Last quarter, I wrote about how Netflix needed to do some soul-searching in their quest to grow subscribers. At the time I speculated that a turnaround may comprise of a few moving pieces, and here’s where my predictions landed:
✅ Ad-supported plan it’s here! Or will be, in 2023. Perhaps with Clippy.
✅ Continue password-sharing crackdown LATAM only for now, but still.
✅ Deepen 1P content Stranger Things Season 4’s wild success makes a case for doubling down on owned franchises across content, merch, experiences and more.
❌ Content-based M&A I still think Netflix should buy WWE and Crunchyroll. They are acquiring Animal Logic though, so perhaps more fun animation!
✅ New verticals Livestream begins, Gaming goes on
✅ Greater awareness of competition everything else points to this; healthy choice.
5/6 - I’ll take it!
Netflix’s latest results tell the story of an embattled incumbent racing to maintain relevance in the face of extremely stiff competition. Here’s the key things I’ve taken away from this Q:
They recorded a net loss of nearly 1 million subs, 1.28m lost in their stronghold (and most lucrative market) North America, home to 1 in 3 subscribers
They’re launching a cheaper ad-supported tier in 2023, bringing on Microsoft as their and tech and sales partner (more on this later)
They’re working to end password-sharing and
They’re deepening investment in new content formats (live-streaming, gaming).
Puzzlingly, average revenue per member (ARM) went up after accounting for FX. The claim is this comes from an increase in average paid memberships, but warrants a deeper dive than I currently have patience for.
Let’s talk about that partnership.
Disclosure: I work for Google, who were purportedly in the running to partner with NFLX. The views I express are my own, not the company’s, and I have no knowledge of any discussions - if any - between the two companies.
If your experience with Microsoft is mainly Windows and XBox, there’s a few things to think about that help make sense of this partnership:
They already run a $10B PPC ads business across Bing, Yahoo! And DuckDuckGo properties, as well as a nearly-$4B ads business via LinkedIn. They have a basic but functional ad-tech platform, demographic targeting capabilities and importantly, a competent and tenured sales machine.
Their recent activities suggest a shift towards a privacy-centric, publisher-consumer-friendly model. Chief among these would be the acquisition of Xandr, who are proponents of advertising in a “post-cookie world”.
Perhaps the biggest pull in Microsoft’s favour is that they do not currently operate a product in direct competition with NFLX themselves.
I am relatively bullish about Microsoft’s sales capabilities, and on the surface I think they’ve got a decent tech stack in the form of everyone/thing they’ve acquired. Where I think they come up short is in tech: their targeting doesn’t really afford the granularity that big brands have gotten used to with their competitors.
There’s also a question of “who advertises on Netflix?”.
The simplest answer is “anyone who advertises on YouTube or on TV”. Indeed, Netflix themselves allude to this with their constant mentions of “better-than-linear-TV” ad experiences. However the majority of TV / video based advertisers are seeking eyeballs and awareness, and may turn to other platforms to actually drive intent and purchasing. These are the types of customers who will throw big budgets at a one-off campaign (think Super Bowl), but won’t necessarily spend sustainably with Netflix given the platform limitations. There’s also a question of whether Microsoft’s existing PPC strategy will be of any value - I say “not at all”, and per Netflix’s own investor letter:
“We’re excited by the opportunity given the combination of our very engaged audience and high quality content, which we think will attract premium CPMs from brand advertisers.”
On the plus side, Netflix’s forays into interactive content might afford a means to drive conversions for performance-minded brands, and might eventually lead to a proper CPA/ROAS-based strategy. Importantly, if they can pull of strong content tie-ins without being corny, they might have something truly magical. Imagine watching Season 5 of Stranger Things and having an interactive ad experience with a re-released line of 80s Transformers toys; I’d be up for that.
Netflix’s move into new content formats is also exciting: they’re doubling down on gaming and experimenting with livestreaming, both exciting and objectively good moves. New content formats mean new ad formats/platforms, which is good.
What’s next?
It seems Netflix themselves are optimistic; guidance for next Q is strong, including a surprising net subscriber growth call.
It’s important to remember that within this doom-and-gloom, Netflix is still the biggest player in TV - at least in the US. This means their ‘surface area of luck’ is massive, so perhaps combined with their strategic changes, there’s hope.
I’ve always held that for their business, content is king. Looks like they’ve finally got the message and are doubling down on owned content - hopefully they’re also thinking of fewer cancellations. More landings, less launches I say.
Call me somewhat skeptical / biased but the iffiest bit for me is the ads business. I’m not certain there is a compelling argument here beyond brand awareness, but hey, brand awareness is a pretty big serving of bread-and-butter. We’ll have to see how 1) Microsoft delivers on CPM and 2) can they go beyond awareness to conversions. I’m certain they’ll be a big player dollar-wise, just perhaps not a particularly interesting one.
Media I’m consuming this week.
3 recommendations to help you learn and grow.
Approved Cameras - Behind The Scenes by Netflix!
Netflix have committed to keeping their business model simple, but this video makes me imagine a world where they open up to high-quality UGC/long-tail, niche content.
Sales Enablement: The Underrated Cog of Enterprise Commercial Engines by Vassilis Tziokas
Once in a while it’s nice to feel wanted / valuable.
Run Away Jay by Kaonashi
I am most definitely going through an HC phase again. These guys killed it. The delivery seemed like it would get boring fast, but the lyrics really hurt (in the way they’re supposed to).