rethink their cash management systems with a particular focus on cash flow as well as coming up with innovative ways to address this.
There are industries that have been impacted more than others. As the world starts to return to normal, we start to look at the change that was caused by Covid and ask whether it was permanent or temporary.
Lights, camera, action
If we think of the world Pre-Covid, one of the most lucrative industries was the entertainment industry. Blockbusters such as Braveheart, Gladiator, Titanic and the Lord of the Ring franchise was big business and ensured that families returned to the cinema. Titanic was so popular in India that it was viewed by an estimated 2 million people in English, a language that Indians who live in India had very little grasp of in the late 1990s, before it was dubbed into Hindi. It still holds the record for the longest screened movie in the country.
Covid changed this and shifted the focus towards the purchasing of big flat screen TVs and a mass migration towards online streaming services such as Netflix, Disney+ (which launches in South Africa on 18 May) and Amazon Prime. The advantages of these services was not only fresh content, but a cache of previous Hollywood blockbusters that consumers could enjoy.
The latest news from Netflix indicates that even the most popular business models need to be innovative in order to withstand disruption.
Under siege
On 29 April, Turnaround Talk reported that Netflix is addressing major concerns regarding its operational model as the future of the company has become unclear.
The article pointed out that, in its first quarter earnings report, Netflix said it lost 200 000 subscribers during the first three months of the year compared to the final quarter of 2021. That marked the first time in a decade that the leading streaming service, which began streaming in 2007, has lost subscribers.
Its global paid memberships fell to 221.64 million, though up by 14 million from the same quarter last year. But in the United States and Canada, its subscribers dropped by 600 000. Further, Netflix projected a loss of another 2 million subscribers during second quarter, indicating the fourth quarter was no blip or fluke. It could be the start of a trend.
Revenue still grew, but slower, at a rate of 9.8% year over year, compared to 24% in first quarter 2021. Revenue totalled $7.686 billion.
Photo By: Canva
Immediate concerns
Netflix’s immediate concern, of course, is tamping down on the subscriber leak before it becomes a bleed.
The article points out that the streaming service emphasized in its letter to shareholders that it sees quality content as the way to keep subscribers engaged and that it still sees growth potential, noting, “while hundreds of millions of homes pay for Netflix, well over half of the world’s broadband homes don’t yet.”
Of course, as it has also noted, many homes aren’t paying for its services because of password sharing. Netflix recently announced a crackdown on the practice, which it estimates could be going on in as many as 100 million households. In several countries, it began testing a program that makes users pay to share accounts.
In addition to monetizing users currently using the service for free, Netflix’s vision also includes expanding its offerings to attract or retain more users. It is entry into gaming signals a desire to connect with younger people.
It has become apparent that Netflix faces the following challenges to its operational model:
- How does the company address the return to the cinema which is becoming a growing trend as consumers look to fight off cabin fever and return to social life?
- How does the company respond to the password sharing challenge? Multichoice tried to address this by restricting streaming to one device when accessing DSTV. This failed miserably with the company quickly jettisoning the idea? And
- How does the company grow in countries where access to the internet is a problem? Africa and Asia are major markets that Netflix can tap into if it can solve this conundrum.
For movie theatres, it was a case of riding out the storm. Once 70% of the population in these countries became vaccinated, movies and a dinner/lunch is a classic date combination or outing that will be difficult to get rid of.
The challenges that cinema’s face, now that the world is returning to some form of normality will be:
- encouraging consumers to return to the cinema. There is still a reluctancy to return to cinema’s while the pandemic is lingering, especially in countries that are battling with low vaccination rates and continued waves of the virus;
- the above challenge will be addressed through content. How do production companies such as MGM and Paramount compete with Netflix and Amazon that have high budgets and the lions share of eyeballs which is what actors are after; and
- pricing will be an issue. How do cinema’s competitively price their product to compete with streaming services?
Photo By: Canva
Permanent change?
The return to cinema’s has a potentially greater impact on Netflix than the company cares to admit if the company doesn’t address its current operational challenges.
The question of whether the Covid Pandemic has inflicted permanent or temporary change needs to be addressed by both streaming services and cinema companies.
For streaming services, the return to the cinema is a challenge that will gain momentum. Turning to South Africa, Moneyweb recently reported that Ster-Kinekor’s business rescue is gaining momentum. This is a sign of the times and a warning to streaming services that they need to address their operational model. This change is leaning towards permanent.
For cinema companies, that change is both permanent and temporary. Indications are that there is a return to normality as Covid-19 becomes more endemic. However, these companies will have to address their pricing strategy to compete with streaming services. The reason that sporting events are facing declining numbers is that fans can watch the spectacle at home where they have unlimited access to beverages and lavatories. With live TV, they can also pause the event for a bio-break. This is a trend that is also popular among streaming services.
To quote one of my favourite movies of all time, Raging Bull, provided that Cinema companies and streaming services address the current challenges to their operating models, they will be looking at Covid-19 and saying: you never got me down Ray! You hear me! You never got me down!
