In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "The definition of scarcity is continuously evolving away from linear. What happens next?"
Two independently reported stories from the past week offer two different lenses on Netflix’s emerging ad business.
The first was Digiday’s Ronan Shields report that Netflix is “now considering alternative options on how to run its operations with potential outcomes including the streaming giant in-housing its ad tech.” Its partnership with Microsoft is a two-year deal announced last July, and its current moves seem to be an insurance policy if Microsoft’s Xandr platform is unable to evolve in the ways Netflix requires.
The second was research released by firm Antenna on the performance of ad-supported tiers of Netflix, Disney+ and HBO Max in their first three months. Netflix’s Basic with Ads accounted for 54% of all Basic tier Sign-ups for Netflix, and 20% of all sign-ups in January 2023. Basic with Ads users now account for ~1% of Netflix’s subscriber base in the U.S.
Nominally that should be around 650,000 subscribers, but Bloomberg’s Lucas Shaw reported internal Netflix data that the total subscribers are closer to 1 million. That would imply Antenna may have mathematically rounded down from a figure like 1.4% of Netflix’s subscriber base in the U.S., or (910,000 subscribers [NOTE: the reason for the rounding down is evidently for simpler chart optics].
So there seems to be evidence of a “there” there for Netflix’s advertising ambitions. Or is there?
Key Takeaway
Netflix’s bets for the future are both subscription and ad-supported streaming, and gaming. An advertising model still seems complicated for Netflix's DNA.
Total words: 800
Total time reading: 3 minutes
The risk of complexity
One year ago at SXSW Candle Media Co-founder Kevin Mayer predicted that Netflix will have ads in the next two years. I opined then that “Mayer could not be more wrong here", and argued that was because “Adding advertising to Netflix adds complexity to a business that is already unusually complex for a media business.” Nevertheless, one month later (April) then-Co-CEO Reed Hastings proved Mayer right with a seemingly-improvised announcement that they had plans for an ad-supported tier.
The risk of complexity was the angle Ronan Shields was pushing in last week’s article: “Netflix is exploring the possibility of building its own ad server, thus reducing its reliance on Microsoft’s ad wares.” But, it also may be in “early-stage explorations of any potential acquisition targets.” That is a “‘build or buy?’ conundrum” where Netflix’s ultimate solution for advertising may be suboptimal in either instance.
Solving for delight
As I wrote in January, ad-supported price tiers are one of three solutions Netflix currently has for consumer“delight”, alongside personalized streaming and mobile games. Less than 1% of its global subscribers have been reported to have been engaging with games daily as of August 2022. So despite all the press coverage, Netflix’s business remains almost entirely driven by subscriptions.
Co-CEO Greg Peters managed expectations on both initiatives in January's earnings call:
“We're planting some seeds in terms of games and things like that, that if we execute well and we're excited about the progress we're seeing so far, will represent the future potential for us in terms of and more profit opportunities. So that's exciting. But essentially, a lot of this is just continue to execute the play[book] that we've got and do it better and better.”
This reflects my take from last March: “Netflix may indeed need more than streaming to drive growth in its business model. But, understanding what they will end up doing relies less on looking to media's past, and rather forcing ourselves to imagine which business models Netflix executives believe its software makes possible.”
Netflix’s advertising initiative seems to have had a strong start and with some strong hires, too (Jeremi Gorman as the new President of Worldwide Advertising, Peter Naylor as Vice President of Ad Sales, and Adam Gerber, Head of Client Development, Advertising). Co-CEO Ted Sarandos already promised “multiple ad tiers” to investors at the UBS Global TMT Conference last December, though he left open the questions of how many and when.
The looming likelihood of a recession would suggest that demand for lower priced offerings and free offerings is going to grow, and the demand for ad-free tiers will decline. Both raise the question of how Netflix will bring delight to its consumers beyond personalized streaming.
The simplicity of gaming
The most interesting story is “Teenage Mutant Ninja Turtles: Shredder’s Revenge”, as Jonathan Stringfield, vice president of global business research and marketing at Activision Blizzard, pointed out in a recent podcast interview with Mike Shields. That game was released for PC and consoles in 2022 and is “a modern take on the classic TMNT arcade games.” Because of Netflix, that popular game is accessible on mobile for the first time.
Is that a huge deal? No. But it is Netflix licensing third-party IP (TMNT is owned by Paramount Global) to solve for delight in ways that other gaming companies could not. And they are doing so by integrating a link to a mobile game that one of their studios produces. Unlike its advertising business, gaming engine technology does not need to be re-invented.
It seems counterintuitive to bet on gaming over the ad-supported model. But, Netflix’s DNA is a simple focus on subscription revenues, and its bet on gaming seems much simpler operationally at Netflix than advertising.
Must-Read Monday AM Articles
[AUTHOR’S NOTE: This has been a weird news cycle in which to launch a Slack. It is on hold.]
* I enjoyed chatting with Jo Redfern, Emily Horgan and Andrew Williams about PARQOR's four key trends for Q1 2023, and hearing their perspectives on how those might apply in the kids space on The Kids Media Club Podcast. (Apple Podcasts)
* Netflix recently applied for a patent for automated video cropping, which aims to use algorithms to turn footage with horizontal formatting into mobile-friendly vertical videos.
* Comcast may spin off both Sky Deutschland and Sky Italia while retaining Sky U.K.
* The collapse of Silicon Valley Bank exposed the vulnerability of Hollywood’s smaller studios to similar bank runs
* A good recap of the Interactive Advertising Bureau’s 2023 PlayFronts conference for gaming
* Why Spotify’s redesign reflects a desire to look like TikTok
* On YouTube, the growth of the Miley Cyrus single ‘Flowers‘ memes serves as a good case study for the way viral trends incubate and grow during the Google-owned platform’s multiformat era.
* Unilingo, the dubbing provider for MrBeast and PewDiePie, and YouTube dubbing are helping creators reach new audiences around the world and monetize the same video in several languages.
* Short-form video creators are losing access to a steady source of income after Meta announced that it is pausing its Reels Play bonus.
* Diamond Sports Group declared bankruptcy, and Sahil Patel of The Information reported the NBA aims to triple its current revenue from TV deals.
* Last, a good Twitter thread from former WarnerMedia and Hulu CEO Jason Kilar on Hulu’s 15th anniversary