Netflix has a lot to gain by becoming a multisided platform.

Currently, Netflix is in the business of buying or making content, which it sells consumers access to at prices and on terms it fully controls (a monthly subscription). That’s unlike a platform such as YouTube, which enables myriad content providers to sell directly to users at prices they control, with limited intervention by YouTube other than the enforcement of some content guidelines.

Netflix’s model has been undeniably successful to date. However, fighting the blockbuster battle over content acquisition and creation is becoming ever more expensive, and it involves an increasing number of combatants (including Amazon, Apple, Disney, and Google). All these companies already have or will have digital download and streaming services. Furthermore, the growth of Netflix’s subscriber base is slowing down. The company lost more than 15% of its stock market valuation over the past month after its growth numbers disappointed investors.

Netflix’s big subscriber base (130 million worldwide) and content-delivery infrastructure are potentially very attractive to many third parties. In addition to video content providers, these third parties include marketers and the developers of cloud gaming or other services. How would Netflix become a platform? Simply by allowing these third parties to sell their products or services within Netflix’s service but outside Netflix’s subscription, on terms controlled by the third parties.

Becoming a multisided platform in this way would allow Netflix to tap a different dimension of growth: selling more stuff to the same subscribers. And the beauty of the platform model is that Netflix can grow without having to buy or produce the new stuff itself. It just has to attract third parties to develop and sell the content, and then it can take (as is common) a share of the revenue or a transaction fee. Moreover, third parties could experiment with new forms of content, which could be very valuable to Netflix’s content acquisition and production efforts. In this way, Netflix would follow in Amazon’s footsteps. That company started as a pure retailer of products it bought from sellers and sold in its own name, before adding a marketplace where customers purchased directly from third-party sellers. Netflix can aim to become a similarly powerful reseller-platform hybrid, except it will have digital content rather than (for the most part) physical products.

Why has Netflix not started on this path already? CEO Reed Hastings and his team must have thought about it. There are only two plausible explanations I can think of: (1) resource allocation and (2) quality control. I don’t find either one very convincing.

The resource-allocation argument would be that, given the resources (financial and human) needed to develop and acquire high-quality content, Netflix simply may not have the bandwidth right now to look at platform opportunities. Well, I’d argue it should create the necessary bandwidth, given the huge potential payoff and the danger of getting stuck in the war over content acquisition and creation. Being a platform for content is much more scalable, valuable, and defensible than being just a content creator and reseller.

The quality-control argument would run as follows. Becoming a platform — allowing third parties to sell content whose quality is not fully controlled by Netflix, and on terms not completely determined by Netflix — runs the risk of letting low-quality content slip through the cracks and alienating customers, who would then hold Netflix responsible. That is a valid concern, but there are many ways in which Netflix can mitigate this risk — as other companies have done when turning their products into platforms (examples include Amazon, Intuit, and Salesforce). I am not arguing that Netflix should move to an open platform model like YouTube’s, where everyone and their cat can post video content. Rather, Netflix can turn its service into a carefully curated platform, with relatively tight governance rules that can be relaxed over time.

My bottom line is that Netflix has little to lose and a lot to gain by shifting from being an aggregator of content under one subscription, to a hybrid aggregator platform on which various content providers sell directly, and at prices of their choosing, to users. Becoming a platform is usually about fear (of competitors) or greed (for new sources of growth and revenues). For Netflix, it should be about both.

Source: HBR