ESIC Digital Economy and Innovation Journal

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Netflix’s complicated role as an innovative disruptor in the film industry
El complicado papel de Netflix como disruptor innovador en la industria cinematográfica

Jennifer Green 1

Central Washington University

jennifer.green@cwu.edu

Received: 10/09/2022

Accepted: 17/11/2022

DOI: 10.55234/edeij-2-057

ABSTRACT

This article analyzes specific aspects of industry practice to consider ways in which Netflix has proven itself an innovative disruptor in the film industry. By applying Clayton Christensen’s theory and model of innovative disruption to Netflix, it addresses ways both Netflix and “incumbents” (in this case, legacy film industry businesses, namely the Hollywood studios) epitomize the concept, and what this has meant and might mean in the near future for the industry as a whole.

While the streaming platform’s categorization as an innovative disruptor is not new and has drawn plenty of criticism, the author pulls from a combination of academic research and up-to-date coverage in trade journals to analyze four key areas of industry practice where the label could be justified. These four areas are: the skipping and/or collapsing of the usual distribution windows; the traditional lack of clear viewership data to compare with theatrical box office figures; the inclusion in prestige events like Cannes and the Oscars; and the use of metrics and algorithms to track and target users in minute detail.

The article also analyzes ways in which Netflix itself has exploited and promoted the ‘innovative disruptor’ label as advantageous for its own business. The steps which have gotten Netflix to where it is today offer insight into film business strategies and industry trends that are actively shaping the future of the industry. This is reflected in how quickly and constantly the film business changes, underscoring how some of the data and information detailed in this article may already be out of date by the time of publication.

The article draws conclusions about why Netflix has faced concentrated pushback from legacy businesses in each of the four industry areas analyzed. The article also considers ways the industry and the incumbent business model are themselves adapting as a result. These dual realities demonstrate the full arc of disruption.

KEYWORDS

Netflix; film industry; innovative disruption; streaming; distribution; box office; film festivals; algorithms

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RESUMEN

En este artículo se analizan aspectos concretos de la práctica del sector para considerar las formas en que Netflix ha demostrado ser un disruptor innovador en la industria cinematográfica. Aplicando a Netflix la teoría y el modelo de disrupción innovadora de Clayton Christensen, se abordan las formas en que tanto Netflix como los "incumbentes" (en este caso, las empresas heredadas de la industria cinematográfica, a saber, los estudios de Hollywood) personifican el concepto, y lo que esto ha significado y podría significar en un futuro próximo para la industria en su conjunto.

Aunque la categorización de la plataforma de streaming como disruptor innovador no es nueva y ha suscitado numerosas críticas, el autor recurre a una combinación de investigación académica y cobertura actualizada en revistas especializadas para analizar cuatro áreas clave de la práctica de la industria en las que la etiqueta podría estar justificada. Estas cuatro áreas son: la omisión y/o el colapso de las ventanas de distribución habituales; la tradicional falta de datos claros de audiencia para comparar con las cifras de taquilla de las salas de cine; la inclusión en eventos de prestigio como Cannes y los Oscar; y el uso de métricas y algoritmos para rastrear y dirigirse a los usuarios con minucioso detalle.

El artículo también analiza las formas en que la propia Netflix ha explotado y promovido la etiqueta de "disruptor innovador" como ventajosa para su propio negocio. Los pasos que han llevado a Netflix hasta donde está hoy ofrecen una visión de las estrategias empresariales cinematográficas y las tendencias del sector que están configurando activamente el futuro de la industria. Esto se refleja en lo rápido y constante que cambia el negocio del cine, lo que subraya cómo algunos de los datos e información detallados en este artículo pueden estar ya desfasados en el momento de su publicación.

El artículo extrae conclusiones sobre por qué Netflix se ha enfrentado a la oposición concentrada de las empresas heredadas en cada una de las cuatro áreas de la industria analizadas. El artículo también considera las formas en que la industria y el modelo de negocio tradicional se están adaptando como resultado. Estas dos realidades demuestran el arco completo de la disrupción.

PALABRAS CLAVE

Netflix; industria cinematográfica; disrupción innovadora; streaming; distribución; taquilla; festivales de cine; algoritmos

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MAIN TOPIC OF THE ARTICLE

This article analyzes specific aspects of industry practice to consider ways in which Netflix has proven itself an innovative disruptor in the film industry. By applying Clayton Christensen’s theory and model of innovative disruption to Netflix, it addresses ways both Netflix and “incumbents” (in this case, legacy film industry businesses, namely the Hollywood studios) epitomize the concept, and what this has meant and might mean in the near future for the industry as a whole.

LOGICAL DEVELOPMENT

The four industry areas analyzed in the article include: the skipping and/or collapsing of the usual distribution windows; the traditional lack of clear viewership data to compare with theatrical box office figures; the inclusion of Netflix products in prestige events like Cannes and the Oscars; and the use of metrics and algorithms to track and target users in minute detail. The article also considers ways in which Netflix itself has exploited and promoted the ‘innovative disruptor’ label in advantageous ways for its own business.

