How Big Data Powers Netflix
August 2, 2021
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by Stephen Kanyi

Netflix needs no introduction, at least not to anyone with a working internet connection. It is no doubt the world’s largest media company with a valuation of just about $165 billion, bigger than Disney.

With more than 200 million subscribers the quality of content on Netflix is unrivalled. Its recent 112 Emmy Nomination scoop backs this up, beating any other streaming service including HBO which was the leader in this category for a good 17 years.

Origins

Netflix was however not always this big and successful. In fact, the company did not even begin as a streaming service. For a long time, Netflix was known for mailing DVDs in little red envelopes, an idea founders Reed Hastings and Marc Randolph are said to have conceptualized after they were fined $40 for being late to return a copy of Apollo 13.

It was then that the company then developed the first online DVD- rental store with a workforce of just 30 people and 925 options for its small customer base. However, after a few hiccups in the form of a $57 million loss in early 2000, the company grew so that it was able to initiate an IPO on May 29, 2002, at $15.00 per share. It posted its first profit the next year earning $6.5 million and revenues of about $272 million.

Netflix’s success during its early years can however not be brought down solely to better strategies or management but rather it was due to the rise of DVDs in the early 2000s. The company was one of the first to truly leverage this technology and benefitted massively from it.

This kind of foresight and calculated risk-taking is what characterizes great companies. Netflix was the first company to recognize the potential of DVDs and they found an efficient and profitable way of distributing them to their then, 670,000 monthly subscribers.

It is Netflix that would also be one of the first to offer a standalone streaming service. This shift was however not a stroke of genius in Netflix’s management strategy, rather it was a recognition of a shift in video technology.

Recognizing the rise of streaming services like YouTube, Netflix realized that this technology was the future of entertainment. They thus moved fast to change their service offering from DVD renting which was already on the decline to a standalone streaming service, one of the first of its kind at the time.

Looking at Netflix one would think they hit the ground running when they decided to shift their core business to video streaming. As with most businesses however the company initially struggled to get this part of the business working. The technology didn’t work well, they only had 1000 movies and TV shows; just 1% of their DVD rental titles and the revenue from this service was practically zero as they initially offered it for free.

Despite these, however, the company grew to the behemoth we know today. And this we can mostly attribute to the company’s adoption of a different strategy to their competition, big data.

Data Analytics For Growth

The use of data analytics in companies is pretty standard these days. Most companies rely on data analytics to give special insights and thus help in making decisions.

This was however not the case a few years ago. In fact, even today a lot of companies still rely on the traditional ‘gut feeling’ of their top executives to drive their decision making, a strategy that is continuously proving to be outdated and blatantly flawed.

In no other industry is the ‘gut-feeling strategy relied upon than entertainment. Movie producers and directors are relied upon to just know what the audience likes and then produce something that they think will suit that demand. The result is a lot of misses, losses and cancelled shows with just a few shows and movies truly worth watching.

For Netflix however, this approach would not cut it. Especially because they would start producing their own shows pitching them as direct competitors to established production companies such as Warner Bros and Disney which was then the largest entertainment company in the world.

A similar post on Vulture details Netflix’s production process and the importance of big data in this.

“We have projection models that help us understand, for a given idea or area, how large we think an audience size might be, given certain attributes about it. We have a construct for genres that basically gives us areas where we have a bunch of programs and others that are areas of opportunity,” said Cindy Holland Netflix’s VP of Original Content.

While the streaming’s giant use of data is not so different from traditional TV networks, it goes much deeper into the numbers to better understand the market.

The company something called ‘verticals’, a term used in business used to categorize markets into niches. In film, this would mean super-specific genres like sci-fi adventures, adult comedies or period romances.

Again, this is not a strategy unique to Netflix only. HBO and Disney two of the most successful entertainment companies also use this strategy. What’s different at Netflix though is their desire to fill nearly all possible categories available with content.

The company will assess how big an audience is and if the show is cost-effective. They will also try to determine whether the show is performing well across multiple verticals. Combine this with ‘taste clusters’ and you have a machine that will keep its audience hooked to shows produced originally by Netflix.

Taste clusters or ‘taste communities’ are particularly effective at grouping members by their taste rather than age or gender as has been the convention. The reasoning is sound, it is more important to group someone by the viewing habits rather than their physical characteristics.

“Nowadays, in our modern world, hit play once and it tells us volumes more than knowing you’re a 31-year-old woman or a 72-year-old man or a 19-year-old guy,” VP of Product Tod Yellin says.

 Ted Sarandos, chief content officer puts it well saying, “It’s just as likely that a 75-year-old man in Denmark likes Riverdale as my teenage kids.”

Such commitment to statistics is novel to the entertainment world but has been key to the growth of Netflix to the giant it is today. It is a testament to the power of data in the modern world.

 However, it will be interesting to see whether Netflix will retain their hold on the market now that its secret is out of the bag. For users, we can only sit back and enjoy good content suited to each of our unique tastes.

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