Tag: TV

Why I Think Netflix Will End Up with 70 Million US Subscribers: Applying Bass Diffusion To The Streaming Wars

(Before we start, I launched a newsletter! It’s weekly and it’s short, and I explained my logic here. Sign up here.)

My goal is to try, as best I can, to explain the complicated parts of the entertainment biz, trying to walk readers through what I’m doing and how I’m doing it. Unfortunately, even when I’ve tried to simplify things, I’ve gotten comments that my articles are pretty dense. That’s what happens when you don’t have an editor. 

With that preamble, today’s article is math-y.

This is about as math-y as I can get. I’ll be slinging terms like linear programming and mean absolute percentage error. To help out, I’m going to start with a BLUF (bottom line up front) so you can read my findings even if you don’t want to read my process to learn how I pulled it off.

Today is the “Bass Diffusion Model” in action. In layman’s terms, the Bass Diffusion Model is a way to calculate a “total addressable market” (TAM or “market size” in non-jargon terms) for various new products or innovations. As the headline suggests, today we’re turning our gaze towards Netflix as a stand-in for the streaming world.

BLUF – Netflix’s Market Size in the US is closer to 70 million than 90 million

When you apply the Bass Diffusion Model to Netflix’s US operations, the model which fits best has a market size in the United States of around 70-72 million subscribers. In other words, a saturated US market is much closer to the low end of Netflix’s projected outcome (60 million) than the high end (90 million). 

The Bass Diffusion model fits the data pretty well. My average “error” fitting the Bass Model to Netflix is 1 million for streaming only and 600K for all subscribers.

That said, applying the Bass model to Netflix isn’t perfect. First, Netflix transitioned from a DVD company to a streaming company, which is arguably two different product innovations. Second, Netflix isn’t alone in the streaming world, and we only have current Netflix subscribers in any period, and don’t know how many folks are still streaming, but no longer Netflix subscribers. Third, this is a US only model. In the future, I plan to apply the projections to the international markets (which has its own problems) and for all streamers.

The Origin Story – Seeing Bass Diffusion Applied in the early 2010s.

Going to b-school during the Qwikster debacle of 2013 made for interesting class discussions. Overnight, Netflix became a laughing stock. Yet, even with that debacle the year before, they had kept adding streaming customers. They were the growth story already—23%!—leading some early analysts to throw out huge potential market sizes. How long would this double digit growth continue for?

That’s when my professor—a marketing professor, naturally—trotted out the Bass Diffusion Model. We’d all learned this model in marketing the year before; I’d never considered applying it here. He did, and out popped a total market size: about 60 million US subscribers. The model fit really well. 

That 60 million has stuck in my head and influenced my thinking ever since. It’s why I launched this series and why I kept my annual subscriber projections a bit lower than most observers last January. Seriously, look at this chart I made back for an article on Hulu at DeciderBass doesn’t leap off as strongly as it did for Fortnite, but you can see it for Netflix and especially see it for Hulu.

Image 1 - NFLX StartFrankly, because of that one application, the 60 million subscribers point in the US felt like the point where we’d see Netflix slow down. Then, in Q2 of this year…that reality finally happened.

The good news for Netflix is the last few years have had better subscriber growth for Netflix than that old Bass model. (For those keeping score, my projection last year was probably too low.) The bad news? Well, 90 million subscribers is looking MUCH harder to reach. But instead of relying on old estimates, today is about making new ones.

The Task – Forecast Netflix Subscriber Growth in the United States

Just to be clear, my goal today is to apply the Bass Diffusion Model to Netflix’s US subscriber count. Why US only? Well, it has a few more data points which will make it a bit more accurate. More over, the recent slow down point gives me a bit more confidence that we’re seeing the inflection, which I’m not sure we’ve seen internationally yet. 

I’ll be building two models, though, because Netflix has actually had two products: the DVD delivery and streaming video. Unfortunately, Netflix has been a bit tricky when it releases subscriber counts, which means I needed to make some assumptions. Let’s explain those.

The Data – Netflix Subscriber Counts Over Time

To really make the Bass model work, I needed to do a lot of cleaning of my Netflix subscriber data to make sure everything I was calculating was apples-to-apples. Wait, doesn’t Netflix provide this? They do, every year. Here’s a Statista table summarizing that. Can’t we just use that?

