YouTube's new Connected TV interface for creator content—which was revealed during last week’s “Made On YouTube” event—looks much like Netflix’s TV interface. Nielsen’s The Gauge has shown YouTube and Netflix to be long-time market leaders competing for attention in the living room, and Netflix has consistently mentioned YouTube as competition in its letters to shareholders and earnings calls.
At the same time, Netflix is pivoting its production economics lower. Both Bloomberg and Deadline reported that Netflix is asking “top talent” to consider reducing their fees “by between 20-30%, in exchange for giving them twice that amount on the back-end if the show or movie is successful”.
Its new economics will be nowhere near YouTube's, which does not directly subsidize creators’ productions. But, Netflix’s lower budgets are trending more lower and opposite to early free-spending years.
The two converging tactics reflect a competitive dynamic that Netflix Co-CEO Ted Sarandos described to the Fast Company Innovation Festival last week: “If you look at revenue, engagement and profit, our businesses are very, very similar, almost identical.” But, “[YouTube] is a very different business model” because it’s “all advertising” and “mostly user-generated”. Netflix is “barely advertising” and has “no-user-generated [content].”
YouTube creators Colin and Samir offered another way of describing this competitive dynamic on X/Twitter yesterday: “Creators are becoming Hollywood faster than Hollywood is becoming creators”.
Netflix’s model seems less “creator-friendly” in Hollywood’s “new business of living room content” than YouTube, which indirectly subsidizes creators. That reads counterintuitively, but it is the story that has emerged in recent weeks.
Key Takeaway
Netflix seems more tied to old Hollywood than to creators who are redefining Hollywood on YouTube. That means it may be evolving more slowly than it should be and investors may need it to.
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User Experience (UX)
YouTube’s interface is “becoming Hollywood faster” because it gives creators the tools to build Creator Show Pages. “A ton” of them are producing 20-to-40-minute videos with “kind of a season arc” and multiple episodes.
Meaning, every month at least 150 million homes in the U.S. will be served long-form creator content similar to how Netflix serves episodes of hit shows like “Stranger Things”. The user experience (UX) will mirror YouTube’s Primetime Channels UX, where apps like Max serve $200 million shows like “The House of The Dragon.
YouTube’s sales pitch at Made on YouTube was that his new UX offers a “really rich, immersive channel page experience which people have come to expect around episodic content”. In other words, the choices of long-form content on YouTube or Netflix will look identical enough in a connected TV UX.
The Economics of Production
This change helps to frame the significance of Netflix’s newly proposed economics for Hollywood creators. As I wrote last week, “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.”
Netflix’s proposed economics do not go so far as to put production budgets directly in the hands of consumers. Nor is it enabling Netflix users to fund creators directly via subscriptions, merchandise and tips (all enabled by YouTube’s Partner Program). In that sense, Netflix is moving slower than creators are moving towards Hollywood.
But, it does reflect what Sarandos said to the Royal Television Society’s (RTS) London Convention 2024 last week: Netflix must cannibalize its own business and “constantly challenge ourselves, to break [the business] and move our business forward on behalf of our consumers.”
I offered a more extreme version of this point last Thursday: “Netflix must shed more of its legacy media DNA as YouTube proves there are more efficient models than traditional theatrical and television production models that can entertain audiences, at scale, in their living rooms.”
Netflix’s proposed terms do not depart unusually from the Hollywood precedent of talent taking more on the back end. But, with the backdrop of YouTube’s recent UX changes, the implication is that they are laggards in evolving their business model.
For Netflix, reducing upfront production costs allows it to make more bets on content and "feed” its algorithms with content that people will watch instead of its competition. This is increasingly necessary when competing with (and losing to) YouTube, which has over 3 million creators in its Partner Program and onto which over 500 hours of content are uploaded every minute (as of June 2022).
Netflix management also has set the objective of surpassing TV viewing time in each country at 10%, but YouTube is the first streaming service to reach that benchmark in the U.S. Whereas, Netflix's share of viewing time dropped 0.3 percentage points year-over-year and 0.5 percentage points month-over-month in Nielsen's most recent The Gauge.
Something has to change at Netflix.
Can Netflix “Become Creators”?
Netflix's UX and creator economics must become “creator-friendly” in two ways that they are not now.
First, YouTube and other creators must want to work with Netflix more than YouTube. They do not: As I quoted Reed Duchscher—CEO of Night, the creator talent management agency—back in July, “Most top creators no longer view premium distribution [on platforms like Netflix and Amazon] as the ultimate goal”.
Second, Netflix’s (and Amazon’s) technology is not constructed for consumers to be “producers” of the content they want to watch. Unlike YouTube, The platforms are both studios and distributors.
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.
What Will Netflix Do?
Netflix appears to be getting squeezed into letting “fans [become] the producers of the content they want to watch”. YouTube has redefined “premium content” with the help of creators. In doing so, it has redefined consumers' investment in content and creators from something emotional into something financial.
The more YouTube UX becomes more like Netflix on TVs, the more the definition of “premium content” will get fudged. In turn, the less Netflix’s value proposition will matter.
Netflix is missing this dynamic primarily because of its production model. There is also the argument to be made that Netflix's innovative focus on “superfans” with games, some live events and experiences distracts management from this market dynamic.
The question that both McLuhan and Clayton Christensen would pose to Netflix management is whether they still need to rely on Hollywood’s production models as heavily as they do now. Netflix seems more tied to old Hollywood than to creators who are redefining Hollywood. It be evolving more slowly than it should be and investors may need it to.
In other words, Sarandos may be understating the extent to which Netflix now needs to cannibalize its own business.