Netflix Pestel Analysis

Netflix is the world’s largest online streaming platform, offering its services worldwide to customers through online channels on various screens. Founded in 1997, the streaming platform has seen a lot of growth and expansion over the past decade and acquired global fame as the world’s leading platform for streaming movies, shows and documentaries.

The online streaming provider has experienced faster growth driven by a strong focus on technological innovation, user experience and a diverse collection of movies and shows in multiple languages. In the third quarter of 2023, the company had more than 247 million paid members streaming movies and shows on Netflix from more than 190 countries worldwide. Driven by the expansion of its global consumer base, the company has experienced solid financial growth over the past several years. It has also released a nice collection of games for its users, several of them based on its most popular movies and shows.

Netflix is the dominant player in the online streaming environment, rivaled by Prime Movies, Disney Plus, and other online streaming platforms including YouTube. The company is operating in an intensely competitive business environment.

In this pestel analysis of Netflix, we will analyse the macroenvironmental forces affecting Netflix’s business and profitability worldwide as well as its competitive position.

Political:

Political factors have played a central role in the world of international business affecting several factors including the business conditions in specific markets. Government policies regarding various sectors, products and services, import, export and other areas including taxes for specific sectors have a direct impact on business operations and profitability.

Netflix offers its services to more than 247 million users across more than 190 countries. However, there are still some regions where Netflix services are not available like China, Russia and North Korea. The reasons are mainly political, that Netflix is banned in these regions. The Chinese market is known for a very high level of internet censorship and control of online content by the government, which prevents Netflix from offering its services in China.

The Russian invasion of Ukraine was the reason that several US based and other international brands decided to exit the Russian market including Netflix1. Such geopolitical changes also have a significant impact on business operations. The degree of censorship of online content is a critical factor that affects which programs can be streamed in a particular region and which not. In the Asian markets, the degree of censorship of online content is higher compared to the Western markets.

While Netflix has strengthened its position in the Asia Pacific region, the government policies related to online content, red tape and other factors have a significant impact on its operations there. Its leading markets are the US and Canada based on net revenue. Government policies related to online content are still evolving in multiple regions and would have a significant impact on Netflix in the future as well.

Economic:

Economic factors are also of crucial importance for large businesses including Netflix. Fluctuations in the global economy or local economies significantly affect viewership. While many trends supported the growth of Netflix, economic factors played a critical role in terms of business strategy for the company. When the level of economic activity in a region is higher, people spend more on leisure activities and entertainment. However, when economic activity declines and the level of unemployment in a region is higher, people stop spending on non essential items including entertainment.

Netflix has adopted a pricing strategy to help it beat the pressure caused by economic fluctuations. It does not price its services uniformly in all the regions of the world. It considers the economic situation and the spending power of consumers before pricing its services in a specific region. For example, while the monthly fees for the same services can be higher in the US and Canada, they are lower for the customers in the Asia Pacific region. In the regions where the consumers are more price sensitive, the company has priced its services lower compared to the other areas.

While its pricing strategy has helped the company manage the impact of economic pressures to a significant extent, changes in currency exchange rates and a stronger dollar still has a negative impact on its total income. The company considers the condition of various economies before forming strategies for local markets overseas.

Social:

Sociocultural factors are affecting business significantly in several operational areas including sales, marketing and other operational areas. It is why companies are focusing more on inclusion and diversity to operate in a manner that demonstrates their focus on equity. The social image of a brand is also a critical factor affecting demand and popularity in various regions. A good social image can drive higher sales, popularity and customer loyalty, while negative publicity can hurt the social image of a brand and its sales.

Social and demographic changes also have a significant impact on businesses and their strategies. These changes can especially affect consumer preferences in terms of content and user experience. Netflix mainly targets the millennials and the GenZ consumers. These are the most tech savvy generations and also among the most loyal consumers of Netflix. Several other such changes have also affected Netflix.

Netflix is localizing its brand for various regions by making and selling more of local content especially crafted to the taste of its viewers in those areas. Localization helps companies overcome social and cultural barriers and is among the most effective strategies for conquering foreign markets. Netflix creates original content in several local languages for its target audiences in different market regions. Its marketing strategy is also more culturally sensitive, which is critical to winning in a highly competitive market environment.

Technological:

Technology is among the most crucial drivers of growth and expansion for businesses of this era. For a large number of brands across various industry sectors including the online streaming sector, it is the central source of competitive advantage. Netflix has become the dominant player in the online streaming sector.

To a large extent, its credit goes to the focus of the company on technological innovation. Its leadership in the online streaming sector is also a result of the company’s early focus on innovation in several critical areas including user experience. Netflix developed its own content recommendation algorithm which played a significant role in helping it grow its popularity across various regions.

Moreover, Netflix invests a huge sum in research and development each year to improve user experience and grow its competitive edge. Its depends on AWS resources and Open Connect mainly to stream its content worldwide. The AWS resources the company uses for streaming its content include AWS Cloudfront, AWS S3 and AWS Elastic transcoder2. It also uses popular databases like Mysql and Cassandra for backend services.

Netflix depends on a complex yet robust technological infrastructure for providing its customers worldwide a seamless and high quality viewing experience. The company has developed technologies to help provide more personalized services to millions of its customers worldwide. It has established a work culture that fosters technological innovation. Overall, technology has proved to be a critical driver of faster growth and higher popularity for Netflix. Continuous innovation is essential to ensure that Netflix continues to dominate the online streaming sector.

Environmental:

As a leading online streaming provider, Netflix is highly cautious about its environmental impact and minimizing the carbon footprint of its operations. The company has made ambitious plans regarding managing and reducing its carbon footprint. To achieve these goals, the company is focusing on decarbonizing its operations and value chain which includes the making of Netflix films and series.

In 2021, Netflix had set two near term climate targets which include:

• Reduce its emissions by roughly half by 2030
• Bring its remaining net emissions from 2022 onwards to zero, in support of global net zero goals, by investing in nature-based solutions that retain and capture carbon.

The climate transition plan of Netflix is focussed on four key levers including:

Energy efficiency: Making cost effective efficiency improvements to the energy used in Netflix studios and offices.

Electrification: Moving from fossil fuel using vehicles to fully electrical vehicles or the ones using hydrogen powered alternatives.

Clean mobile power: Using alternatives to diesel generators on productions

Renewable energy: Moving towards the use of renewable energy sources

The company is approaching these four levers using the OED framework or Optimize, Electrify and Decrabonize3.

In this way, Netflix is moving steadily in the direction of becoming a highly sustainable brand. Customers and governments around the world are also supporting and encouraging brands that have embraced sustainability through their operations and value chain. Being more sustainable will help improve the company’s image in the short and the long run.

Legal:

Legal issues can sometimes prove very costly for the technology brands like Netflix and it is why remaining legally compliant in all the areas of operations across all markets where it operates is critical for Netflix. The company has faced several lawsuits in its history, many of them related to its content. For any technology business, it is not so uncommon to come against such lawsuits. From labor to copyright and several more content related areas like the portrayal of particular individuals and groups in its original movies and series, there are several such areas where lawsuits can hurt the company’s image and business.

Apart from these, consumer privacy is also an important concern for the online streaming giant. Recently, Netflix has faced one such legal challenge in the form of a defamation lawsuit related to the onscreen portrayal of a particular individual in one of its famous shows made in 20194. Online streaming providers and entertainment brands have to remain cautious about consumer privacy and that the content they create does not hurt the sentiments of particular people or groups.

Netflix is also being targeted by tax related laws in various regions. As such legal compliance and ethical business operations are of critical significance for Netflix.