Main Street and Madison Ave Should Applaud Netflix on Their Decision to Open Up to Advertising, Even as Wall Street Looks Down On It

Agility is one of the skills most often cited as a prerequisite for succeeding in today’s business landscape. We usually associate that skill with people. But the true measure of business success is when a company can demonstrate agility. Agility can also be a euphemism for “needed business turn-around” when it comes to business not meeting Wall Street expectations. I for one want to applaud Netflix for its recent announcement to open up their inventory to advertising. I do not consider this a pockmark on their success or a negative commentary on their business acumen. It is true that Netflix stock is down to $211.52 as of noon on 4.21.22; down from their 52-week high of $700.99. That’s a 70% drop. Many may look at this as a business in decline. I, however, choose to see a business willing to pivot and recognize their competitive landscape. A business willing to risk failing (in the eyes of Wall Street, not Main Street) to leap ahead.

It is the sign of leadership when you can pivot when you are on top. Netflix has a history of successful pivots. They began as a DVD mail rental business in 1998 – a distant player to industry leader Blockbuster. By 1999, they introduced a subscription model, a revolution in the industry. In 2007, they offered streaming beyond mailing DVDs, well ahead of consumer’s adoption. At the time they understood where the business was going. By 2011, they went all-in on streaming.  And in 2013 they began creating original content, using algorithms and data to understand and then predict consumer taste and agreed to go from concept to two-year production deals based on their confidence in the data. A monumental mindset shift versus traditional programmers. I would agree that the use of data to understand consumer sentiment towards unknown content desires is revolutionary in an industry that still green lights and produces content like they did in the 1950s. Proof of their success can be found each week when Nielsen publishes a list of the top 10 originals, acquired titles, and movies across all streaming platforms by minutes viewed. Out of the 30 possible slots across the three categories, more than 2/3rd routinely go to Netflix. {Source: MoffetNathanson’s Quarterly US SVOD Tracker (1Q 2022)}. In addition, out of the 16 Emmy nominations in this past year for Best Drama and Best Comedy, the most nominations – five – went to Netflix. Netflix has been well ahead of the curve since their inception. And I look at this latest announcement as another demonstration of their agility and willingness to take calculated risks.

Netflix is a clear leader in the streaming wars today. See data from MoffetNathanson’s Quarterly US SVOD Tracker (1Q 2022).

But Netflix recognizes the trends and their headwinds. Traditional media players are launching new streaming services. And the traditional players are offering both higher priced services with no commercials and lower tiered offerings that have some commercialization. With the proliferation of streaming services, consumers have finite resources to spend on entertainment. So this recognition by Netflix that some consumers may want to pay less in exchange for viewing ads is a wise business decision.  It recognizes the long tradition of exchanging a consumer’s attention for reduced cost media. The chart below, again by MoffetNathanson, shows the new entrants into the streaming wars.

And one final data point that I think demonstrates Netflix’s commitment to its audience and its business is its commitment to original content. You can see that Netflix produced 774 original episodes in 1Q22 versus 177 from their closest competitor Disney +. That’s a 337% increase over Disney +.

But Netflix recognizes that competitors are on their heels in the race for consumer attention.  And since 2020, with the consolidation of media companies, Netflix no longer ranks #1 in content spending, Disney now owns that honor. This shift was an eye opener to Netflix and I assume began their consideration of new approaches to the marketplace. Source here.

So while Wall Street may be souring on Netflix, I recognize their courage to pivot. And in addition to this being a good thing for Netflix and consumers, I think it is a good thing for the advertising industry in general. When you have the largest platform in the newest asset class not participating in the advertising competition, the industry does not win. With Netflix’s inventory soon to be included in the supply pool of audience impressions, many positive things will happen. Supply will increase in a supply constrained and fragmented marketplace. Brands will likely be able to extend their unduplicated reach. Costs may even come down a bit.

I have one giant watchout. Netflix must participate in the industry measurement ecosystem and not create a new walled garden. They are a leader. And as a leader, they should not fear having their performance measured alongside their peers. So today I sit and cheer Netflix’s decision. I hope when they finally enter the advertising arena they do so as a full fledged member of the marketplace and compete for audience, advertising dollars and brand partnerships as an equal platform that makes their performance an open book.

 

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