AUTHORS POINT OF VIEW AND CONTRIBUTIONS

The author pulls from her own background as a researcher and a trade journalist to compile data and consider industry trends. She looks at how Netflix has faced concentrated pushback from legacy businesses in each of the four specific industry areas analyzed, and how the industry and incumbent business model are themselves adapting as a result, demonstrating the full arc of disruption.

IMPACT AND CONCLUSIONS

While the streaming platform’s categorization as an innovative disruptor is not new and has drawn plenty of criticism, the author explains why she considers the label justified and why it is relevant to study the topic to consider -and potentially predict- ways Netflix is and may continue to change how film business is done.

INTRODUCTION

The film industry is not a static entity; it is constantly evolving. In the last decade, the industry has appeared to be evolving at an even faster rate than usual with the advent of streaming. This recent major disruption to the film industry is profoundly impacting all aspects of the film business. "Disruption" refers to a process, not a single or fixed moment, "whereby a smaller company with fewer resources is able to successfully challenge established incumbent business," according to the authors of the original theory and model of "disruptive innovation," writing in the Harvard Business Review (Christensen et al., 2015). Here is their recap explaining the theory 20 years after it was originally published in 1995:

'Disruption' describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.

Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred (Christensen et al., 2015).

Netflix offers an excellent example of disruptive innovation, according to this definition – and even according to the "father" of the theory, Clayton Christensen (McAlone, 2015), as well as, strategically, according to Netflix itself (Frey, 2021). As per the model, Netflix's mail DVD service and then streaming platform involved targeting consumers in ways that the traditional (or so-called "legacy") Hollywood studios were not, and at a more affordable price. It could be argued that the studios, in pursuit of ever greater profits at the international box office with a largely formulaic blockbuster-style cinema, were overlooking the needs of many consumers – as detailed in the description of incumbents – who were interested in different kinds of films, greater accessibility and a lower cost of entrance.

Eventually, Netflix began competing head-on with the studio business as it evolved from a mail-order DVD outfit to an online streaming distribution platform for others' films and series, and then became a prolific content producer itself, with production branches around the world to match its global distribution. The platform has drawn customers away from the traditional movie theater market, especially during the pandemic, attracted top talents and competed with studio films and shows for placement in film festivals and prestige awards events (Oscars, Emmys, etc). It has had a knock-on effect on the industry as a whole as other players have moved to mimic some of Netflix’s strategies and actions, including even the kind of programming it has produced (Jenner, 2018).

Netflix – and other OTT ("over the top," or via internet) platforms to follow – have moved upmarket while preserving their early logistical advantages, mostly related to greater accessibility:

physically, they are accessed at home or by phone at the time of a customer’s choice, and their catalogs of on-demand product are much vaster than previous, time-limited platforms like theaters, television and home video;

economically, OTT platforms are more affordable than a ticket to a movie theater or even a cable TV subscription (AppleTV+ was going for $4.99/month in the US as of this writing, while average theater tickets cost almost double that for one screening and cable TV packages typically cost more than ten times that number);

and culturally, platforms like Netflix offer on-demand dubbing or subtitling into multiple languages2, the ability to taste-test products before committing to watching them in full, and internal algorithms that rate and prioritize content – including from other cultures and languages – based on your individual tastes and consumption patterns.

Within the theory of disruptive innovation, the streamers are an example of "new-market footholds", or disrupters, which "create a market where none existed" turning "nonconsumers into consumers" (Christensen et al., 2015). The process takes time, which is why the authors of the theory point out that incumbents don't always see the innovators as competitors. For example, when Netflix began as a DVD mail service, it was not a serious threat to a business like, say, Blockbuster or AMC Theaters; however, when Netflix shifted to streaming in 2007 (see the brief history of Netflix below for more detail), Blockbuster was ultimately forced out of business (Christensen et al., 2015). If Netflix had begun as a more direct competitor, Blockbuster (and perhaps the studios) might have mounted a more serious counter-attack (Christensen et al., 2015).

This is what distinguishes innovators from disruptive innovators. Jenner has further described a process in the way consumers had already been accustomed to one aspect of Netflix’s business, time-shifted and personalized viewing through VCRs and DVDs, before Netflix came along, making the shifts less attention-calling: “It may be a technology’s ability to connect directly to our existing media habits that make these shifts unnoticeable” (Jenner, 2018, p. 7).

Netflix has impacted the traditional film business in a range of ways, from technology uses to content style to consumption habits to marketing and distribution. This article will consider four key ways that Netflix has and continues to disrupt specifically film industry practices, as well as criticism of these practices and ways in which the platform itself has capitalized on its reputation and status as a “disruptor”. It will engage in a discussion of how Netflix's innovations have impacted the sector and what this might all mean for the industry, consumers and the streaming landscape in the future.

