Monday AM Mailing: Failing To Reach Its Disney-esque Objectives, Netflix Becomes Reed Hastings' Frankenstein
In 2020 and early 2021, a theme of Netflix’s messaging was its naked ambition to become like Disney, if not overtake it.
In September 2020, Netflix co-CEO Reed Hastings told the New York Times that two of the best authors in the entertainment industry were Neal Gabler, who wrote the definitive biography of Walt Disney, and Bob Iger, who had been running Disney. In February 2021, Hastings told investors that Netflix’s long-term aim is to beat Disney at animation: “We’re very fired up about catching them in family animation, maybe eventually passing them, we’ll see. A long way to go just to catch them.” (NOTE: Brandon Katz wrote a good article on this for The Observer last year, “Netflix Not-So-Secretly Wants to Be Disney, But Is It Placing the Right Bets?”)
An eye-opening report from Drew Taylor of The Wrap emerged last week, revealing that a recent executive firing brought “perhaps an inevitable end to a deeply chaotic period for Netflix Animation, particularly its Kids & Family division, which saw a boom of talent and creativity give way to corporate pressure, mixed messages and accusations of ‘staged data.’”
The story reveals serious flaws in Netflix’s execution of its long-term objective of beating Disney in kids animation. After last week's stock price drop, it is worth asking the question:
Assuming Netflix’s stock price and perception from Wall Street would be different with better execution around its Disney objective - and also, given Netflix’s keeper test - does Netflix require a change in management, starting at the top?
Deep Chaos in Animation
There is no one problem with the animation story. But if there was one, it’s the operational disconnect between the stated objective of chasing Disney and the available evidence of how Netflix has executed against it. The Wrap story describes a Kids & Family division that saw “a boom of talent and creativity give way to corporate pressure, mixed messages and accusations of “staged data.”
It is effectively a story of producers and creators swayed by the promises of a “glittery Utopia… backed by the financial and promotional might of the Netflix empire.” But, now Netflix has moved away from creator-driven projects, and those creators have moved on to Cartoon Network, Disney, Nickelodeon, Apple TV+ or Amazon.
There is not necessarily anything unusual about that. Rather, the details of why they left are worth highlighting. Perhaps the most notable were the failures of Netflix’s feedback culture. That culture “went out the window when the show was threatened with cancelation.” Creators also complained that the process was “manipulative” and complained of “being presented with ‘staged data,’ data meant to prove a point that Netflix has and squash conversation around it.”.
This reinforces something that The Baby-Sitters Club showrunner Rachel Shukert told Kathryn VanArendonk of Vulture:
When you only have your numbers in a vacuum and you don’t know the numbers of anything else, you don’t know what you’re trying to hit. You don’t know what numbers other comparable shows are hitting. Netflix will give you context in terms of what your numbers were last season or what they were hoping for, but even that is very vague. You’re flying a little blind.
The takeaway is Netflix’s feedback culture is not working, and it’s being engineered by Netflix employees to deliver self-defeating outcomes for the Kids & Family strategy.
PARQOR Hypothesis & Missing Assets
The Wrap’s Drew Taylor may have written the most unintentionally pro-PARQOR Hypothesis paragraph, ever:
Levers that other animation studios at bigger corporations can pull, like consumer products releases or promotional tie-ins, aren’t pulled at Netflix. There weren’t “Kid Cosmic” action figures lining the shelves of Target. You couldn’t get a “City of Ghosts” Happy Meal toy at McDonald’s. There’s no theme park or dedicated retail space to exploit either. On the official Netflix Shop, there isn’t a single Kids & Family animated series represented.
The PARQOR Hypothesis argues that the media businesses most likely to succeed in streaming and beyond must meet five attributes, and highlights any missing pieces they (arguably) may need to solve to optimally succeed.
Those attributes are summed up in the BEADS acronym:
an Aspirational Brand
Existing user base at scale
Multiple Avenues to monetizing the same IP, and
Daily value proposition (something new for fans to consume daily)
Sales Channels: Online (digital) and offline (physical) commerce
Netflix has scored 2.5 out of 5 on the above, lacking an aspirational Brand, Multiple Avenues to monetizing the same IP, and offline Sales channels. The quote above reinforces that score, and convincingly.
Netflix has been confidently assuring investors it can catch up with Disney, and yet it has failed to deliver a business model that is competitive with it. Moreover, the story suggests that Netflix may have never pursued the right operational efforts to put these pieces in place.
Reed Hastings’ Frankenstein
One implicit question lurking in the background of last Friday’s essay Netflix’s Best Advertising Bet Won’t Require Software was, if Netflix indeed adopts an ad supported model, and Hastings isn’t the guy to take the call about make-goods, then who is?
I think the objective evidence of operational dysfunction and failure in Netflix’s pursuit of Disney’s all point to two difficult questions now facing Reed Hastings:
Is the feedback culture still the right foundation for a more mature Netflix?
And, more importantly, does Hastings believe he (and the rest of existing management) pass their own keeper test?
I think the answers to both are, no.
So, are there objective reasons he should leave according to his own cultural standards? Yes.
