In a saturated streaming market, Netflix can’t (and shouldn’t) bet on commercials alone—or steadily increasing monthly subscription prices.
After all, after years of telling the world it would never do that (and it would be blasphemy to think otherwise), Netflix this week launched its discounted $6.99 monthly ad-supported tier. (something I’ve predicted over the years), It’s a significant “never say never” moment for the company which recently announced a positive turnaround with 2.41 million new paid customers after two consecutive quarters of losses. Many pundits hail the Q3 news as proof that the streaming leader is alive and well once again – Forbes Calls It “Monster Q3” — and that its new ad-supported tier will propel the company to new heights in the face of increasing hyper-competition. but will? And will it be enough for Netflix to live long enough to be independently instead of being swallowed by a much bigger fish? ,I have discussed that possibility In my last few columns.)
The quick answer is “no” – ads alone won’t be the great “fix” that many believe. And Netflix’s advertising moves also carry significant risks. First, ads disrupt the platform’s “pure” high-quality streaming experience we all know and love (and co-CEOs Reed Hastings and Ted Sarandos have always been touted as a major difference). . This, in turn, can adversely affect its brand and overall customer satisfaction (which can be measured by “Net Promoter Score” or “NPS”). For those paying customers who “downgrade” to the new ad-supported tier, there’s a serious risk of increased churn, especially as they compare (and sort) their streaming options in these tough economic times. . Netflix, after all, lacks the highly marketable franchise content of others (including Disney+, HBO Max, and Peacock).
Another obvious risk, of course, is that a higher-than-expected existing subscription will be downgraded to the new ad-supported level and cannibalize the streamer’s solid base of existing (and high-paying) subscriptions. Undoubtedly, the metrics and customer data-rich company mined its numbers to optimize overall level pricing and thought long and hard before doing what was previously unimaginable. But until now, there was no real-world situation. Now they are, and it’s not just increasingly tight purses.
Netflix finds itself in a completely saturated US streaming market that Canter pegs at about 90%, and Netflix’s seemingly stellar Q3 results bear this out. The company has And Canada only added 100,000 new sub-subscriptions, not to mention 2 million fewer overall sub-subscriptions year-on-year. The fact that Netflix just announced that it will stop giving analysts projected subscriber numbers starting in January 2023 appears to be a tacit acknowledgment of that reality. And along with its increasing dependence on international expansion, it also faces fundamental challenges. Many “Ripest” areas are mobile-first, pricing-challenged, and unable to generate any revenue close to the new monthly $6.99 plan.
To be clear, Netflix’s ad-supported move is smart in terms of what it represents — the recognition that it must find new ways to grow and diversify its revenue streams. After all, it faces massive competitors with very different business realities. Netflix essentially lives on content revenue alone (paid subscriptions and now advertising dollars). The company’s biggest threats, however, are the promotion of multi-faceted business models, which use content as a form of marketing to increase customer satisfaction/NPS, which, in turn, generate more sales of their core products. Apple TV+ outsold iPhone and Mac. Amazon Prime Video kicks off the etailer’s annual Prime membership pump. Meanwhile, Disney+ is Mickey’s new portal into the world of Disney beyond film and television — specifically, theme parks and merchandise. So, Netflix smartly realized that something had to be done.
But beyond commercials, what else can (and should) Netflix do? Certainly, Streamer should be taking a close look at cost cutting, especially its huge annual $17 billion in materials spend. Do we really need all those titles? Meanwhile, on the revenue side, Netflix’s expansion into the lucrative gaming market makes sense (the streamer now has about 35 games). But it won’t be easy to differentiate in the gaming world as the giants are already in that space. How about expanding the merchandising to a few franchises, including “Stranger Things” and “Squid Game”? Absolutely! But that’s not enough.
The most obvious opportunity for Netflix is to take its powerful global brand out of our living rooms and into the real world to create entirely new synergistic monetization experiences — and it’s finally taking baby steps at least. just last week, The company opens its first “immersive” pop-up retail story In a sign of perhaps more things to come in Los Angeles. Theme parks, anyone? No, don’t build them. Just license “Stranger Things”—like Warner Bros. did with “Harry Potter” at Universal Studios parks—and they (more customers) will come (and stay with the brand).
Perhaps the most tantalizing out-of-home opportunity is to expand significantly into the physical world of movie theaters, something that Netflix has only done so far. It’s certainly a great time to try hard to buy (and save for) a distressed indie theater chain. Such a move would be welcome for myriad reasons, not just for box office receipts and popcorn revenue. For one thing, Netflix may be adding another — and significantly more — paid VIP subscription tier that includes a MoviePass-like component. Imagine Netflix is also offering special in-theater early screenings for originals like “Glass Onion: A Knives Out Mystery,” which hits 600 theaters for a week on Thanksgiving. Co-CEO Ted Sarandos insists that “knives out” is the rare exception, not the rule (he recently said “we make our movies for our members, and we really want to see them on Netflix”) . But haven’t we heard that song before (ie, “No ads, ever!”)?
The company’s support for theaters will lead to positive buzz for its featured films, not to mention great public relations for Hollywood talent. All of this translates into invaluable marketing that will drive growth for every element of Netflix’s now significantly expanding business model.
Netflix can’t (and shouldn’t) bet on commercials alone, and it also can’t count on consistently raising monthly subscription prices. Remember, Streamer’s massive Big Tech competitors boast trillion-dollar-plus valuations and hundreds of billions of cash that, despite their own recent price hikes, keep them pricing on the north side of Netflix. Gives the ability to reduce moves.
Netflix’s final “fix” may be M&A — from both sides of the table. As a buyer, it should acquire a proven boutique studio like Blumhouse that will give it the franchise content it so desperately needs for years of multi-monetization across all channels (streaming, games, merchandise, out-of-home). Is. But at some point—which may be quicker than most think—it could also be a seller. And of course there’s a long line of potential megabuyers that boast a far more flexible, multi-faceted business model and may use Netflix as a priceless giant in their overall revenue-generating machines rather than as a whole cog.
For those of you interested in learning more, visit Peter’s firm Creative Media at creativemedia.biz and follow him on Twitter @pcsathi.
