Netflix’s Rise and Fall: Network Effects
The existence of the pandemic brought rise to many lifestyle changes in everyday life. With the inability to go outside or occupy public spaces due to lockdown restrictions, many people had to find ways to entertain themselves, whether it be baking, surfing the internet or streaming shows and movies online. One of the most prominent streaming platforms that people turned to was Netflix. As a result of this popularity, Netflix gained an explosion of new subscribers and naturally, a lot of profit at the start of the pandemic. However, this growth spike did not last long, as the latter half of 2020 saw Netflix report only an additional two million subscribers, half a million less than what they had originally projected to gain for that half. In mid-2021, Netflix held 208 million subscribers, which is four million new subscribers from quarter one of 2021. While this is still a large number of growth, this is substantially lower than the overall growth that was seen from the year 2020 as a whole, which held an increase of twenty-six million in its first two quarters. From these numbers, it is evident that Netflix’s growth has dwindled, leading to the ultimate question of what promptly this growth slowdown in Netflix’s subscriber and profit growth? What was the cause of the spike in growth in the first half of 2020 but a discouragingly low number ever since then?
To answer these questions, the idea of network effects comes into play. Network effects occur when an increased number of people enhance a good or service’s value. During the period of lockdown, most people shifted their focus to Netflix as a main source of at-home entertainment. In fact, a subscription to Netflix was almost considered trendy, as social media was inundated with news and influencers talking about the latest Netflix series or rediscovering old classics—if you didn’t have a Netflix account, you were “missing out”. This heightened popularity is what sparked the boost in subscriber count for Netflix, thought almost under a false pretense. Technically, this is considered to be a positive network effect, as a large amount of people began to rapidly subscribe to Netflix, the intrinsic value of Netflix exponentially increased. However, as quickly as this frenzy rose, it fell. Once lockdown restrictions were beginning to lift and life outdoors began to resume in the latter half of the year, fewer people felt the need to subscribe to Netflix and continue streaming online, as they now had many other outlets for entertainment to choose from. On top of that, other competitors who had seen the massive success of Netflix began entering the market: HBOMax, Amazon Prime, and the birth of Disney+ quickly saturated the market, taking even more opportunity away from Netflix as a whole. Additionally, Netflix decided to increase their subscription prices, either to combat the dwindling sales or hope to capitalize on the initial success they had originally. However, this decision was received poorly, as it deterred even more potential customers from purchasing a subscription. Here, it is clear that Netflix had begun to experience a negative network effect. Opposite to that of a positive network effect, as less people subscribed to Netflix, the value of this streaming service decreased proportionally.
https://www.theverge.com/2021/4/20/22394425/netflix-subscriber-growth-stalls-2021