Network Effects

According to Leibowitz (2002), many internet products and companies have network effects. This can be defined as when the usefulness of a product increases for consumers in proportion to the number of people using it (Leibowitz, 2002). Big companies tend to have large network effects over smaller networks, which leads to consumers being willing to pay more to join the large network (Leibowitz, 2002). This can be seen in the case of Netflix, who continue to hold a significant market share in online streaming over competitors such as Amazon (Soper, 2015). However, despite leading the market share, there is still content excluded from Netflix due to licensing deals (e.g. Game of Thrones can only be watched through cable television or subscribing to HBO) (Munarriz, 2014).

Netflix’s sheer number of subscribers is an example of network effects, giving consumers a good reason to invest their money in the service. Munarriz (2014) says “it's the place to be for viewers because that's where the content can be found, and it's the place to be for content creators because it's where the viewers can be found”. This shows that network effects is playing a major role in Netflix’s continuous increase in subscribers, therefore allowing them to gain the streaming rights to even more movies and TV shows, expanding the size of their library. This is a significant change from the original DVD-via-mail service where Netflix could easily buy cheap DVDs in bulk (Cohan, 2013) as they now need to gain the rights to stream. There are a number of strategies used by Netflix to increase subscribers and therefore increasing their network effects. One of their most successful strategies has been their original content.

Television programs such as House of Cards and Orange is the New Black are produced for and streamed exclusively on Netflix. While there can be risks when creating original content, such as failing to impress or not appealing globally (Lin, 2015), there has so far been significant rewards for Netflix and their original shows. The main reward has been a continuous growth in the subscriber base (Lin, 2015). If the content is impressing audiences and Netflix is the only source to watch it then more consumers will subscribe. It can also build brand loyalty and reach a larger audience globally (Lin, 2015). The popularity of their original show House of Cards was shown earlier in 2015 when the third season of the show became available two weeks ahead of schedule. It was portrayed as a “technical glitch” but was speculated to be a publicity stunt (Bond & Jarvey, 2015). The attention this gained on social media led to a 1000% increase in viewership, meaning there was a rise in awareness of the series before the new season came out (Bond & Jarvey, 2015). The fact that viewers specifically have to use Netflix to view the show reinforces that the company is continuously developing and creating new ways to increase their subscribers and brand loyalty. Original content can stand out as an individual way to promote Netflix. This gives them an advantage over its competitors to continue increasing their network effects within the attention economy.

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