A BRIEF HISTORY OF NETFLIX3

The following is a very brief history of Netflix, sourced from the company’s own website, and focused on industry aspects of relevance to this study. Netflix was launched in 1997 as an online video rental site, and a year later it began renting and selling DVDs. The year after that, in 1999, it offered its first subscription service – a monthly package price gave customers unlimited DVD rentals sent to their front door. Five years after launch, in 2002, the service had 600,000 members in the US and then reached 1 million by 2003, 2 million by 2004 and 5 million by 2006. Ten years after its initial launch, Netflix began offering films to stream on users' personal computers at home.

The company began its international expansion soon after this, as Chart 1 below – provided by Netflix in its 2016 Annual Report – indicates, starting with Latin America and the Caribbean in 2011, then across Europe and into Australia, New Zealand and Japan between 2012 and 2015 (see chart below). The expansion helped the service double its members from 50 million in 2015 to 100 million in 2017. Like the example of MTV before it, the platform’s search for international audiences necessitated “a commitment to localization and local content production” because “what works at home does not always work abroad” (Lobato, 2019, p. 109). That is true no matter where “home” is.

Chart 1. Netflix International Expansion (2010-2016)

(Netflix 2016 Annual Report)

The company reported that members had screened 10 billion hours of content in the first quarter of 2015 alone (Netflix Shareholder Letter, 2015:Q1). As early as 2000, Netflix was playing with its algorithms to figure out how to make the user experience as individually tailored as possible, with recommendations based on prior viewing. In 2016, Netflix expanded its services to 190 countries and 21 languages, and it unveiled its "download" feature, which allowed the time-shifted offline viewing we're accustomed to today.

"When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred" (Christensen et al., 2015). By 2019, Netflix was boasting more than 158 million subscribers globally and expanding its production activities in regions across the world. Less than half of those subscribers were based in the US. The streamer soared during the lockdown days of the pandemic but stumbled soon after, coinciding with increasing competition from other platform launches in 2019-2020. It lost subscribers in the first and second quarters of 2022, ending in summer 2022 with 220.67 million subscribers (Netflix Shareholder Letter, 2022:Q2), and its stocks took a tumble.

Among the milestones in original productions were its first stand-up special in 2012 followed the next year in 2013 by its first original series, most notably the Emmy-winning House of Cards and Orange is the New Black. Its first original feature film was Beasts of No Nation in 2015 and its first non-English original series was the Mexican Club de Cuervos. Its first non-English foreign-language film was also Spanish-language, this time from Spain: 7 Años.

INDUSTRY DISRUPTION ANALYZED IN FOUR KEY AREAS

Streaming platforms like Netflix have been the center of debate concerning the ways in which they are disrupting the film industry and how the traditional business, led by the "legacy" Hollywood studios, are responding. This article will address four key industry-specific aspects:

1.The skipping and/or collapsing of the usual distribution windows;

2.A lack of clear viewership data to compare with theatrical box office figures;

3.Inclusion in prestige events like Cannes and the Oscars; and

4.The use of metrics and algorithms to track and target users in minute detail.

1. Distribution Windows

Netflix has angered and worried theatrical distributors and exhibitors in bypassing or shortening theatrical “windows” (the length of time between a film’s premiere on different distribution platforms, eg, between theaters and television) and releasing new films entirely online. From its first original film production in 2015 until the autumn of 2018, Netflix released few films in theaters and always simultaneous to their online release.

The first Netflix features to be given a theatrical release prior to online were Roma, the Coen brothers' The Ballad of Buster Scruggs, and Sandra Bullock-starrer Bird Box. All three fall/winter 2018 releases opened in a handful of cities one to three weeks prior to being available on Netflix. The three-week window on Roma represented the company's longest window between theatrical and streaming, but it fell far short of the traditional (and in some countries legally mandated) window of minimum 90 days.

Controversy erupted again in 2019 with Martin Scorsese's The Irishman, which opened on Netflix 26 days after its theatrical release. The theatrical release was further severely limited after Netflix and exhibition chains AMC and Cineplex were unable to come to an agreement on a minimum exclusivity window (Hayden & McClintock, 2019). The exhibitors reportedly would not go below a 60-day exclusive theatrical run, while Netflix was said to consider going only as high as 30 to 45 days (Hayden & McClintock, 2019). This disruption is not limited to Netflix. As other streamers were starting up in 2019-2020, and especially during the pandemic of 2020, studios were testing the waters with simultaneous releases online and in cinemas, a shortened theatrical exclusivity window or skipping theatrical altogether.

