Netflix's Network Effects

Sep 30 2018

If software has network effects, you expect more users on the platform to lead to more value for all users. This would in turn lead to more users, and so on.

When you think about Netflix, their users are the media consumers and the media suppliers. So more of any type of user should add value for other users. Let me start with what’s going right:

A new user means that the platform is now more valuable for content creators. They want their media to be popular. Then more / better movies and shows leads to more users. So this dynamic, common to any marketplace, is in play.

Additionally, they do have consumer-to-consumer effects, but not how you would expect. They have small things like percentage-match, but those have all but lost significance since they will not rate a movie poorly so as to not make creators upset.

Rather, they have so many popular titles, that you likely have friends suggesting shows for you. This makes the platform so much more valuable - curated content from people you trust. It is interesting because it is not a part of the platform at all; it just happens. They cannot really control or predict the future of it. Either way, this is a very strong asset of Netflix.

This leads me to the issues I see with their network effects. First, they should make the consumer-to-consumer effects part of the platform. As of now they cannot accurately measure or expand its impact. Even something as simple as suggesting movies to people you are friends with on Facebook could do it.

The other concern is there is no immediate effect bringing more suppliers onboard. To elaborate, a new supplier leading to more users leading to more suppliers takes a long time. The content will be slow to get on the platform then become popular. Only then will enough users join to be significant value-add, drawing in new suppliers. There should be something in place such that suppliers can utilize data from other suppliers. With this, new users cause immediate benefits within the network.

All in all, I think Netflix has a great positive feedback loop working for them. There are areas for growth that they should probably pursue to be able to increase retention, especially as user growth slows. However, there is a lot to be happy about.