Netflix has played a major role in popularizing the culture of binge-watching all across the globe. Netflix initially started as a DVD rental company and today, it has come a long way to become the most popular and successful streaming service platform in the world. Today, with a market capitalization of USD 157 billion, Netflix is the 77th most valuable enterprise in the world. However, in the swiftly changing external environment, Netflix cannot be complacent.
The Netflix PESTLE Analysis will highlight the key external business determinants that can lead to potential opportunities as well as threats for the company. The analysis will ascertain how the external business environment is changing and what are going to be the repercussions of these changes for the company. In fact, to comprehend the PESTLE Analysis Model in detail, you can go check out our elaborate guide on PESTLE Analysis.
For now, let us get going with the PESTLE analysis of Netflix without further delay.
Table of Contents
A diligent and factual PESTLE Analysis of Netflix
Political factors affecting Netflix
The US has a stable and opportune political environment for industries. Besides, the US enjoys great trade relations with most countries of the world. However, its relations with China and Russia have seen massive disruptions in recent times. In the wake of the Russian invasion of Ukraine, US OTT platforms are suspending their services in Russia which could lead to a major decline in subscribers. Furthermore, The US is a major market for the OTT industry. Various state governments have initiated several steps that can impact the OTT industry. OTT platforms are now required to pay gross receipts tax in Delaware while Florida imposes communication service tax on the OTT platforms (S&P, 2019). This would increase the prices of the streaming services, hence the companies would lose the customer base.
Furthermore, Malaysia is an emerging market for OTT companies and the government has plans to strictly monitor the content on the OTT platforms. This would lead to more interference in the production and streaming of the content, therefore leading to more dependency for the companies on the government (Kaur, 2021). Further, the taxation policies are discouraging as the government levied the new 6% service tax in 2020 on the Foreign Service Providers Kumar & Hui, 2021). This would make the streaming services more expensive.
Economic factors affecting Netflix
The per capita income in the US in 2021 was $63, 416 while it is expected to lower to $55000 in 2022 and $57000 in 2023. Besides, in Malaysia as well the per capita income among the residents is declining, it declined from $11,414 in 2020 to $10,002 in 2021.
The high reduction in per capita income would shift the purchasing behavior of the customers more towards essential products and they would be reluctant to spend on the entertainment services. This could lead to the loss of subscribers. Further, the inflation is at an all-time high of 7.5% and this would result in an increase in the production cost for the OTT companies.
Further, as per Mordor Intelligence, the US OTT market is anticipated to grow at a CAGR of 11.2 percent in the next four to five years. Further, in terms of the number of subscribers, the market is expected to witness an annual growth of 2.25 percent. How the market shares of different OTT service providers compare in the US market is illustrated below.
Social factors affecting Netflix
The binge-watching culture is thriving all across the globe and is highly popular among youngsters, especially in the United States. During the times of the COVID-19 triggered lockdowns, binge-watching emerged as the premier source of entertainment, and OTT platforms got a major boost in subscriptions. The social trend of OTT platforms facilitated by modern lifestyles and great technological agility among youngsters offers a great opportunity for OTT platforms to further broaden their customer base. The liking for the OTT featured content is high in the US with more than 50% of people having a subscription to at least one OTT service. Further, consumer spending on digital entertainment is also rising. In 2021 there was an increase of 8% and the spending reached a record level of $32 billion (Stoll, 2022). Both these trends signify the potential opportunity for the OTT platforms to increase their profitability. But for making the most of these opportunities, companies will need a well-thought change management process.
Further, in Malaysia too, the number of OTT subscribers is increasing in a constant way. As per Statista, the OTT services penetration is the highest in the age group 16 to 24 followed by 25-34 years of age. In these age groups in Malaysia, more than 50 percent of people have subs OTT platforms.
Technological factors affecting Netflix
The expenditure of the US government on research and development in 2021 amounted to $157 billion and the government has increased the budgetary allocation to $171 billion for 2022. The Malaysian government also encourages innovation and has established a budget of RM423 million for the same. Various technologies being used in the OTT industry include the use of artificial intelligence for tracking the viewer’s behavior in terms of what shows or the type of content is most liked by the person and based on that the companies are able to suggest to the viewer the shoes or series of his taste. Further, the production of the content is witnessing a change through the use of machine learning wherein the need for human assistance is reducing as the task of data processing, creation of new videos and trailers, and other related tasks are being done through technology and now the trailer of movie can be produced in less than 24 hours compared to one week to one month that it used to take earlier. Another technology that is shaping the OTT industry includes cloud computing to manage the workflow of the information. The streaming of videos through cloud computing can be done in an uninterrupted way as the cloud computing systems have the ability to process large amounts of data. Further, the cloud computing systems enable the companies to transcode a variety of video files into formats of different sizes, thus ensuring that they get rendered into user-friendly formats.
