There’s a whole lot to unpack with Netflix this week and so instead of writing a novella, we’re going to make the OG streamer the sole focus of today’s Week In Review.
Let’s start off with their subscriber numbers, which were up, mostly thanks to Asia, but across the board as well.
This is good news in that it helps them with Wall Street right now (the stock is up a whopping 35%, showcasing Wall Street’s irrational fixation on subscriber numbers) and shows that there is still some give in the streaming market, especially internationally.
It’s notable though mostly because Netflix announced they were going to stop focusing on subscriber numbers and start focusing on revenue growth, something that they (correctly) note is far more indicative of how well the company is doing.
But wait! There’s more!
Netflix also announced that they were doubling down on their all-at-once release system, the trend towards weekly releases be damned. While this is great for fans of binging, it does put far more pressure on their marketing department, which now has a movie-like window to create buzz for a series and to find ways for it to catch on.
Finally, they also noted that they would be nudging viewers to set up separate accounts for family members who are not living in the same household and that they’d even allow those new paying customers to port their viewing histories, preferences and favorites over to their new accounts. Just in case, you know, that, rather than actually paying cash money to watch Netflix was what was holding them back.
Oh, and their new ad-supported tier launches next month for just $6.99 (versus $15.49 for the current Standard plan) and while it is already commanding stratospheric CPMs, it does not yet have any subscribers.
So a whole lot to unpack.
Why it matters
Despite Netflix COO and Chief Product Officer Greg Peters claiming that he does not see many users switching from the ad-free to ad-supported tier, those subscribers have to come from somewhere, and given that around two-thirds of all U.S. households currently subscribe to Netflix’ ad-free product, the ad-supported base will be way too small if a sizeable number of those subscribers do not switch.
Which brings up the thing that nobody wants to talk about.
Right now, the rumor mill has it that Netflix is asking for (and getting) CPMs as high as $65. But right now, Netflix has zero ad-supported subscribers.
That is, of course, because the product has not yet launched, but it’s foolish to expect them to suddenly sign up 20 million+ net new subscribers in the first month.
So who exactly is going to be seeing those ads?
That is the actual problem Netflix is going to be facing. They are going to need to sign up tens of millions of subscribers for their ad-supported product and, Peters’ wishful thinking to the contrary, many of them are going to have to come from the current subscriber base.
Hulu, for example, has a split of around 60% ad-supported and 40% ad-free. That allows them to reach a sizable enough audience with their ads to keep brands interested and to justify a large spend.
Netflix may need to get to something close to that split in order to justify those $65 CPMs, and even people I’ve spoken to who feel 60% is unrealistic seem to net out at 20 million or so ad-supported subs in the U.S. for the service to be viable.
There does seem to be a plan B in the works, one that might help Netflix to reach that 20 million mark.
It is a widely acknowledged fact that many, if not most Netflix accounts are shared among multiple family members who do not live together.
Not so much because people are trying to rip them off (there’s that too) but because of what I’ll call the “Cell Phone Paradox.”
The Cell Phone Paradox
Netflix has been around for a decade and then some. Meaning that in many families, the kids got access to the account when they were 15 and still living at home and even though they’re now 26 and self-supporting, there’s never been a reason to throw them off the account.
This is where the Cell Phone Paradox comes into play, because these same 20somethings often have their cell phone service tied into their parents’ “Family Plan'' and even if they’re paying for their share of it, it’s still considerably cheaper than if they had service on their own. What’s more, none of the mobile carriers seem particularly bothered by this arrangement, seeing it, no doubt, as an easy way to keep recent graduates in the fold.
But that of course creates the expectation that adult children can stay on all of their parents’ subscription plans indefinitely, from cell phones to the New York Times to streaming.
Netflix’s Plan B for their ad-supported service is to try and adjust this mindset. Rather than forcing parents to kick their adult children off their accounts, which would seem Simon Legree-level harsh, they are going to pressure them to start paying a little extra for those accounts, a couple of dollars for each non-resident subscriber whose new account will still be tied to the OG family account. (Netflix has already offered to let them port all their preferences and favorites to the new accounts.)
There will likely be two options for these additional users, one for ad-free and one for ad-supported, and if many choose ad-supported, that could quickly give Netflix as many as 10 million new U.S. ad-supported subscribers.
And then there is Plan C: Live sports.
