Netflix: From Intellectual to Physical Property

To strengthen its franchise-building infrastructure, Netflix should acquire a theme park.

The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

Getting Streamrolled

Netflix is the undisputed market leader in streaming video on demand (SVOD) with over 200 million global subscribers in an increasingly competitive industry. The company has developed many hit projects such as Stranger Things, House of Cards, and The Irishman over the past few years. However, none are comparable in scale or scope to the top ten greatest media franchises, which include Star Wars and Marvel. While Netflix is making progress to bolster its intellectual property (IP) and to create long-lived franchises, Reed Hastings, Netflix’s CEO, believes that “compared to Harry Potter and Star Wars, [Netflix has] got a long way to go.”

Wearing Every Hat at the Same Time

Netflix aims to be the service of choice during subscriber “moments of truth:” when a subscriber wants to relax, enjoy a shared experience with friends and family, or is simply bored. To achieve leisure dominance, Netflix has spent billions on content, fueled by new debt raises. Since 2010, Netflix has been responsible for 45 percent of the industry’s content spending.

Rather than focus on a few specific franchises, Netflix has developed a wide range of content. In 2019, Netflix released 371 new shows and movies—more than the total number of original series produced by all U.S. broadcast networks, cable networks and premium cable networks in 2005. Netflix contends that the breadth of its content enables it to tailor each user’s experience to their individual viewing preferences, boosting viewer engagement and interest.

Although Netflix has the capability to produce Oscar award-winning content, it also develops content that caters to everyday viewers looking for a distraction to fill time. The average American watches 5.5 hours of TV per day, and most of this watching is done while multitasking. Award-winning movies are often not ideal background entertainment, but “mediocre” shows generally are. Netflix, therefore, has developed a wide range of average content that is more easily watched in the background. Business publication Quartz has even gone so far as to declare Netflix the “king of mediocre.”

Much of Netflix’s content also seems to have a short lifespan. Viewership for Aziz Ansari’s Right Now, for example, dropped by 95 percent in its first two months. Moreover, Netflix’s best content is often binged quickly: Stranger Things’ second season (nine one-hour episodes) was watched in its entirety by 360,000 viewers in the first 24 hours.

Does Netflix Even Want a Franchise? We’ve Seen Stranger Things

Netflix, now cash flow positive and the largest SVOD service in the world, has proven many critics wrong. Netflix measures the success of its originals in five ways: the ability to acquire new subscribers, engage existing subscribers, cost per hour viewed, critical acclaim, and brand enhancement. To achieve success in these five criteria, Netflix has been focused on developing original franchises. 

Importantly, franchises help acquire new subscribers. One in three streaming subscribers chooses a service just to watch one show in the catalogue. Most shows will not have the allure to attract a significant number of new subscribers but shows and movies connected to major franchises are the most likely to do so. For example, Disney+ had a goal of 10 million subscribers within one year—this was achieved in just the first day, largely due to its major franchises and despite a significantly smaller original content budget.

Franchises create familiar content and reinforce brand engagement, which is especially important given rising competition. Over 55 percent of Americans subscribe to more than one major streaming service. Each of these services has thousands of options, yet viewing decisions are often made in under 90 seconds. Consumers cannot consider all the content available to them, and the abundance can make people less satisfied with their decision. As a result, consumers rewatch favourites. Twitter has reported that the mention of the word “rewatch” increased nearly 100 percent from 2017 to 2019. It is enjoyable to rewatch the same shows and movies because familiar stories are easy to process and repeatability breeds affection: a psychological phenomenon known as the “mere exposure effect.” Franchises can be built out into multiple shows and movies with overlapping themes and characters that are familiar to fans, increasing engagement as consumers like the familiarity.

Building on franchises with repeatable storylines and characters can also increase the value of existing content. Take one of Netflix’s most popular shows, The Witcher, as an example. Originally, The Witcher was a Polish fantasy novel series released in the 1990s. Despite two decades on the market, the book only entered the bestseller list in 2015 and 2019 when The Witcher 3 video game and The Witcher TV show were released. This is not an isolated example: online searches for old Star Wars movies increase dramatically with new movie releases, and the original A Game of Thrones novel sold four times as many copies after the show was released.

Finally, franchises often improve content unit economics. Content based on similar stories and characters can often use the same sets, costumes, and equipment. Actors can even be signed on for longer-term contracts at a lower per-project cost.

Beyond the value of franchises to Netflix, the existing strategy may also begin to lose some of its effectiveness. While successful so far, there is likely a point of content saturation. Incremental spend on content will lose marginal value as consumers have finite leisure time and an unwillingness to consider everything they could watch. 

The Marvel Cinematic Universe Wasn’t Built in a Day

Many media companies have tried and failed to create new franchises. It is more than making a top-quality TV show or movie—Netflix has already done this several times. Nor is it as simple as creating spinoffs based on the same intellectual property (IP) quickly; in fact, this strategy can annoy customers and dilute the value of IP, as Disney learned with Star Wars.

