Some of my thoughts on media & entertainment business … if you were forwarded this email and want to receive regular updates, click here:
Netflix Comes Back to Earth
I had an interesting debate with a streaming studio exec last year if Netflix would ever introduce ads on its platform. We eventually agreed that ads would be an inevitable decision for Netflix and would come in maybe 3-5 years with a bruised stock. That bruise ended up being more of an ass whooping:
NFLX
In its last earnings report, Netflix unveiled a less than ideal subscriber outlook and the stock tumbled 35%, losing $50 billion in value overnight. The Netflix growth story quickly shifted from “all-conquering streaming giant can do no wrong” to “oh sh*t.” One of the lifeboats Netflix threw out was introducing a lower priced, ad supported tier. Netflix will be joining other friends like Disney+ (announced), HBO Max, and Hulu with Toyota commercials in the middle of Ozark.
Why Do Streamers Launch Ad Tiers? Well, like any good strategy, there are three main reasons
Increase TAM (Total Addressable Market)
You believe that a cheaper, ad tier product will unlock a new category of subs who were previously priced out (especially important in developing markets). You also have to factor in a little cannibalization when current Netflix subs downgrade to an ad tier
Boost ARPU (Average Revenue Per User)
Although ad tiers are cheaper for consumers, streamers unlock a new revenue stream: ads. Each ad tier sub is now worth the monthly price + ad revenue, sometimes making these subs more valuable than no-ad subs
Placate Wall Street
The quarterly dance continues
Sound easy? Once you move past the consultants’ PPT slides, operationalizing ads is very hard. Netflix has no prior expertise here and can’t phone a friend like Disney w/ Hulu or Peacock w/ NBC. Furthermore, Netflix Originals were not created with ad breaks in mind and that will open a host of difficult conversations with creative.
The introduction of ads might also change Netflix’s other differentiating factor: the binge model where episodes drop all at once. The ad tech landscape is an algorithmically driven mix and match of supply and demand, so advertisers may pay more for inventory mid season if a show blows up. With a binge model, Netflix misses the boat on premium bids because they’ve locked in some of that ad inventory all at once.
New Netflix Content aside, Netflix’s biggest differentiators were no ads and the binge model…strategies change fast when billions of dollars disappear. I predict when Netflix launches its ad-tier, it will be competitively light on ad load (minutes of ads / content length) and use that as an increasing revenue lever over time. Netflix might also front load the ads (vs mid-roll) to avoid initial clunky viewing.
Other Highlights
Deals
Abry Partners invested $100 million for a minority stake in Kevin Hart's production company, HartBeat
Sony Pictures TV acquired Industrial Media (American Idol, 90 Day Fiance) for $350M
What I’m Streaming…
A little late to the party here but thoroughly enjoying the vibe