Home Critical engine Network effects are overestimated – The New York Times

Network effects are overestimated – The New York Times


When the model switched to streaming from 2008, the sources of benefits remained the same although the fixed costs of physical distribution are now replaced by the fixed costs of digital storage and distribution. Conventional wisdom, however, is that the Netflix streaming model unleashed a variety of supernatural powers stemming from AI and network effects. The result, Deutsche Bank analyst Bryan Kraft wrote in a 2019 research report, has been to give Netflix a mystical “platform status”, involving stronger barriers to entry and supporting higher valuations. These true believers, for example, believe that the streaming model not only allows Netflix to refine its already excellent recommendation engine, which it does, but in fact gives Netflix a magical ability to select hits algorithmically, which it does. he does not do.

This particular duck begins with the origin story of Netflix’s first big hit, “House of Cards.” As Times columnist David Carr described, Netflix was able to cautiously outbid all other comers for two seasons of the show – 26 episodes in total for $ 100 million – without even a pilot due to the structural benefits afforded by. big data and artificial intelligence. In that account, the contestants were unaware of three key facts that together made “House of Cards” a sure-fire success: the popularity of films directed by David Fincher, films starring Kevin Spacey and the original BBC series “House of Cards”. with Netflix viewers. “With those three circles of interest,” Mr. Carr wrote, “Netflix was able to find an intersection of a Venn diagram that suggested buying the series would be a very good bet.”

Such ex post explanations for the selection of successful creative projects suggest a false level of predictability. They inevitably follow the punches just as a deafening silence follows the flops. Shortly after the triumph of “House of Cards”, Netflix embarked on an even more expensive series – “Marco Polo”. Dropped by original buyer Starz due to prohibitive expenses and complications from filming in China, the first two 10-episode seasons were budgeted at an estimated $ 180 million. When the show was canceled, no suggestion of an algorithmic problem was provided.

The increase in spending on original content has been the biggest change since then in Netflix’s business model, and it doesn’t reflect a better business but increased competition from companies like Disney, WarnerMedia, ViacomCBS and NBCUniversal on which Netflix s. ‘is supported for its licensed content. “Reading a script and guessing who might be good at participating in it – it’s not something that basically as a tech company… told Fast Company at the time of the initial investment of the “House of Cards”. His conclusion couldn’t have been clearer: “We think we better let others take creative risks.

Netflix’s launch of the Content Investment Kraken reflects a competitive necessity, not newly discovered competitive advantages. Of course, the easiest way to check if the barriers to entry have increased or decreased is to see how many entries have since taken place. Between early 2019 and late 2020, Netflix grew from nearly half of U.S. subscriptions to video-on-demand services to about a quarter, according to data compiled by the Wall Street Journal.

For nearly 20 years, Netflix has tried on several occasions to integrate network effects into its basic business model. But he failed consistently and eventually gave up.

Even going back to the days of DVD by mail, Netflix tried to create its own form of social network by creating Netflix Friends in 2004. Although it never gained popularity, the company kept the service until. in 2010 before closing it. A number of subsequent programs with Facebook, which Mark Zuckerberg personally participated in the design, were also dropped due to lack of user interest. Netflix even completely eliminated user reviews in 2018. Hastings himself ultimately described his futile pursuit of network effects as a “competitive fantasy.”


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