Legal factors affecting Netflix
The federal government of the US has recently passed a law named The Protecting Lawful Streaming Act wherein the piracy of the video services has been made illegal. The persons or companies that are found to be engaged in piracy of the video content can face imprisonment of up to 10 years and additional fines (Farber, 2021). This can be positive news for the OTT platforms as their content would be much more secure now and they would be able to optimize their revenues. Furthermore, another positive news for the companies is the change in net neutrality laws wherein the government has made a law that all video streaming services should be treated equally by the internet operators and there should not be any preferential treatment towards any platform (Dastin, 2017). This would ensure that the content of all the OTT platforms gets streamed efficiently without disruption in speed which would lead to an increase in customer satisfaction.
Furthermore, Malaysia, where the OTT platforms are gaining dominance, has introduced certain regulations recently. The 2021 Copyright Act makes it illegal to facilitate the infringement of copyright and the companies cannot engage in the sales of rent of streaming technology to earn profits while importing any streaming technology has also been barred under the new act. This would ease the functioning of OTT platforms as the companies that copy the materials would not be able to do so under the new rule (Ismail, 2021). Another regulation that governs the OT industry in Malaysia includes The Communications and Multimedia Act which promotes the competition in the industry and to ensure the competitiveness is maintained, the highly valued mergers and acquisitions require the government’s approval. Further, the Act states that internet companies should not be biased towards any platform while streaming the content.
Environmental factors affecting Netflix
OTT industry contributes highly to the global emissions, an hour of content streaming per user results in an emission of 55 grams of carbon dioxide. The sources of emissions include operations in the data centers that consume high energy for storing the data. The companies in the US may have to incur additional expenditures as the federal government has set a target of generating 33% of electricity in the country through renewable sources (Bossong, 2021). Even so, the Malaysian government has high targets for shifting to sustainable sources of energy. The government plans to increase the capacity of renewable energy in the country to 31% by 2025 and 40% by 2025. The companies would have to incur additional money on setting up the required infrastructure.
To encapsulate, the environment for the OTT industry is highly favorable with the high penetration of mobile phones in Malaysia and the rise in consumer spending on digital entertainment by the people in the US. The changing technology in the form of cloud computing or streaming the content allows the companies to stream the content in a more efficient and speedy manner. The positive aspect for the companies is that both the US and Malaysian governments are doing their best to control the piracy of the content but on the other hand the companies also need to be sustainable in their approach to conducting operations as the OTT platforms produce lots of emissions through high consumption of energy which they need to limit or use renewable sources of energy to reduce their impact on the environment.
Moreover, to identify the internal strengths and weaknesses of the company, you can read our diligently compiled SWOT Analysis of Netflix. These internal capabilities as well as weaknesses will have a direct impact on the companies effectiveness to exploit the opportunities highlighted in this PESTLE Analysis.
Jaffar, S., & Lim, J. (2019). Experts say 6% digital tax will be borne by consumers from Jan 1, 2020. /www.theedgemarkets.com. Retrieved 5 April 2022, from https://www.theedgemarkets.com/article/experts-say-6-digital-tax-will-be-borne-consumers-jan-1-2020
James, S., & Egan, C. (2019). More US states introduce streaming tax. www.spglobal.com. Retrieved 5 April 2022, from https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/more-us-states-introduce-streaming-tax-52446679.
Kaur, M. (2021). Govt looking to curb ‘sensitive’ content on streaming services like Netflix. www.freemalaysiatoday.com. Retrieved 5 April 2022, from https://www.freemalaysiatoday.com/category/nation/2021/11/30/govt-looking-to-curb-sensitive-content-on-streaming-services-like-netflix/
Kumar, S., & Hui, Y. (2021). The evolving world of Malaysia’s digital services tax. /www.internationaltaxreview.co. Retrieved 5 April 2022, from https://www.internationaltaxreview.com/article/b1vw301b7db052/the-evolving-world-of-malaysias-digital-services-tax.