There was no mention of "competition" in Netflix’s Q3 2024 letter to shareholders last week. Typically, Netflix uses the quarterly opportunity to message both its competitive advantages and also how it sees the competitive landscape evolving.
Netflix did hint that competition in the advertising marketplace was very much on their minds. The letter touted success at the 2024 upfronts this past summer. It highlighted “deals with all major holding companies as well as independent agencies, with a 150% plus increase in upfront ad sales commitments over 2023."
Netflix assured investors in its letter that the results of its upfronts were “in-line with our expectations” and that the company is “on track to reach what we believe to be critical ad subscriber scale for advertisers in all of our ads countries in 2025”. It also offered a growth story: Its Basic with Ads tier drove over 50% of sign-ups in countries with the offering and sign-ups to the tier grew 35% from Q2.
However, as I wrote in July, Netflix’s upfront did not meet its objectives because Amazon had played the spoiler. Amazon surprised the market in June with the announcement that its entire Prime Video subscriber base would default to a new ad-supported version.
In an instant, Amazon became a new competitor, at scale, to Netflix’s advertising ambitions at the 2024 upfronts. Netflix reportedly was forced to drop its ad rates to 25% less than its prices from the previous summer.
Management avoided discussing that competition in its letter and the reason is obvious: Amazon, YouTube and other Silicon Valley competitors are in far better positions to disrupt Netflix’s business than legacy media companies ever were.
Key Takeaway
Netflix’s venture into advertising also seems to be opening the door to competitive challenges they have long avoided with their focus on disrupting the linear business.
Total words: 1,300
Total time reading: 5 minutes
Competition From Amazon
Amazon arguably could be *the* competitive dynamic for Netflix because it disrupted this year’s upfronts. Amazon is now aiming broader than video—as Mike Shields reported from its fourth annual unBoxed event last week—and is focused on a “‘full-funnel’ approach” of “marrying brand spending with its performance strategy.”
The objective seems to be “a much bigger ad prize (i.e. all of the ad budgets)” than simply competing for TV budgets.
Shields also reported that Amazon “took some thinly-veiled shots at rivals” like Google and The Trade Desk, but without naming them. Both rivals rely on cookies and are trying to reinvent the cookie. Amazon does not need either: “we can deliver highly relevant ads…Without relying on a single ad identifier.”
Notably, Google and The Trade Desk were the two partners Netflix highlighted in its letter to shareholders. Amazon’s pitch was that it will have more scale, better technology, better data and better artificial intelligence (AI) tools than Netflix or any of its partners can build.
Netflix’s assured investors that it is “on track to reach what we believe to be critical ad subscriber scale for advertisers in all of our ads countries in 2025” seems modest by comparison. It also conceded to investors that “we have much more work to do improving our offering for advertisers, which will be a priority over the next few years.”
YouTube As Frenemy
YouTube was also reported to have fallen short of its goals at its upfront because of Amazon. We will not hear their spin on Amazon’s impact until their earnings call on October 29, 2024.
Instead, the more relevant story is that YouTube is a “frenemy”—both a friend and rival—to Netflix. Netflix co-CEO Ted Sarandos recently told investors YouTube and Netflix “ clearly do compete” in “certain segments” of Netflix’s business, but they “also feed each other really well.” Netflix “teasers and trailers and behind-the-scenes clips are “incredibly popular” on YouTube, and the two companies simultaneously offer intellectual property (IP) like CoComelon and the Amazing Digital Circus (“TADC”).
However, the competitive dynamic is a bit dicier on the content side. I argued recently “YouTube Is Forcing Netflix to ‘Break’ Its Business Model” that “The more YouTube pressures Netflix into producing more content at a lower cost, the more Netflix will have ‘to break [the business]’ and undermine the studio side of its model.”
The competitive dynamic is friendlier on the advertising side. Netflix uses Google’s DV 360 platform to deliver ads, and advertisers can use the same platform to deliver campaigns on both YouTube and Netflix. So, advertisers can accomplish their objectives on both services through a single Google platform.
This Is Not Netflix’s Business Model
Both Amazon and YouTube rely on two forms of content that Netflix does not offer consumers:
Creator content (Amazon’s Twitch with 21 billion hours streamed in 2023), and
Free ad-supported content (Amazon’s FAST FreeVee, now "Amazon Prime Video Channels" on Fire TVs as of August)
With these, Amazon and YouTube are changing the rules of the game that Netflix is aiming to play with Hollywood content.
Amazon is leveraging both the breadth of its content offerings and retail commerce platform to disrupt the TV advertising marketplace. Offering ad buyers a “full funnel” means they can provide more than just video inventory and become a one-stop shop for agencies. That limits Netflix’s competitive advantages to offering its library of content, only.
Meanwhile, YouTube is leveraging its success on connected TVs to enable creators to build Creator Show Pages. These will offer a “really rich, immersive channel page experience which people have come to expect around episodic content” from subscription platforms like Netflix (and Amazon). YouTube also has beaten Netflix management to become the first streaming service to reach the benchmark of 10% of TV viewing time in each country (10.6% in the U.S. according to Nielsen’s The Gauge).
In trying to look more like Netflix, YouTube is implying Netflix’s moats are less defensible and vulnerable to platforms hosting creator content and with more sophisticated advertising platforms. That is partially because, as I argued last Thursday, Silicon Valley is reimagining the business of storytelling. But, Netflix’s venture into advertising also seems to be opening the door to competitive challenges they have long avoided with their focus on disrupting the linear business.
The Path to 500 million
Netflix has been promising investors since last September—when CFO Spencer Neumann spoke at the BofA Media, Communications & Entertainment Conference—that the service will “grow into” 500 million-plus smart TV households globally that are not currently members.
I argued in March that was a concession that Netflix will not be the first streaming service to reach one billion subscribers worldwide. It is incrementally on its way to 500 million subscribers: Investors had expected 4 million subscribers added and Netflix surprised them with 5.1 million. The question now is how they will do so with both Amazon and YouTube smelling blood in the water.
On its earnings call, management told investors that a “more normalized” production schedule—a consequence of the Hollywood strikes—would return Netflix’s supply of shows to “a very steady drumbeat of great new TV shows and films and games for our members to watch throughout the year.” With that improved supply will come continued growth.
This may not be enough to compete with YouTube, as I argued in August: “the more YouTube competes with Netflix on television screens worldwide, the more YouTube is proving that consumers' ‘choice and control’ over the medium of the internet means fans are the producers of the content they want to watch.”
In other words, the more YouTube looks and feels like Netflix both in product and in content quality, the more interchangeable the services will become on Netflix’s march to 500 million subscribers. The more both YouTube and Amazon capture advertisers’ spend on video, the more Netflix’s advertising offering will seem suboptimal for buyers.
I wrote last month that Netflix Co-CEO Ted Sarandos’s promise to “break [the business]” and cannibalize itself may be understating emerging competitive challenges. Amazon and YouTube are aggressively moving in directions that create existential dangers for Netflix.