In edX's MOOC, Platform Strategy for Business, the following question prompted a heated debate:
Does Netflix have Economies of Scale? Virality?
In short, my analysis reveals the following:
With regards to Netflix, I would argue that it has supply economies of scale with regards to its original content capability.
With regards to its distribution of non-original content, it has high fixed costs with low marginal costs. Thus, the average cost is declining in volume with more users so that more sales implies the ability to lower prices. In traditional economics, this leads to more sales, which allows even lower prices. The supply curve shifts down. However, Netflix has been RAISING prices.
I don’t see any demand economies of scale as users are NOT creating value for users? Indeed, not only does Netflix spend more money on non-sports content than any streaming provider, it also spends more than many traditional TV media companies. In 2017, Netflix spent $6.3 billion on original and acquired programming, according to data from Moffett Nathanson! So, unlike Facebook or Twitter, its users don't freely contribute content. And, I'm not certain that all media has to use Netflix as producers such as HBO offer their own streaming subscription service (e.g., HBOGo).
I would argue also that it exhibits virality as its adopters has pulled non-adopters onto the platform, i.e. converting non-users into users.
I would argue that the Netflix business model exhibits an implicit network effect in that it provides a recommender system which is based on user behavior rather than their explicit text input. Better recommendations lead to better user engagement.
For those interested in learning more about platform strategy, below is an link to the MOOC:
@RayBordogna opines on "strategy" concepts.