In a May 2020 survey of 363 film professionals (filmmakers and professionals from various sectors, including Exhibition, Home Ent/TV/VOD, Sales & Distribution and "Other"), mostly from the US and Canada, researcher Stephen Follows attempted to take the temperature of the industry on the topic of windows. He found that as many as 30% of filmmakers feel there should be no exclusive window for theatrical, suggesting a sea-change could certainly come about if talent has their say (Follows, 2020). Other professionals (exhibitors especially) seemed more comfortable with a return to status quo or anywhere from 30-90 days of exclusivity. Meanwhile, professionals across sectors agreed (mildly or strongly) that the business model of cinemas needs to "significantly adapt" and "adapt more flexible theatrical release windows" (Follows, 2020). As Follows summarized: "The finely balanced power dynamics of releasing have been destroyed [due to COVID] and the outcome is as-yet-uncertain. Studios may feel emboldened to further shorten theatrical windows and loss of months of income could harm some exhibitors’ ability to invest or even continue operating" (Follows, 2020).

Streamers do not always want to put in the necessary marketing spend on a full-fledged theatrical release, and, on the reverse side, exhibitors rebounding post-pandemic do not necessarily want to pick up films that will premiere too quickly on streaming services (McClintock, 2022). This reality is reflected in the numbers: according to reporting from The Hollywood Reporter, an event title from a streaming service will often play on no more than 400 to 500 screens, versus the 3,000 to 4,000 of traditional Hollywood event films (McClintock, 2022).

Reported negotiations in summer and fall 2022 on new and upcoming releases suggested that the studios and Netflix have all loosened their stances and are open to meeting halfway at 45-day exclusive windows, potentially starting with the Knives Out sequel and the new film from Alejandro González Iñarritu (Bardo), and encompassing as many as a dozen titles after that (Shaw, 2022). This ties into the model of disruptive innovators: "The disruptive effect drives every competitor—incumbent and entrant—upmarket" (Christensen et al., 2015), and shows how the industry is evolving hand-in-hand with Netflix pushing its own agenda.

2. Viewership Data

Another bone of contention Hollywood studios have traditionally had with Netflix is its opaque viewership data. Whereas studio films are often said to live and die with the first weekend box office results, Netflix gets to pick and choose what data to share about the success (or lack thereof) of its content. Because what is provided generally comes from the platform itself, it is therefore unverifiable (Frey, 2021). Though Nielsen also tracks SVOD (subscription video on demand) content, Netflix bypasses them by publishing its own lists. Unlike Amazon, Netflix also traditionally has not revealed all of the ticket sales on the films it releases in theaters (Ng, 2019).

Despite pressure from other studios, Netflix has little incentive to disclose data, for a few reasons – because the mystery allows for vague metrics like "top 10" or "most viewed" to sound successful without comparison; because it does not have to, since it does not respond to advertisers (when Netflix launches its ad-supported subscriptions in the future, this might change); because talent might try to negotiate higher compensation, royalties or bonuses4; and because licensers might up their asking fees on popular shows (Ng, 2019).

The opacity also provides a “key point of leverage in acquisitions negotiations” as “Netflix prevents even its content suppliers (major Hollywood studios, television networks, independent distributors) from knowing precisely who watches their productions, not to mention where, how often, and with which devices” (Frey, 2021, p. 105). It is a master stroke of marketing, as Frey notes, wherein Netflix controls the narrative about viewing on its platform, and what information it does reveal often gets rehashed wholesale across the media spectrum (Frey, 2021).

Even so, as the granddaddy of the business, Netflix was said to be more transparent about viewership than competitor platforms like Disney+, Hulu, Amazon, HBO Max, Peacock or Paramount+ (Shaw, 2021). In some ways, Netflix is following in the footsteps of previous industry disruptors; emerging cable providers of the 1980s and 1990s were said to have slanted data by comparing multiple channels to single broadcast networks, and HBO kept its ratings secret for decades while open broadcasters' ratings were revealed daily by Nielsen (Ng, 2019). In the fourth quarter of 2019, Netflix explained in its shareholder letter its latest method for tallying viewership, which raised more than a few eyebrows:

As we’ve expanded our original content, we’ve been working on how to best share content highlights that demonstrate popularity. Given that we now have titles with widely varying lengths - from short episodes (e.g. Special at around 15 minutes) to long films (e.g. The Highwaymen at 132 minutes), we believe that reporting households viewing a title based on 70% of a single episode of a series or of an entire film, which we have been doing, makes less sense. We are now reporting on households (accounts) that chose to watch a given title (footnote). Our new methodology is similar to the BBC iPlayer in their rankings based on 'requests' for the title, 'most popular' articles on the New York Times which include those who opened the articles, and YouTube view counts. This way, short and long titles are treated equally, leveling the playing field for all types of our content including interactive content, which has no fixed length. The new metric is about 35% higher on average than the prior metric. For example, 45m member households chose to watch Our Planet under the new metric vs. 33m under the prior metric (Netflix Shareholder Letter, 2019:Q4).

