Netflix Network Effect
Founded in 1997, Netflix now boosts an impressive user base of roughly 50 million and shows no signs of slowing down. Netflix has undoubtedly pressured TV channel providers to rethink how entertainment is delivered and has completely changed the way consumers now watch shows.This rapid growth of Netflix can, in fact, be partially explained by network effects and the concept of the rich get richer. Both concepts go hand in hand to push Netflix to the level of popularity it enjoys today.
Netflix is essentially an entertainment delivery system and therefore experiences direct network effects. User’s expectation of how many other people are using a product is one factor that influences how much a given user values that item. When that expected usage among the population is above the first equilibrium, there is an upward pressure that will get others to use the item as well. In case of Netflix, when one knows that his or her friends are also watching Netflix, one will come to trust the product even more and value it highly. However, Netflix goes even further to strengthen their direct network effects. By creating original and exclusive shows, Netflix is able to additionally increase the value of Netflix to people. In addition, Netflix has indirect network effects as well. Another factor that increases the value of Netflix is the amount of content that is available on Netflix. The more Netflix expands and adds new shows, the more people will come to Netflix.
Before Netflix, content creators competed each other to gain the favors of TV networks so that their show would be created. However, Netflix has surpassed TV networks in terms of popularity and importance. As a result, content creators are now beginning to come to Netflix hoping to turn their ideas into reality. As more and more content creators come to Netflix to create new content, more and more people will begin to tune into Netflix. This then causes even more content creators to put their shows on Netflix – further elevating Netflix’s status. Netflix can be considered a real life model of the rich get richer concept. This cascading effect is most likely the main reason for Netflix’s ever increasing user base.
Taking into account Netflix’s direct network effects and indirect network effects, we can see how Netflix was able to initially increase its user base and gain some popularity. Then once Netflix was able to gain a sizable user base, the effect of the rich get richer causes Netflix to get more content which in return causes more people to join Netflix. Although this may be a simplification of how Netflix has become popular, there is no denying that the network effect and the rich get richer effect played an important role.
Links:
http://blog.hbs.edu/dighbs/can-netflix-better-leverage-network-effects/
http://www.dailyfinance.com/on/netflix-and-the-network-effect-its-now-too-big-to-beat/