Dive Brief:
- Netflix spent about $1.5 billion on technology over the last 12 months, according to the company's Q2 2019 earnings call.
- The "majority" of the tech budget is a fixed cost investment, allocated for Netflix's business growth, said Gregory Peters, chief product officer of Netflix, during the call. Improving content delivery efficiencies is a fixed cost, whereas other expenditures are dependent on scale.
- Encode efficiency is one such scalable cost as Netflix's creators take "moving pictures" and "reduce them into a digital form," said Peters. The digital forms require seamless accessibility on a variety of devices and network conditions "in a mobile environment."
Dive Insight:
Disney, AT&T, Comcast and Apple have all announced plans for subscription-based video streaming services, placing pressure on Netflix's dominance. Behind Disney and YouTube, Netflix is the most valuable media brand.
The increased competition is costing Netflix more than just subscribers. Netflix is losing the rights to hit shows like "The Office," "Friends" and its catalog of Disney movies.
The emergence of more streaming competitors, especially those with "long operating histories, large customer bases, strong brand recognition, [and] exclusive rights to content," refueled Netflix's technology investment, according to Netflix's 2018 10-K report.
Established companies can secure better terms with suppliers, offer better pricing for customers and have a more robust technical infrastructure, according to the report. But Netflix is still the fastest growing brand of 2019. Its valued soared 105% year-over-year to $21.2 billion.
This is where Netflix's technology spend is meant to maintain a competitive advantage.
Automation is playing a role in the creative process of marketing Netflix's in-house shows and movies, Peters said. Trailers are made after someone curates scenes and characters to assemble "a compelling trailer."
With its technology budget, the company is leaning on automation to index the scenes and characters so trailer creators are free to focus on the more creative side of the process. "That's just one example of the kind of investments that we are making that we think have that kind of returning leverage against scale," said Peters.
Similar to Netflix, music streaming platform Spotify has financial demands that require scalability for its technology infrastructure, including its website architecture, development tools, security and disaster recovery solutions, according to the company's 2018 annual report.
Spotify spent more than $110 million on research and development in 2018. IT costs grew by about $17 million because of an increase in cloud computing services and software license fees.
But as Spotify grows, it expects "it will become increasingly difficult to maintain the rate of growth we currently experience." Though all companies that curate suggestions for consumers require data collection, Spotify, unlike Netflix, uses personalized ads for revenue. Spotify's ad-based platform could feel the impact of data privacy laws.