In the fine print at the bottom of the page, in the footnote referred to in bold in the text above, Netflix revealed the specifics of the new metric: "Choose to watch and did watch for at least 2 minutes – long enough to indicate the choice was intentional – is the precise definition" (Netflix Shareholder Letter, 2019:Q4). In other words, Netflix was counting as "views" all films and series that got a minimum of two minutes of viewing time from a subscriber.

Presumably due to industry pressure, Netflix began offering a new metric system in 2021 under the banner “Netflix Top 10” (https://top10.netflix.com/), which offered updated lists of top ten watched movies and shows in English and non-English, with the total number of hours worldwide each was viewed by week (from Monday to Sunday), and announced they would incorporate Nielsen’s ratings in 2023. Once again, we find the innovator disrupting business-as-usual and impacting the way incumbents and others do business, but with all players eventually making moves to find a long-term shared space.

3. Prestige Events

Prestige events have been an important element in marketing films for as long as such events have existed. At Cannes in 2016, controversy erupted over the inclusion of two Netflix films in the official competition that weren’t expected to be released theatrically in France. People booed the Netflix logo on screen and the French exhibitors’ association protested the festival’s decision, resulting in a rule change for future editions of Cannes and a promise for local theatrical release from Netflix (Green, 2017). Netflix pulled all of its films from Cannes in 2018 after the French festival barred films from the competition if they would not be screened in French theaters for a minimum number of months (Anderson, 2018). Netflix has not yet returned to Cannes.

Netflix also responded by premiering no fewer than six films at the Venice Film Festival later that same year, taking home the top Golden Lion Award for Roma and a best screenwriting award for Joel and Ethan Coen's The Ballad of Buster Scruggs, and four in 2021. Not everyone has been thrilled: three Italian industry associations representing writers, arthouse theaters and exhibitors put out a joint statement calling it "unfair" that Venice was serving as a "marketing vehicle" for Netflix, ultimately prompting the country to change its laws regarding distribution windows (Anderson, 2018). Others of the first Netflix films invited to compete at A-list5 festivals have elicited sporadic reactions. It is likely that any remaining resistance will weaken with every passing Netflix film in a festival and the growing cadre of A-list directors, some festival darlings, working with the streamer.

Netflix also began aggressively lobbying for the Oscars to do away with the eligibility requirement for a minimum seven-day theatrical release on films, to better fit their own day-and-date business model. “The Academy should be celebrating moviemaking in all its forms, not the art of distribution”, Netflix head Ted Sarandos was quoted in a November 2017 Vanity Fair article (Sperling, 2017). But a veteran Academy member quoted in the same article countered: “The issue I have with Netflix is they won’t play by the rules. They could go theatrically ahead of the release on their platform, but they won’t. I don’t suspect that they will be given a fair shake, at least not in the best-picture category, until they do. Or until the exhibitors die away and traditionalists whose lives were spent creating films to be seen on the big screen leave the business. I don’t see it changing overnight” (Sperling, 2017).

Since its earliest days as a producer, "Netflix has been an aggressive awards player, seeing trophies as invaluable marketing vehicles" driving subscriptions and growing credibility among talents the streamer wants to attract to its roster (Laporte, 2019). Netflix is reportedly significantly increasing its marketing budget every year. The company spent $2.37 billion on marketing in 2018, up 65 percent over the $1.44 billion budget for 2017 (Levy, 2019). That’s in addition to its $12bn budget for content in 2018, up from $8.9bn in 2017, and expected to grow to around $15bn in 2019 and $17.8bn in 2020 (Spangler, 2019).

In 2019, Netflix film Roma earned a record ten Oscar nominations and won four Oscars, including Best Director, Best Foreign Language Film and Best Cinematography, and Netflix also took a Best Documentary Short Oscar for Period. End of Sentence. But plenty of commentators suggested Roma would have won Best Film if it had not been backed by Netflix – in other words, the industry barrier was higher than the language barrier, perhaps proven the next year with Boon Jong-ho's Best Film win for Korean-language, non-Netflix contender Parasite. "Hollywood was relieved that Netflix did not win Best Picture", Anne Thompson wrote in an IndieWire article (Thompson, 2019). Studio executives and talents, including Steven Spielberg, spoke out against the loss of the theatrical experience Netflix films represent, arguing against their eligibility for the industry's highest honors (Thompson, 2019).

In May 2020, mid-pandemic, a much-talked-about editorial in the LA Times made the case that the Oscars should change their rules to allow films that premiere solely online. Variety critic Peter Debruge argued: "If Netflix has the money to buy ‘Roma’ and produce ‘The Irishman’ — movies bolder and better than 95% of what the studios produce — then the company shouldn’t be forced to open those films on one Los Angeles screen to qualify" (Glieberman & Debruge, 2020). Debruge concluded: "the truth is, the way people consume movies has been changing as long as the movies have been around, and the Academy risks irrelevance when it stands in the way (Glieberman & Debruge, 2020). His co-author on the Variety article disagreed, with the two sides reflecting deep-held positions on a debate that embodies "a real paradigm shift, almost a revolutionary change" in the film industry (Glieberman & Debruge, 2020).

