Michael Shustek on the Netflix Effect

Netflix and other streaming services have dominated the entertainment industry, uprooting companies like the former monolith Blockbuster and replacing them with options for instantaneous media consumption. “The Netflix Effect” refers to how one company can disrupt an entire industry and create new boundaries, requirements, and standards within an economic and societal sphere.

Creative Destruction
A term coined in the 1940s by economist Joseph Schumpeter, “creative destruction” refers to this kind of upheaval of economic structures and practices. He referred to it as an essential component of the capitalist society. What Netflix did to the entertainment industry is a perfect example of this destruction. By introducing new services that utilized advancing technology and appealed to Internet users (a fast-growing population), Netflix capitalized on changing lifestyles in order to disrupt the economy in its favor.

Disrupted Industries
Though Netflix began as a DVD rental service, it has since evolved, shifting the entertainment industry as it advanced. As a result, the DVD and video tape rental industries suffered greatly, rendering such services practically obsolete. With the introduction of on-demand services and other streaming capabilities, renting physical copies of films and video games became an uncommon practice.
However, once the initial shock of Netflix’s disruption passed, new companies like Redbox emerged, providing rental services at cheaper costs. The resurgence of this practice suggests that Netflix’s disruption was not complete or permanent, but as evidenced by the growth of 150% in stocks witnessed between 2017 and 2018, its effects on the economy and its expansive user base were significant.
Netflix also impacted traditional media companies, challenging standard television channels, cable networks, other online streaming services like Hulu. As Netflix has become a household name and media powerhouse, it continues to threaten the way entertainment is purchased, managed, and enjoyed.

Consumer Benefits
While the Netflix Effect inevitably disrupts the economy and drives some businesses out of operation, it lends significant benefits to the consumer. By inciting fierce competition and swaying market forces, the Netflix Effect results in faster development of better products made available at cheaper prices. The disruption provided by this effect largely benefits the consumer for these reasons while also allowing a company like Netflix to emerge as a potential monopoly in its industry.

Innovative and adaptable companies like Netflix are able to alter markets by proving they are capable of destroying, disrupting, and creating economic patterns and practices. The Netflix Effect is not limited to the media industry, but because of the influence Netflix has had on society as well as the economy, the name seems apt when discussing similar occurrences of disruption.

Originally posted on MichaelShustek.org