Member Mailing: Why The Quantity vs. Quality Criticism Misses Netflix's Deeper, More Structural Issues
“It feels like we’re standing in a crystal clear stream like in A River Runs Through It, and we’re fly fishing, and our neighbor [HBO programing chief] Casey Bloys is up the river, and then somebody comes in with a bag full of hand grenades, pulls the pins, throws them into the river, scoops up all the fish, and then says, ‘We’re better fishers than you are!” Okay, that’s some beautiful fish that just got blown out of the river.”
-- FX Networks CEO John Landgraf, August 2018
Netflix’s recent struggles reminded me of the quote, above, which FX Networks CEO John Landgraf delivered to the semi-annual State of the TV industry speech at the Television Critics Association (TCA) back in 2018. That visual of fishing with hand grenades was a funhouse mirror on Netflix’s spend ($8.9B in 2017 and $12B in 2018). In 2017 Netflix had become the market leader in spend (topping ESPN, which also spent more than $8B on sports rights in 2017).
Landgraf was criticizing how Netflix had been leveraging the raw power of greater content spend to produce inferior content where HBO and FX had been leveraging skill and tried and true processes of creative development to produce superior content.
Now investors are asking whether the strategy of fishing with grenades is the problem: Disney and Warner Bros. Discovery have recently walked by promises of more spend in response to investor concerns (and Warner Bros. Discovery saw its stock upgraded by Cowen). Netflix still plans on spending $18B in 2022, so it seems to believe fishing with grenades is not a problem (yet).
But there is the question of how much time Netflix has before it loses the confidence of investors, or worse, the engagement of subscribers to churn. Its move into an ad-supported model is in response to those concerns. That, too, raises another important question: how will fishing with grenades compete with Free Ad-Supported Services and YouTube?
In other words, fishing with grenades has always been perceived as a quantity vs. quality problem, but four years later, it seems to reflect deeper and more structural challenges within Netflix.
Netflix & Fishing With Hand Grenades
If I were to rephrase Netflix’s business logic of fishing with hand grenades more favorably, I would describe Netflix as a software company that funds culture to feed its distribution software.
Meaning, I believe Netflix’s platform and distribution software is a machine that needs to be fed to drive growth and user engagement. The fishing with hand grenades approach has been the best means of feeding that machine.
Licensed content is the worst business model for Netflix’s fishing with hand grenades approach because all marginal views of licensed content result in variable costs to be paid out to third parties. In the past, Netflix also incurred additional marketing costs for that content on behalf of third-parties (and may still, though to a lesser extent).
Whereas with original content, all views have zero marginal costs because the cost of production is a sunk cost. Effectively, all additional views of original content after recoupment of the production costs are profit. So, the more Netflix invests in original content, the better its business model is.
However, because its software still demands being “fed” with content at scale, Netflix will still need to license content. There were two good posts on these questions of licensing content and quality vs quantity on What’s On Netflix last week.
1. Licensing Content
First, on the point of quantity, What’s On Netflix's Kasey Moore found that between 2011 and 2022, Netflix’s total library in the U.S. has decreased from 11,000 titles of movies and TV Shows to 6,000 titles. That is a reflection of distributors licensing fewer movies to Netflix as they shift them to their own streaming services.
However, Netflix has been incrementally growing its movie library in recent years (it bottomed out in 2017), and distributors like Universal, Lionsgate and Paramount still license movies. Newly announced deals with Sony and Universal will see both their animation and their live-action suite come to Netflix for the entirety of the first window (notably despite the existence of Peacock as a first-party outlet for Universal).
It also found that Netflix’s library now consists of over 47% originals, and is predicted to hit 50% in August 2022. Netflix Originals could make up 75% of its library in May 2025.
So, Netflix may “feed” its machine with less content than before, but it is feeding that machine by spending on more originals.
2. Quality
Second, What’s On Netflix had a guest post from Frédéric, who hosts the French-language podcast Netflixers, and runs the Netflix & Chiffres Substack. Frédéric pulled the data on Netflix Originals and Shows internationally to tackle the gist of John Landgraf’s critique that fishing with hand grenades has produced content inferior to FX or HBO.
Frédéric relies on the average IMDb rating for Netflix original movies and series as his standard for quality. He draws some interesting conclusions:
For the last three years, every film that Netflix releases have had a 50/50 chance of getting a bad/mediocre average grade (less than 6.0/10 on IMDb), and “That’s a lot.”
But, he also concedes “there are more and more good films too and one way to look at it is to say that those good films exist and if you were to only watch them, your perception of the Netflix brand would probably be different.”