Roma was also novel for the extravagant marketing campaign the streamer launched on its behalf, considered the most expensive Oscar campaign ever for a foreign-language film as well as for a Netflix film. Netflix was widely reported to have spent as much as around $25 million on the campaign, more than the budget to make the film itself. The company also reportedly hired a former Miramax marketing consultant to oversee the campaign, which could be considered a statement in and of itself. On top of standard tactics like posters, trailers and social media, the marketing campaign went above and beyond by creating an interactive website, purchasing billboard ads around Hollywood, hosting star-studded cocktail parties and an immersive experience on a Hollywood production stage, and sending Academy voters gifts ranging from a box of Oaxacan chocolates with a note signed by the lead actress to glossy coffee table books to movie posters signed by Cuarón himself (Laporte, 2019).

Netflix followed its Roma Oscar success with The Irishman and Marriage Story, among other nominees and winners. It seems likely that as streaming platforms proliferate and grow, the culture and rules will evolve, especially after the Academy (and other major bodies representing prestige awards, like the European Film Awards and the Goyas) agreed to allow films that premiered online while theaters were closed during the pandemic shutdowns of 2020. The 2021 Oscars acknowledged the pandemic reality with nominated films from various streamers; Netflix took home a record-breaking seven awards. The Academy reinstated its theatrical release requirement in 2022.

4. Metrics and Algorithms

Netflix has been using algorithms and metrics since its start to “personalize” the online experience and track user habits, employing this data to curate and tailor content to individual users and attempt to predict what new and future content will be most successful. A 2017 Netflix blog post described the strategy:

The Netflix experience is powered by a family of ranking algorithms, each optimized for a different purpose. For instance, the Top Picks row on the homepage makes recommendations based on a personalized ranking of videos, and the Trending Now row also incorporates recent popularity trends. These algorithms, along with many others, are used together to construct personalized homepages for over 100 million members” (Parks et al., 2017).

Netflix uses its metrics and algorithms to collect metadata on individuals, allowing it to personalize content and cater to viewers’ “pre-established” choices and tendencies (Costa, 2020; Bulygo, n.d.; Alexander, 2016; Frey, 2021). This is especially attractive in an era of surplus content options and in such a high-risk industry (Frey, 2021). The kind of information Netflix collects includes (Costa, 2020; Bulygo, n.d.; Alexander, 2016):

What day you watch content.

What time you watch content.

The device on which the content was watched.

The nature of the content.

Searches on the platform.

Portions of content that got re-watched.

Whether content was paused, rewound, or fast forwarded.

User location data.

When you leave content.

The ratings given by the users.

Browsing and scrolling behavior.

Netflix did not invent the “algorithmic logic of predictive personalization,” as Neta Alexander notes (Alexander, 2016). “Digital recommendations and personal profiles emerged in 1994, when Amazon’s founder Jeff Bezos developed an economic model based on big data and ‘collaborative filtering’” (Alexander, 2016, p. 87). They’re used on music platforms like Pandora or Spotify, search engines like Google, social media platforms like Facebook, and so on (Frey, 2021). But they do distinguish Netflix from traditional, offline film distributors and are “treated as proprietary” (Frey, 2021, pp. 46, 50).

Many have expressed concern about these metrics being applied to audiovisual systems. Regulatory bodies like the European Union have debated whether the personalized recommendation system could be employed to work around content quotas (Lobato, 2019). Alexander has written about the potential impact this catering can have in trying to translate “taste” into “an empirical, mathematically based formula” and creating “filter bubbles” where we are fed “the same formulistic products,” limiting the possibility we might discover something new or unusual or outside our “comfort zone” (Alexander, 2016, p. 82).

These systems “must project the illusion of plenty, but simultaneously prioritize or circumscribe choice by providing a set of recommendations in a credible, benign, and largely invisible way” to “focalize attention and reduce the unmanageability of cultural choice” (Frey, 2021, pp. 40-42). As Frey writes: “Although audiences ultimately value the push of recommendations, they do not like to feel pushed” (Frey, 2021, p. 40). The algorithms are characterized, as in other areas of Netflix’s business, by “nontransparency” and projecting a vague science-based, technological objectivity to promote the credibility if not infallibility of the platform’s “recommendation” system (Frey, 2021, pp. 50, 57).

