Team 49 – Technology of the Week: Platform Mediated Markets. A Comparison between YouTube and Netflix

When you come home from a long day of work and classes chances are you’ll switch on the tv to see what’s on. At least, that is how it used to be. In today’s world, there’s an even chance you’ll boot up the laptop to put on a YouTube video. Or maybe you’ll watch some Netflix. Since the early 2000’s these two companies have been competing for your attention with other forms of entertainment. It’s time to compare these two platforms, and see what makes them so successful.

YouTube and Netflix are both companies that provide video entertainment. In YouTube’s case this entertainment is made by users, for users. The revenue comes from advertisements. Netflix provides professionally made moves and series. Consumers pay a fixed monthly fee to watch as much as they want.

First, both companies are subject to significant Network effects. Network effect means that your platform becomes more valuable the larger its network becomes. When YouTube has a lot of users, it gets more content. When YouTube gets more content, it attracts even more users. When YouTube gains more users, advertisers can reach more potential customers through YouTube. Netflix is subject to similar network effects. When the platform gains more users, the more feasible it becomes to serve niche content, and the more consumers of this niche content are attracted as users of the platform. This makes Netflix well suited to serve the long tail of demand.

Second, YouTube and Netflix both provide information goods. This means that expanding the network comes with very little marginal costs. This allows for an opportunity to expand and capture the market that both companies try to utilize. Netflix for instance, is currently mainly serving the America’s and Western Europe, but plans to serve every country by the end of 2016.

These Network effects have the potential to create a dominant position for both Netflix and YouTube. So much that the question arises, “is there room for competitors in this market?” The answer to this question depends on two more factors: homing costs and user uniformity.

Homing costs are the costs users pay to make a platform their “home”. For YouTube, this just the time it costs to register. Netflix on the other hand, has a monthly subscription fee. Hence, users are more likely to use YouTube and a similar platform than Netflix and a similar platform. The other factor, uniformity of users also influences the threat of new entrants to the market. When people like the same content, one platform can serve them all. When people have different tastes, there can be multiple platforms catering to multiple niche tastes. YouTube offers people the opportunity to serve their own niche, but Netflix does not believe it is competing with similar services like HBO, but is just one of many options.

What do you think the future for these companies will look like? Let us know in the comments so we can compare our ideas.


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