The second conclusion is an important point about “feeding” the machine: Netflix’s distribution and personalization software does not always deliver optimal outcomes for its original content investments.
He also highlights how the question of quality vs. quantity must be contextualized within Netflix’s evolution from relying almost entirely on English language original shows to producing more original content overseas:
In 2016, 8 of its 10 best-rated Netflix Original films were English-language films but in 2021, that number was 4.
In 2015, 8 of its 10 best-rated Netflix Original series were English-language show but in 2021, only 2 of them were - Korean dramas and animated series are now the main best-rated shows.
Frédéric concludes:
So maybe the problem is not so much about the perceived quality of Netflix Original films and series but about how this discussion seems to be focusing entirely on US films and series by US streaming analysts and media in what can only be described as a myopic view of a global market.
Sure, Netflix has dropped the ball on its US content over the last few years, mostly because the competition is fierce for talent and projects there. But what Netflix is doing internationally is something that its US competitors are nowhere near replicating.
In other words, there may be valid critiques of the fishing with grenades approach from Hollywood’s perspective, but globally the approach seems to be succeeding in growing its library of originals that audiences want to consume at scale. Moreover, Netflix’s partnerships with more than 170 dubbing studios that produce programming in at least 34 languages enable content like “Squid Game” (1.6B hours watched in the first 28 days) and “Lupin Part 1” (317MM hours watched in the first 28 days) to succeed in non-Korean or non-French speaking regions countries like Brazil, Argentina, Germany, Italy, Spain, Poland, Vietnam, the Philippines and others.
Effectively, Frédéric's argument is that fishing with grenades is a fair critique that has evidence to support it, but it also has strong counter-evidence in the successes of Netflix’s international strategy.
Some Alternative Lenses on Fishing With Grenades
Netflix’s precipitous drop in stock price (72% over the past six months) reflects, in part, growing investor concerns that fishing with grenades is not sustainable as revenue growth slows, subscriber growth slows and churn increases from increased competition.
There are four alternative perspectives that the analyses, above, that suggests investors may not be looking closely enough at the impact of the fishing with grenades strategy:
The market is over-reacting
The market is right, but the problem is Netflix’s culture
The market is right, but the problem is Netflix’s technology
The market is right, but should focus more on competition from FASTs (Free Ad-Supported TV services).
1. The market is over-reacting
At 2200MM subscribers and 0.9% churn projected in Q2 2022, which is historically Netflix’s weakest quarter, the model still works. Netflix’s movies and shows can attract 100MM plus viewers.
It has pioneered the international content development model and remains way ahead of the competition, even after Disney announced last week that it currently has over 500 local original titles in various stages of development and production (“180 of those titles are slated to premiere this fiscal year, increasing to over 300 international originals per year in steady state”).
Even if post-pandemic Netflix faces saturated markets in the U.S. and Canada and in parts of Europe, the strength of its international production model and its proven ability to drive views at scale for foreign language content remain competitive advantages. As long as growth continues to be primarily international (NOTE: excluding Russia, it saw growth in Q1 2022), Netflix has unusual market advantages in international content production and distribution that other streamers are still figuring out.
2. The market is right, but the problem is Netflix’s culture
Two recent articles - Netflix Animation Erased: Executives Fired, Shows Canceled and Accusations of ‘Staged Data’ and Netflix’s Big Wake-Up Call: The Power Clash Behind the Crash - offered a surprising, alternative lens to the fishing with grenades critique: Netflix’s famed feedback culture was not producing content that was succeeding .
The Netflix Animation Erased article highlighted how Netflix’s famed feedback culture “went out the window” in animation when the show was threatened with cancelation”. It also included complaints from creators that the process was “manipulative” and of “being presented with ‘staged data,’ data meant to prove a point that Netflix has and squash conversation around it.”. On this point it is notable that Netflix announced yesterday that it has cut another 70 workers from its animation studio.
In other words, there were politics at play that interfered with the success of original animated content it was producing and distributing. This is not a small issue: over 60% of consumption on Netflix is of kids and family content.
The Netflix’s Big Wake-Up Call article revealed how Co-CEO Ted Sarandos’ objective of increasing its volume of original shows substantially year-over-year to compete “began to prove destructive to the culture and the quality of the service’s offerings”. It dove into the resulting tension between the more “spendy approach” of former head of TV originals Cindy Holland, and her successor Bela Bajaria, who found success with international content and “has established a reputation for grinding down budgets”.