Netflix also uses metadata to attempt to repeat the success of predecessors by tracking what’s worked and repeating it, providing a strategic familiarity: new products can “quickly and easily remind us of what we’ve seen before” (Travers, 2018). The parallel to long studio practices of looking to repeat success through focus-group testing and risk-averse products (such as franchises, sequels, spin-offs, remakes, etc.) is obvious. But Netflix can disrupt traditional focus groups to a new level using teams of “taggers,” or metadata analysts. These hired hands watch content and assign dozens of tags for every product on data such as “release date, language, genre, cast and crew members, and types of profanity and violence depicted in the movie or show,” as well as “personality traits of characters,” details of storylines, and so on, and these tags help Netflix develop future content as well as serve customers “super-specific collections, which are based on what you’ve already watched” (Woo, 2020).

This contrasts greatly with traditional television networks, where “Ratings are just approximations, green-lighting a pilot is based on tradition and intuition. Netflix has the advantage, because being an internet company allows Netflix to know their customers well, not just have a ‘persona’ or ‘idea’ of what their average customer is like” (Bulygo, n.d.). Like all digital media, feedback and data from/about users also allows online platforms to evolve in a back-and-forth conversation with viewers (Lobato, 2019).

All of this represents innovative uses of technology to find new advantages in the traditional business of film and television production, marketing, distribution and exhibition. Streamers rely on subscription fees for revenues and must respond to audience tastes and demands. Yes, they need to maintain a healthy catalog of titles, but they will logically look for products that repeat or mimic the kinds already generating clicks. This could have a rebound effect on the kinds of films and series they are willing to purchase and/or produce, and there is concern about whether this could be causing subtle changes to the kind of content produced (or acquired) as well as to the potential pitfalls of making (forcing?) creative decisions based on "big data" (Travers, 2018).

Though Frey, again, questions the hagiography and ‘big data mythmaking’ that infuses the platform’s algorithms with an infallible, beyond-human capacity, pointing to flops on Netflix as proof to the contrary (Frey, 2021), some directors have commented publicly on how this can work in actuality. In a 2018 interview with GQ magazine, director Cary Fukunaga described working on development with Netflix:

Because Netflix is a data company, they know exactly how their viewers watch things… So they can look at something you're writing and say, We know based on our data that if you do this, we will lose this many viewers. So it's a different kind of note-giving. It's not like, Let's discuss this and maybe I'm gonna win. The algorithm's argument is gonna win at the end of the day. So the question is do we want to make a creative decision at the risk of losing people? (Baron, 2018).

CONCLUSIONS

There has been a lot of debate about whether and how Netflix fulfills the role of innovative disruptor. This article has attempted to take a novel approach to the discussion by focusing on four key industry-specific aspects of Netflix’s business:

1.the skipping and/or collapsing of the usual distribution windows;

2.a lack of clear viewership data to compare with theatrical box office figures;

3.inclusion in prestige events like Cannes and the Oscars; and

4.the use of metrics and algorithms to track and target users in minute detail.

All of these issues are evolving, and any writing on Netflix can get outdated quickly. As Frey rightly notes, the general public’s lack of understanding of how algorithms and big data works, and a view of Netflix as “an apple-pie American pillar of innovation and entrepreneurialism, an omniscient builder of the best of all possible entertainment worlds,” a view that fits neatly with the company’s own publicity efforts, benefit the platform in creating a cutting-edge profile supported by other stakeholders like technology journalists, scholars and investors (Frey, 2021, pp. 100, 103). That profile is also key to the platform’s future in an increasingly competitive streaming market (Frey, 2021).

In other words, Netflix itself benefits from the image of innovative disruptor, but that does not negate the reality that the traditional film business has been shaken by the arrival and strategic evolution of Netflix, and that the platform has disrupted some of the industry’s traditional ways of doing business, including such aspects as distribution windows, rules for participating in prestige events, collecting and sharing viewership information, and collecting and exploiting data on usage to curate and individually tailor content. The proof that there is widespread concern about Netflix’s model and reach can be found in the near-constant pushback from other businesses and industry bodies, as well as from government regulatory and support organizations in charge of cultural protectionism (Lobato, 2019). The industry and Netflix have appeared to move closer towards each other on most of these issues, seeking compromise.

Other events have also impacted Netflix’s evolution. During the pandemic of 2020-22, Netflix's customer base was directly impacted when theaters closed and streamers saw a huge uptick in subscribers, prestige festivals canceled their editions or moved online and awards bodies around the world (including the Oscars) modified their rules to include films premiered exclusively online while theaters remained closed. As of this writing, while the world was still emerging post-pandemic, the theatrical box office was only just starting to recuperate, and Netflix's subscriber base and shares were feeling it.

What this will all mean for Netflix in the future is difficult to predict, though the trends seen so far provide clues. The platform has also made sounds about new directions in response to 2022 losses, including the numbers and kinds of films they would invest in – signaling a potential shift to bigger movies and franchises, in other words more formulaic fare like its studio competitors – and the anticipated introduction of lower-cost, ad-based subscription plans, paid sharing plans and a fuller exploration of video game potential on the platform (Netflix Shareholder Letter, 2022:Q2).

