Deciding to Sell Shovels as a Strategy

Who would have thought that a dead children’s book author would become the biggest content partner to Netflix? That’s what happened after Netflix spent $700 million acquiring the rights to Roald Dahl’s books. To be fair, his children’s books aren’t unknown. They have sold more than 250 million copies and feature well-known characters such as Matilda, Fantastic Mr. Fox, and Willy Wonka.

This content deal is Netflix’s biggest yet. It is also a sign of things to come. Companies like Netflix are on a buying spree, and they are reaching even beyond the grave for hidden gold.

The streaming market is in a rush for “gold” (i.e. subscribers) and companies are forced to spend exorbitantly. Few companies can keep up with the pace of competition, and it’s unclear if the prize of being the dominant provider is even worth it. At the moment, the only way to dominate in the metric of subscribers is to sacrifice profits. 

Sony is using a different strategy. Instead of entering the arena and directly competing with other platforms for a share of the viewing population’s attention, they are positioning themselves as a provider of content, not to the consumer, but to the platforms. If the streamers are in a gold rush for subscribers, Sony is selling shovels. 

Let me show you how three conditions lead to failure for a domination strategy, but success for a Shovel Strategy.

The perfect conditions for the Shovel strategy

Condition 1: big spenders

When players in a market balloon their budgets in a tit-for-tat approach, you’re in for trouble. In the streaming market, ballooning budgets for acquiring content are mere table stakes. Amazon bought 100-year-old MGM for an eye-watering $8.5 billion. Disney originally forecasted $2 billion in content costs but has spent upwards of $9 billion. HBO paid $15 million per episode for the last season of Game of Thrones, but Amazon is spending $58M per episode for Lord of the Rings. Even Apple, who isn’t that serious about Apple TV, originally budgeted $1b for content acquisition but has now spent more than $6 billion. It’s hard to compete when your competitors have seemingly infinite budgets and can just keep digging for a few more billion dollars. 

Sony has realized that it won’t be able to keep up with the content acquisition battle. Instead, they have become content brokers who sell their valuable content to the highest bidder. They struck deals with Netflix and Disney worth $3 billion, a number that is bound to grow in the future. Sony demonstrates that you can you can dominate by refusing to compete on the same metrics as everyone else. By functioning as a content mercenary, they can spend less but still reap large rewards.

Condition 2: uncertain growth numbers

The growth numbers in this market are disputable or highly unpredictable. Everyone is spending large amounts of money because they want to be number one. However, the streaming market may not be as lucrative as people expect, especially if you exhaust your profits getting there. Netflix originally expected 1 billion homes with broadband, but the real market is closer to 400 million, of which 80% already have Netflix accounts. Internet speeds, broadband penetration, and disposable income within homes haven’t grown as quickly as expected, particularly within developing markets such as India. Netflix has been forced to cut prices in certain markets to keep up with its subscriber projections. Other streaming services will have to deal the same issues sooner or later. 

Sony doesn’t have to worry about subscriber growth numbers. As long as companies continue to put a premium on content, they will do well. Where subscribers come from isn’t a concern either. Let other companies worry about that.

Condition 3: low customer loyalty

When customer loyalty is low, you need to work harder to replace those who leave and to persuade others to stay. For an average consumer, it doesn’t make much sense to continue paying a monthly fee if the content isn’t appealing. 

Most new subscribers come from the big hit releases like Wonder Woman 1984 on HBO Max or Hamilton on Disney+. 50% of these new subscribers will leave within six months. Look at how subscribers spike with new releases before returning to normal. 

Source: WSJ and Antenna

In smart TVs like Fire TV Sticks, switching between platforms takes seconds. Worst of all, streaming services have to compete with free options like TikTok and YouTube. It’s not surprising that customers will drop services at any moment.

Sony doesn’t have to worry about customer loyalty. The platforms are its customers. Whoever pays the most for their content will get it. The content deals Sony signs are independent of subscriber growth or retention numbers.

Two lessons for your business

Watching Sony deploy the Shovel strategy prompts a couple of questions for any business. First, are you competing on the right metrics? Second, are you facing the future honestly?

Compete on the right metrics

You need to play by your own metrics. If Sony entered the streaming market, they would need to compete on metrics like subscribers. Instead, they choose to focus on the value of their content and their deals with other companies. Businesses fall into metric envy when they see competitors do well. Disney’s stock is now closer to a tech company thanks to Disney+, but like a tech company, they are also now beholden to exponential long-term growth. 

Finding a game you can win is as important as playing the game well.

Face the future honestly

The future of TV is streaming platforms. Sony isn’t rejecting the future; instead, they are accepting it by focusing on their most valuable asset: content. They understand that technology isn’t a differentiator in the streaming market—everyone can play videos reliably across devices—but few companies can create great content consistently. Companies need to face the future boldly. Sony has chosen to optimize for the price their content can attract from the platforms. That allows them to find opportunities that competitors are missing.

Getting into the shovel business

The streaming market may be like the gold rushes of the 1800s. Everyone is digging for gold, but it’s not clear how much there actually is in the ground. It might be better to get into the shovel business than to go digging. Even after the rush is done, people will still need shovels. 

Sony is becoming an expert in creating and selling shovels. The battle for content will continue for years. The signs of stress are already showing. Netflix is losing subscribers and is considering introducing a low-cost or free plan with ads. Adding ads ruins one of the biggest selling points of streaming services: non-stop content binge-watching.

Sony has wisely decided to avoid getting caught up in the frenzy on the wrong side of the table. Instead, they can cheer on as dead authors receive blockbuster content deals. That’s great news for all of those selling shovels. 

In your own business, consider if there’s a way to sell shovels instead of joining a gold rush. What would that look like for you? If you want to chat about it, find me on Twitter. I’m @ugarterd.

Featured Image by Stephen Philpott

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