Unfortunately, it’s a bit unreliable. When I use data, I pull it myself so I can vet it. For example, with those Statista numbers, are those numbers paid subscribers or free? Streaming only? Or all subscribers? Many tables and charts for Netflix actually mix up those categories in the same chart.

In fact, even in my chart above—the one for Decider—I did a bit of that.

So I updated all my Netflix subscriber numbers, calculating streaming and all subscribers for Netflix from the beginning of time. This took me SO long—and I had some insights into Netflix’s history from it—that I’m going to write it up as its own, probably too-in-the-weeds, article. In the meantime, just know these colors are the six different ways Netflix has revealed subscribers to investors:

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Most Important Story of the Week – 13 September 2019: Debunking Some Apple Myths

This is my third try writing this week’s column. Apple TV+ is clearly the “most important story” this week since it’s Apple’s entry into the streaming wars. That’s like the United States entering World War II. What did my first two takes look like?

Attempt 1: An article about “ecosystems”, since that was the explanation du jour of the week. I wrote too much for this column.

Attempt 2: Really calling folks out for not digging into Apple’s financials. But that required me to do them too, which took too long for this week’s column. That’s an analysis article.

Still, I had so many thoughts on Apple that we’ll have enough for thoughts on Apple TV+/Channels today and in the future. Don’t worry.

(Programming note: I’m traveling for a music festival—Kaaboo 2019, the film festival for the middle-aged. Seriously, that’s how the bill it—so if I make any mistakes, I was rushed. And I’ll have my newsletter next week! Sign up now!)

Most Important Story of the Week – Debunking Some Apple TV+ Myths

Reading the coverage of Apple TV+’s pricing announcement, the media ecosystem swung from “$10 is way too expensive” to “$5 wins the content wars” immediately. That sort of surprised me. Bit of an overreaction, wouldn’t you say? Along the way, too, I noticed a lot of observers leveraging a lot of the same explanations and even numbers to explain the news. 

Let’s debunk a couple of those. Plus, I’ll add in the strategic risks for Apple implied by these mistakes. First, though, a new product that actually does make sense.

Apple Arcade Solves a Customer Problem: No in-app purchases

I play a few more iPad games then I probably want to admit. I loath pay-to-play, though. Just not how I was brought up to play games and the best games don’t feature this mechanic, in my opinion. Apple Arcade, their subscription video game service, solves this problem. Potentially. Right now, they probably don’t have enough games to warrant a subscription, but like all new businesses it will grow. And I hate subscription biz models anyways (for customers). So we’ll see. 

However, compared to Apple TV+, at least Arcade solves a customer need. Now how many customers are like me–which is market sizing–is a future question. But at least it solves a problem; it isn’t clear that folks were clamoring for more TV to subscribe to.

Debunking One: Apple TV+ is free. 

This is kind of true, in that yes, if you buy an Apple device, the service is free. But I saw tons of folks saying this free first year meant that Apple made it essentially free. That’s too far.

After a year, customers will need to start paying. I assume some others assumed that if customers buy multiple devices, they can keep stacking on year long free trials, but that doesn’t sound like any free trial I’ve ever seen. Most likely, after a year, the device that logged the free 12 months will have to start paying. And that, my friends, is where the true test of a business starts.

Strategic Risk for Apple: The Promotional Carousel Is Hard to Get Off.

Ask DirecTV or Hulu how offering ridiculously low prices worked for customer churn. Even if Apple doesn’t report subscriber numbers—they probably won’t—we’ll be able to tell by the discounts Apple does or doesn’t offer whether or not churn is happening.

Debunking Two: Apple will have 250 million potential customers.

This number is in fact true. It’s roughly how many iOS devices Apple sells per year. Roughly. The implications are not.

But is number of devices really the potential market? Consider two things. First, many families are on Apple’ plans. Which means even if the family owns four devices, or bought four, they’re still only subscribing once. More critically, look at this chart from Business Insider on iPhone sales.

58d04a02112f701f008b57db-750-563

Huh. So the US portion is really 70 million phones per year, with another chunk of iPad and laptops, which I didn’t see reported anywhere. Everyone breathlessly went with the 250 million. Sure, Apple TV+ is launching in 100 countries, does that include China? It’s notoriously hard to launch content in China, and Netflix and Amazon aren’t there. So I’m skeptical. Overall, if you’re discussing Apple’s plans, be very careful about mixing up US-focused strategies and global numbers.

(Bonus chart. During research, I found this amazing chart at Asymco. It should look familiar.)

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