With these new directions and the evolution of its current activities, Netflix is likely to continue to significantly impact film and television content as well as viewer habits and consumption patterns. The most obvious alteration to consumption brought about by streaming is the switch to online and on-demand viewing rather than in theaters, and to binge-watching series rather than watching them episodically as they're traditionally released on individual television platforms. This trend got new wings with the rise in streaming due to the pandemic, widespread theater closures and the launch of Netflix competitors like Disney+ and HBOMax.

According to a June 2019 report from PricewaterhouseCoopers, streaming customers in the US are expected to keep growing at 10 percent annually and the OTT market will grow at 14 percent annually through 2023, and new services from Disney, WarnerMedia, NBCUniversal and the like will probably have to look to international markets for subscribers in order to compete with Netflix (Bond, 2019). Netflix will too, and it will have to compensate for the acquisitions lost to companies launching their own platforms and to the fact that it does not have long back catalogs of recognizable content like the studios do (Frey, 2021).

All of this is and will continue to have knock-on effects to traditional theatrical and television markets. A new phase of consolidation responding to the disruption involves legacy studios and networks (cable, satellite, DTT) converging with the internet and internet-native companies to offer competition to the traditional audiovisual sector (EAO, 2018). "The theory of disruption predicts that when an entrant tackles incumbent competitors head-on, offering better products or services, the incumbents will accelerate their innovations to defend their business. Either they will beat back the entrant by offering even better services or products at comparable prices, or one of them will acquire the entrant" (Christensen et al., 2015).

Previous technological shifts and disruptions in the audiovisual industry – cable TV, satellite TV, home video, pay per view, etc. – brought about new channels and platforms but ultimately contributed to the same, mostly one-directional flow of content and market domination emanating out from American companies to the rest of the world6 (Straubhaar, 1991). As Jenner put it, “even though Netflix changes conceptions of television, it does not substantially overturn relations of power between audience, industry and the nation state within neoliberalist capitalist systems” (Jenner, 2018, p. 9). Lobato asked the question: “Does the service provide a diverse ‘window onto the world,’ or is it yet another vehicle for U.S. domination?” (Lobato, 2019, p. 138).

This is an interesting topic for further study. Netflix has “localized” to find a global audience and, increasingly, to meet local and regional content policy requirements (Lobato, 2019) by opening local production and marketing hubs around the world. But the industrial imbalance of American companies over other local industries in terms of production, distribution, exhibition, media flow and cultural-linguistic familiarity will not magically disappear just because there are new (American) players disrupting the traditional film business.

ACKNOWLEDGEMENTS

The author would like to thank Drs. Valeria Camporesi, Antonio Lázaro-Reboll, Christopher Meier and Lidia Meras for their ideas and references on previous work that directly contributed to this article. The author would also like to acknowledge inspiration for this work that stemmed from reporting conducted for The Hollywood Reporter and research undertaken at the Universidad Autónoma de Madrid.

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1 Dr. Jennifer Green is a film journalist and critic specializing in European cinema, and a Senior Lecturer in Communication and Film at Central Washington University. She has served as a correspondent in Spain for The Hollywood Reporter and Screen International, and she is a regular contributor to Common Sense Media, The San Francisco Chronicle and The Seattle Times. Her work can be found on www.filmsfromafar.com.

2 Subtitling and dubbing at Netflix is a massive and growing undertaking worthy of separate study. As Lobato noted in 2019, “Each Netflix production requires a small army of translators… people who know how to smooth out the frictions of culture and make services like Netflix work everywhere” (Lobato, 2019, pp. 118-119). The process involves a wide range of variables, from sensitivity to local censorship norms and cultural standards and taboos, to localizing fonts and interface design around specific languages (Lobato, 2019). The platform is ahead of its competitors in this but logically cannot incorporate the languages of every country everywhere (Lobato, 2019).

3 Background was sourced from the "About Netflix" page of the company's media website, unless otherwise referenced, found at https://media.netflix.com/en/about-netflix.

4 Another important area of disruption not addressed in detail here but worthy of attention – and likely tied into opaque viewership data – is Netflix's handling of royalties. Unlike traditional studios, which often offer talents profit participations based on the performance of their work, Netflix has been reticent to do so but has started making agreements to compensate talents more equitably, or at least in more traditional ways.

5 A term used to denote roughly the same list of competitive festivals accredited by the International Federation of Film Producers Associations (FIAPF), led by Cannes, Venice and Berlin but also including Sundance and Toronto, among others.

6 Another related topic beyond the scope of this article is the cultural influence of Netflix’s global tentacles. As Lobato put it, “export power does not translate directly into cultural power” (Lobato, 2019, p. 142), however there has been a lot of debate about the increasing homogenization of tastes, styles and viewer expectations due to globalized media, and the topic has taken on new layers of significance in the age of streaming.