The article concludes with a description of the company culture as now "more prudent and frequently indecisive" and a quote from an “important creative talent who had successes working with Holland” that “the idea that they could spend their way to world domination is over”.
In short, fishing with grenades has resulted in Netflix’s famed culture becoming dysfunctional, and in turn, a lower quality of content in key divisions like animation (NOTE: I wrote more on this dynamic in Failing To Reach Its Disney-esque Objectives, Netflix Becomes Reed Hastings' Frankenstein).
3. The market is right, but the problem is Netflix’s technology
It is worth revisiting a point, above, that Frédéric made (emphasis in bold added): “there are more and more good films too and one way to look at it is to say that those good films exist and if you were to only watch them, your perception of the Netflix brand would probably be different”.
The question here reflects another drawback of fishing with grenades as a strategy: all content that could reach its intended audiences does not, despite the strength of Netflix’s distribution software and personalized recommendations. Or, if the content does reach its audiences, it is not always consumed.
An additional problem this critique highlights is marketing: if Netflix’s “ubiquitous access” is a key strength in marketing (its ability to make its content available one click away to its subscribers both on-platform and off-platform, online and offline), Netflix is still failing to get content that should be watched by audiences but are not being watched.
Notably, yesterday it announced it had let go of 60 to 70 contractors working for Netflix's social media and publishing channels, including Strong Black Lead, Asian American-focused Golden, Latinx-focused Con Todo, and LGBTQ-focused Most. In other words, fishing with grenades needs a marketing strategy that ensures those “fish” are consumed, and currently Netflix’s marketing strategy both on-platform and off-platform is suboptimal.
4. The market is right, but should focus more on competition from FASTs
Netflix’s move into ad-supported streaming is an acknowledgement that consumers increasingly want choice, as Co-CEO Reed Hastings told investors on its earnings call. To its credit, Netflix has always acknowledged YouTube as one major competitor, and in its recent earnings calls it has acknowledged that ad-supported services launched by HBO Max and Disney+ are also competition.
But, an angle it has not covered is one that IAB Executive Chairman Randall Rothenberg did a good job of highlighting in a recent tweet thread: “there will be many multiple “televisions,” each one striving to keep its own audience - an audience smaller than historical norms - locked in and blissfully unaware of those other televisions inhabiting other dimensions in different space-time continuums.”
He predicts that walled gardens are ultimately too limited a user experience, and therefore “we’ll see more FAST networks rising (especially on the major TV companies streaming properties) as the singular “cable universe” continues its entropic spiral, as SVOD services encounter consumer price intolerance, and as regulatory pressures cut into the effectiveness & advantaged pricing of digital audience targeting.”
If I were to rephrase his point in the context of the analysis above, FASTs may offer a better user experience than Netflix for consuming both content that Netflix licenses from third parties and perhaps even older original content from Netflix.
Why?
Because Netflix’s ecosystem may be trending towards being a smaller ecosystem for Netflix original content, only. 6,000 titles may seem enormous, but there are only hundreds which are Netflix originals. Also, as Frédéric highlighted, they are not always discovered.
If Rothenberg is right, consumers wanting an optimal viewing experience closer to the linear Electronic Programming Guide (EPG) and access to broader content will want walled gardens with larger universes of content. Hundreds of original titles from Netflix simply may not be enough for consumers.
The strategy of fishing with grenades has had the unintended consequence of having limited Netflix’s value proposition, and not expanded it.
Conclusion
The most valuable key takeaway from the above may be Frédéric’s critique of the quantity vs. quality debate: Netflix “seems to be focusing entirely on US films and series by US streaming analysts and media in what can only be described as a myopic view of a global market”. I think that is a fair counter criticism of John Landgraf’s original critique of Netflix “fishing with grenades”: Netflix has pursued scale in order to compete at the expense of quality, but that trade-off has been less a reflection of the problems with fishing with grenades and more “because the competition is fierce for talent and projects” in Hollywood.
The debate over quantity vs. quality also has missed how Netflix has built a market-leading solution for producing quality, at scale, internationally. But, it also missed the enormous cost to Netflix’s competitive advantages that this strategy has entailed, particularly its culture.
Perhaps what this debate has missed most is Randall Rothenberg’s point about the limits of walled gardens: FASTs and YouTube increasingly offer better and broader content offerings of third-party content that both the strategy and economics of fishing with which dynamite will find harder to compete. That may be the biggest irony to emerge: emerging competition from free services reinforces Netflix’s fear that it may not have enough content is absolutely valid. This emerging competition also highlights how Netflix may no longer have the optimal business model for streaming.