But, this is a crisis. Engineers are threatening to leave. In The Information’s Jessica Toonkel report on the “months of debate” before Netflix’s “about face on advertising, she suggested that Hastings’ comment on the Q1 2022 - which was about changing his mind and now being in favor of an ad-supported model - “appeared to be an unscripted move”.
Toonkel suggested the answer was improvised because “Netflix stock was nose-diving in after-hours trading, falling 25%.”
I think she may be right. I wonder if Hastings’ answer was his way of saying to investors, “This is my mess and I’ll fix it”. But, the question remains as what those fixes may look like.
Netflix seems to have mutated away Hastings’ extraordinarily successful rocket ship towards becoming a next-gen Disney, and instead into a Frankenstein over which he may have lost control. He may ultimately fix it all because it is his creation. But, if the solution must involve the ad-supported model he promised investors, he may not be the leader to fix it.
A quick note
A reader noticed that I had kept “Comcast’s & ViacomCBS’s Struggles in Streaming” as a theme under Must-Read Monday AM Articles. ViacomCBS is no longer the company’s name, neither company seems to be openly struggling as much in streaming and more importantly, the theme has had an “N/A” instead of articles under it for about a month.
It may look like laziness, but it was inaction: if I changed one theme, what else do I change? There were no good answers.
The “Vibe Shift” has forced the reconsideration of many things, and I think both this theme and the broader themes in general require a rethink. Below is my first stab at new key themes in the marketplace. If there any you would like for me to focus on curating articles, I would be happy to add them.
Must-Read Monday AM Articles
* The FT dove into what lies ahead for the streaming marketplace in Are you still watching? Netflix and the future of streaming
* The Wall Street Journal argued that Biden’s FTC should take note from the Netflix earnings: Streaming is a highly competitive business
* Ben Bowman of The Streamable asked and answered Would Netflix Ever Consider a Free Ad-Supported Version?.
* Netflix announced they’re set to launch a series and game combo across a single IP called Exploding Kittens
The Vibe Shift
* CNBC’s Alex Sherman highlighted an interesting marketplace dynamic: “Legacy media has disrupted Netflix. The consequence may be mutually assured destruction”
Emerging "Metaverse"-type convergence strategies
* N/A
Aggregator 2.0
* N/A
Sports & Streaming
* If Apple has already secured the rights to the NFL Sunday Ticket rights beginning in the fall of 2023, Daring Fireball’s John Gruber argues they’d prefer to keep the deal under wraps until a time of their own choosing to announce them.
* John Kosner and Ed Desser argued in Sports Business Journal how small and midsized sports may compete in an era of diminishing pay TV revenue .
* Influential analysts say Netflix needs to figure out a sports strategy if it wants to rebound from its recent spate of bad financials
* Jomboy media is the fastest growing media startup in sports
Creator Economy, Platforms & Transparency
* Spotify cancelled the Greenroom Creator Fund - which it started in 2021 - after not paying out to any creators.
* The Obamas’ deal with Spotify expired and Bloomberg’s Lucas Shaw summed up what the deal’s end reflects about the current podcast marketplace.
Original Content & “Genre Wars”
* Former Seeso Head Evan Shapiro was interviewed about the demise of CNN+ and said it reflects how the corporate-media landscape “evolves way too slowly” and ““ it always has.”
* DreamWorks’ new animated film The Bad Guys embraces a more stylized look that moves away from the hyper-realism of recent animated movies
* Amazon Kids+ has teamed up with LA-based pocket.watch to launch its first original mobile game, Super Spy Ryan.
* Vanity Fair’s Joy Press reports how streamers are pulling back on edgy content and acting more like the networks they trounced in the revolution
* Disney’s focus on genre fans and programming makes Disney+ 30% more valuable than average streaming services, according to Fandom’s “State of Streaming” report.
AVOD & Connected TV Marketplace
* Sony is working on a plan to put ads inside PlayStation games, similar to a move by Microsoft to run ads in Xbox.
* The BBC Three experiment to relaunch as a live television channel has so far failed to attract more than 100,000 viewers on live television
* Digital ad revenue in the U.S. jumped 35% to $189 billion last year as marketers chased consumers spending ever more time on online media and shopping, according to a new report from the Interactive Advertising Bureau and PricewaterhouseCoopers LLP
* Marketers expect a rocky transition as the new ad sales team takes shape at Warner Bros. Discovery
* VideoAmp has acquired Elsy, a company that helps advertisers optimize the money they are spending to place commercials on various media platforms
Other
* Why Netflix and other streamers are cracking down on password sharing
* The Information’s Wayne Ma reported Apple TV+ employees can’t analyze “how customers move from one piece of content to another, making it next to impossible to recommend more videos to them based on their preferences
* Former WarnerMedia CEO tweeted out thoughts on why businesses trying to recoup on original programming through ads, only, face an uphill battle
* A new study released by TiVo indicates that 26% of U.S. and Canadian consumers who have a pay-TV subscription at one point attempted to cut the cord. In the United States, that number is 28% (in Canada it’s 19%).
* Mike Dano of LightReading asks, Is Verizon's big 5G gamble falling apart?