There is no magic formula to create a new franchise. The content needs to be especially well-received by the audience and there is an element of serendipity. However, one key success factor for franchises is allowing fans to engage with a wide range of content forms. The Marvel Cinematic Universe gives fans many ways to engage with its content. From watching movies and shows to playing video games or visiting the soon to-be-built Avengers Campus at Disney theme parks, fans have a diverse array of options. How can Stranger Things—or any other Netflix series—possibly compete with this?

It will not happen overnight, but Netflix needs to begin piecing the system together so that it can capitalize on any new show or movie with franchise potential. A franchise system needs to allow fans to interact with IP in between new releases. Netflix cannot create a franchise if fans are left with few options to engage with the IP beyond re-watching the series. Since 2016, there have been just three seasons of Stranger Things, and little else for fans to do to interact with the IP other than re-watch shows. There is also less content for fans to talk about, especially relative to a universe as expansive and immersive as Marvel.

Netflix has developed two teams dedicated to developing franchises and has started to create ways for fans to engage with IP in new ways such as licensing its IP to book publishers. However, COVID-19 has created a specifically attractive opportunity for Netflix to begin building franchises: theme parks.

It Can’t Get More High Definition Than This

A Netflix-themed park would allow current fans to engage with the company’s IP in a completely new way. While Netflix has attempted this approach through licensing a Stranger Things Halloween attraction at Universal Studios, a theme park solely dedicated to Netflix content would award it the most flexibility.

IP-based theme parks are not an unproven concept. Disneyland is iconic, and Disney continues to expand their theme park presence with a recently launched Star Wars attraction in two of its parks and an Avengers Campus that is set to debut later this year. Super Nintendo World is opening its doors in February at Universal Studios Japan, as the company attempts to better connect consumers with its video game-based IP. WarnerMedia and 20th Century Fox, who have so far decided against building their own theme parks, have licensed the rights to build attractions to competitors. WarnerMedia, for example, licensed one of its most valuable IP assets, Harry Potter, to Universal Studios, which built the Wizarding World of Harry Potter—and attendance has remained high since its 2010 opening.

Theme parks can give fans an incredibly engaging medium to interact with IP. Rather than watch their favourite content, fans can immerse themselves directly in it. This high level of immersion is memorable and increases fan attraction to the IP. Disneyland has shown that this effect can be powerful. The original goal of Disneyland was to create memorable experiences for fans that would increase the longevity of their IP. A clear example of this is Snow White. When Disneyland opened in 1955, 18 years had passed since the original release of Snow White and The Seven Dwarfs. Since Disneyland opened, Snow White has been re-released six times, and the IP has been used in video games, Broadway musicals, and comics. In 2022, a live-action Snow White movie will be released—85 years after the original movie. In sum, a theme park will allow Netflix to begin building tangible franchise value by creating memorable experiences for fans to seek out, talk about, and experience, beyond simply re-watching a series.

A theme park would also provide Netflix with an opportunity to cross-sell merchandise and products that deepen engagement further, such as clothing and books, while being a revenue-generating segment in its own right. 

Buckle Up for the Ride

Netflix likely does not have enough IP to fill an entire theme park with IP-based attractions. However, this is not necessarily an impediment. Disneyland, on its opening day in 1955, had only a few rides based on IP and most attractions were unbranded. In the short term, Netflix should look to acquire one location and begin adding IP-based attractions throughout the theme park, one ride at a time. By avoiding creating an entirely new IP-based theme park, Netflix ensures the location can avoid downtime and continuously generate revenues. With a large library of content to choose from, Netflix should take its time in testing the viability of certain TV series and movies to translate into attractions.

While a standalone theme park can be successful, several cross-selling opportunities could be captured with Netflix’s current subscription platform, enabling discounts on food and admission. This would incentivize existing subscribers to go to the theme park while attracting new subscribers.

The Watchlist

Now is an opportune time to acquire a theme park. COVID-19 has greatly reduced foot traffic, with publicly traded amusement park companies such as Six Flags and Cedar Fair suffering severe financial losses in the past year. While both companies’ stock prices have rebounded, the pandemic has forced both to restructure operations and take on significant debt burdens. As a consequence, Netflix can acquire one or several parks for an attractive price before they reopen fully.

Netflix’s 2020 content spend is over $4 billion more than the combined total enterprise values of Six Flags and Cedar Fair, which own a combined 43 parks among other assets. While Netflix should begin by acquiring a location near its headquarters in California, Netflix could consider other tourist destinations such as Florida or New York as potential targets.

The Next Episode

With the entry of media providers like HBO and Disney into the SVOD space, Netflix risks losing on both subscriber growth and retention to superior and longer-lived franchises. By acquiring a theme park, Netflix can begin building stronger customer engagement that provides exciting new experiences. Ultimately, Netflix should take its first step in creating a system that can enable them to transform excellent content, like Stranger Things, into long-lived and valuable franchises.