Strategy

Netflix Q3 2021: Finding The Next Squid Game

20 October, 2021
Squid Game

Netflix is often considered a singular network that audiences gravitate to as they would any other channel. Netflix is not the equivalent of a singular network, however, it’s the quintessential digital bundle. Each piece of content is its own individual contribution to a massive bundle offering and, as such, understanding the value each title brings is key to understanding the platform as a whole. 

Look at Netflix’s latest Q3 earnings. The company added 4.4 million subscribers, the majority of which continue to come from APAC region (50% of all new paid memberships came from APAC), followed by EMEA (~41.5%) and then UCAN and LATAM. These additions come on the heels of several global hits that found audiences in key territories, including Manifest, La Casa de Papel and, of course, Squid Game

Although 4.4 million additions isn’t within the ~eight million memberships Netflix was used to seeing most quarters pre-pandemic, the fact that Netflix’s international footprint continues to garner speed (APAC has long been Netflix’s next goal, and now those priorities are being realized with tangential subscriber growth) and UCAN didn’t lose any subscribers is good news for shareholders. 

While Netflix has seen steady decreases in demand share — at the same time that competitors like Disney+ and Apple TV+ have seen an increase in overall demand share — Netflix’s originals are continuously growing in demand compared to licensed titles. Right now, the growth in originals comes alongside continued spend in licensed content that isn’t performing as well (catalog titles) as its originals. But total global demand for Netflix originals grew 3.3% compared to Q2 2021, and is up 74% since Q2 2019. 

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Based on demand spikes seen for Netflix series over the last quarter, including the fifth season of La Casa de Papel (Money Heist) and Squid Game toward the very end, it seems like international originals are increasingly important in boosting demand for Netflix originals. It’s a notable moment for Netflix, a company that’s begun to find more footing with international original series traveling across continents, and finally confronted with real competition in the streaming space. 

If the power of Netflix’s bundle is increasingly its originals, both domestic and international, and less on licensed content that may have brought subscribers in originally, then Netflix can focus less on licensing third party series and more on building out its own potential franchises. 

International Originals Are Key

Squid Game wasn’t designed to be a global hit. Neither were La Casa de Papel, Elite, Dark, or Ragnarok. The latter series haven’t seen the success Squid Game has (they’ve seen higher global demand peaks, but haven’t found the same global cultural zeitgeist) but they’ve accomplished a critical feat, close to the heart of so many Netflix executives — they found the vast majority of their audience outside of their home country, according to the company

For a company that’s competing with corporations investing everything into their massive franchises (Disney has Marvel and Star Wars, WarnerMedia has DC and Harry Potter, while Amazon has a Lord of the Rings series), being able to find a consistent string of hits that originate from all corners of the globe is key to giving subscribers access to something other competitors can’t right now. Netflix wants “those shows to be hugely impactful in the countries we make them,” Sarandos said during a conference a few weeks ago and, “every once in a while, one of these breaks out.”

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This is where the beauty of Netflix’s creative-meets-tech-equally mentality comes into play. If the most valuable piece of real estate is Netflix’s homepage, and recommendations are the most direct way of getting a subscriber to watch something when they open the app, being able to tap into real time demand and ensure those titles are easily discoverable helps guide viewers. 

Part of the reason that foreign content hasn’t traveled in the past was discoverability issues. When someone wanted to watch a foreign show — think of highly in-demand anime like Naruto — the only viable options for US households was piracy or purchasing an expensive DVD set from Amazon. The more investment Netflix makes in owning the global rights to its original series and regional productions it licenses, the more virtually borderless it becomes. Its shows can appear on people’s homepages, in their recommendations, and suddenly content that was once out of sight and out of mind is front and center. 

Foreign content is still considered niche content for US households. Dark is not Stranger Things or Bridgerton. When we consider that Netflix still sees the highest rate of penetration in the United States (74.02 subscribers, ~35% of total subscriber base), ensuring that US-based subscribers have a string of relatively successful hits to watch in order to keep them subscribed, or to pull in new subscribers, is key. Naturally. English-speaking shows perform better in predominantly English-speaking markets, but leveraging international hits as their own discovery moments is crucial. 

Think of it like this: some shows have a higher affinity with other series based on viewers’ demand. Or, more specifically — Parrot Analytics tracks what other series fans of shows like Squid Game or La Casa de Papel are watching.

People who watched Netflix’s Spanish teen drama Elite in the last seven days also watched the German drama Dark; people who watched Dark also watched Narcos. Those who watched Narcos watched France’s Lupin, too. Fans of Lupin watched Germany’s Tribes of Europa (seen in the graphic below). Similarly, people who watched Squid Game watched Japan’s Alice in Borderland, and those who watched Alice in Borderland tended to watch South Korea’s Sweet Home. At the center of all these series was La Casa de Papel. 

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If Netflix executives can lean into cultural zeitgeists like Squid Game when they happen, and use those as portals for highlighting other key international series using audience behavior and contextual recommendations, Netflix can offer a completely unique slate for a global audience at half the cost. 

A Tool For Discovery 

A core question Netflix has to answer for shareholders every quarter is what makes Netflix stand out from the rest, especially with competition in the space increasing and younger subscribers more likely to churn and return? How does Netflix contend with lapsed subscribers, who are in part jumping from streaming service to streaming service, chasing the next hit or big franchise entry? 

This most recent quarter saw Disney+ move into second place in digital original demand share in the United States, thanks to shows like Loki and The Bad Batch, two entries in Disney’s biggest franchise pillars — Marvel and Star Wars. Apple TV+ jumped in demand to 6.5% of total demand share globally, surpassing HBO Max (minus HBO content) thanks to big fan hits like Ted Lasso. The competition that Netflix has continuously downplayed is starting to catch up. 

What once differentiated Netflix from the rest — having a consistent string of hits, and access to some of the best talent in the world — is now popping up on its competitor platforms. So, what makes Netflix stand out from the rest? According to Netflix, a big part is focusing on developing authentic international content that performs well in home regions while also traveling globally. 

La Casa de Papel was our first non-English language title to show that - with subtitling and dubbing - great stories truly can come from anywhere and be loved everywhere,” the company’s letter to shareholders read. “Netflix is a global, direct-to-consumer service which enables creators to reach broader audiences - and gives our members an even greater choice of stories to enjoy.” 

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Non-English content viewing has grown “3x where we started in 2008, when we started making content,” co-CEO Ted Sarandos said on the call. Sarandos added that Netflix can promise creators “the possibility of having a Squid Game experience,” in part because the streaming service’s recommendation system, user interface, and display helps people discover shows they might not even be aware of. 

If something is out of sight, it can only be out of mind. Netflix, thanks to its presence in key international markets, and thanks to how its distribution strategy works, can help try and make non-English, international titles find a core audience in other markets. The more Squid Game or La Casa de Papel events that occur, the more likely it is that subscribers are open to watching non-English titles, and the better this becomes for Netflix’s international bet. 

And that’s Netflix’s core strength going forward: the company is helping to make international entertainment feel less niche and travel much further than foreign entertainment in the past. Netflix’s biggest asset isn’t that it’s a big streaming service with a massive content offering; i’s biggest asset is being able to integrate worldwide content into one easily accessible screen that feels just as local in Seoul as it does in Chicago. 

If Netflix can continue to make its homepage reflect not only regional hits and potential breakout shows or films, but also series that are gaining traction in countries around the world, then executives can continue to offer unique entertainment that costs a fraction of the price and drives global demand and subscriptions. 

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