While Netflix does not currently offer any live sports, they are gearing up for it and just as advertisers see the prestige in being available on Netflix, so do professional sports leagues, and as John Cassillo points out on TVREV this week, the NBA’s rights deals are up this year and Netflix is definitely not out of the picture.
Sports rights would be huge because there is always advertising on live sports, even on Amazon and Apple, and because live sports would allow Peter Naylor and team to sell against the entire Netflix user base with the added bonus that all those viewers will be watching the game at the same time, allowing for massive reach on each ad.
So there’s all that and then there’s the doubling down on all-at-once delivery.
This is a tricky call because it’s what Netflix is known for, but it’s also increasingly difficult to pull off in a very competitive environment.
To review, Netflix had a period where the release of a new season of “Narcos” or “Orange Is The New Black” was a media event of sorts, and there would be all manner of coverage and all manner of buzz, right down to numerous high-profile recap blogs for when you were two episodes ahead of all your friends.
Or, to put it in more real world terms, “What episode are you on?” was a legit party question and you didn’t need to specify “of Stranger Things.”
Those days have long passed though, and now Netflix is competing with the likes of HBO Max and Apple TV+ and others who offer weekly releases of very similar types of programming.
Add to that Netfiix’s massive output and it’s easy for shows to get lost.
Even easier when Netflix seems to be content to wait for shows to gain buzz organically before promoting them. Which may be why the CMO position is so frequently in flux.
The advent of an ad-supported model should give rise to a more aggressive marketing program—advertisers want to know people are spending time with the actual shows they’re buying ads against and watching them, not just paying their monthly subscription fee.
Pointing out how much effort you are putting into driving both viewership and awareness for those shows is going to be very helpful to your ad sales teams.
So there’s that too.
What you need to do about it
If you’re Netflix… good job with the way you seem to be handling the password sharing thing. Letting users stay on the family account is very smart and will likely encourage many of them to cough up the extra few dollars. (The fact that they won’t need to change their existing log-in and password and that they can take their preferences and viewing history with them are going to be key.)
Now you just need to see how many of them you can push over to the ad-supported version.
One thing to watch out for though: most people subscribe to your mid-tier ($15.49/month) plan precisely because it allows for multiple users to watch at once. If all those multiple users are going to need their own accounts, then the main account holder may decide to pull back to the more basic ($9.99/month) plan. So make sure it’s not attractive for them to do so, which could be as simple as not allowing the additional family accounts on the basic plan.
Your call.
You also need to figure out how you’re going to market all those all-at-once shows. There is indeed a perception in the production community that you do not support the shows you buy and that getting a show or (particularly) a movie on Netflix is like sending it into a black hole. You’ve got a lot of competition now and a lot of your competitors are making shows geared to a similar audience and promoting the hell out of them.
Two of them (Amazon and Apple) can treat TV like a hobby business and they have multiple avenues to promote their programming, avenues that re unavailable to you. (Example: When I asked Alexa for the weather last month, she asked if I wanted to know her favorite Lord of the Rings character. And all my Amazon packages that month had LOTR-themed packing tape holding them together. That is huge in terms of awareness and all it costs Bezos is the price of the tape.)
So remember that is what you are up against.
It’s not 2017 anymore.
Finally, you need those NBA rights. Really, really need them. Meaning you should beg, borrow and steal whatever it is going to take to secure them. Because that, more than anything, is going to cement your ad program and will give you the chops needed to take on live sports the world over.
That, and I can’t think of any streaming service whose brand image lines up more closely with the NBA than yours. It will be a win for both sides.
One final piece of advice: linear channels.
You’ve got a lot of library content and shows no one has seen so far. Create themed, curated linear channels out of all that content and you will see engagement skyrocket, meaning more time spent on platform. Which is going to be critical for your ad revenue, because you only get paid when someone is watching.
If you’re Wall Street, stop focusing on subscriber numbers. Revenue is key, so is time spent on platform (how long are people watching shows for.) Beyond that, the key stat to watch is how quickly Netflix builds up its ad-supported subscriber base and where those subscribers come from. Those numbers will be the real measure of their success.
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Alan Wolk is co-founder and lead analyst at the consulting firm TV[R]EV. He is the author of the best-selling industry primer, Over The Top: How The Internet Is (Slowly But Surely) Changing The Television Industry. Wolk frequently speaks about changes in the television industry, both at conferences and to anyone who’ll listen.
Wolk's Week in Review is an opinion column. It does not necessarily represent the opinions of Fierce Video.