Netflix is still out in front in the SVOD race, but increasing market pressure could push the company into relying less on word-of-mouth advertising, according to one analyst.
“Netflix has done a very good job driving subs via non-traditional forms of marketing—much better than traditional networks,” wrote Jefferies analyst John Janedis in a research note. “As both penetration and competition increase, NFLX may find a need to augment its current marketing with more traditional platforms.”
For 2017, Janedis predicts Netflix’s marketing expenses will remain elevated at around $1.26 billion, a 25% increase year-over-year. Among the reasons for the increase is the fact that Netflix intends to greatly expand its original content output, jumping up from around 600 hours this year to about 1000 hours in 2017.
“Marketing spend is closely tied to original programming, as the success of this content has been a key factor in building the NFLX brand,” Janedis wrote. “After spending $2.6M in marketing / hour in '15 and $1.7M / hour in '16 (JEFe), our '17 estimate reflects a marketing spend of $1.3M / hour.”
Another big driver for Netflix’s potential increased marketing spend is the need for localized content in new markets.
“NFLX has operated in 130 countries for less than a year—we believe it will need to sustain higher levels of int'l marketing spend to continue building brand awareness, particularly around localized original content,” Janedis wrote.
Netflix did just announce a new exclusive deal with Indian film studio Red Chillies, which comes as competition in India and other international markets is heating up. In particular, Amazon confirmed its Prime Video expansion outside of the U.S. to another 200 countries and territories.
“Given AMZN's spending power, we expect its global rollout could have an impact on the trajectory of NFLX's sub growth / key cost drivers (programming, marketing),” Janedis wrote.
Taking those factors into account, Jefferies predicted that if Netflix’s marketing percentage of streaming revenue is 50 basis points higher than expected (around 12.4 percent), Netflix could see a $53 million impact to earning and an 8 cent impact to EPS.