03 Jun Is Netflix’s next move advertising?
Netflix global numbers are phenomenal and scary in equal measure: Netflix has acquired a whopping 150 million subscribers, but has amassed $42BN in debt and longer-term payments relating to content (broadcast rights). Their annual programming budget for Netflix Originals alone is reported to be US$15BN. So the $billion-question is how to fund this rising debt?
Last week they announced they will be increasing monthly subscription costs in the UK by 20%, following in the footsteps of the US, as well as a number of markets in Latin America and the Caribbean, with increases across western Europe also expected. The increase is the first for 2 years and was defended as directly funding the content but surely investors are starting to get twitchy about the rising debt.
The monopoly is over
Many analysts are citing the new threat of competition as the main driver to increase pricing. In the face of new streaming service Disney+ launching later this year, Netflix will get kicked by losing all Disney, 20th Century, Pixar, Marvel and Lucasfilm content and punched by their subscription fees, which will be half Netflix’s at launch. Streaming veteran Hulu is also growing in the maturing US market, acquiring twice as many subscribers as Netflix in the first quarter this year.
Alternate revenue
Price increases every couple of years will only get them so far, especially if it risks losing subscribers once the cheaper alternatives are up and firing. Netflix is going to have to explore monetising it’s audiences attention in some form. Founder Reed Hastings has always been against advertising but he might face investor pressure to reconsider if the debt mountain keeps rising.
Baby steps taken
Last year they tested running trailers for their own shows between episodes. A move that caused outrage amongst the vocal few. But let’s be clear, this was self-promotion, not advertising. Netflix described the change as: “testing whether surfacing recommendations between episodes helps members discover stories they will enjoy faster.” Advertising is another proposition, but if it is sensitive to the audience and well integrated within the platform, it could be embraced amongst savvy subscribers who understand the economics.
The ad model works
The introduction of advertising to streaming services has been shown to work. US streaming service Hulu states three-quarters of its 28 million customers on a $5.99-a-month plan that includes exposure to advertising. Importantly, they actually make more money per subscriber from their subscription-plus-ads combination than they do from their $11.99 ad-free option. Netflix could follow suit and offer subscribers different pricing tiers with different levels of advertising exposure.
The landscape Netflix disrupted so spectacularly is now catching up with them and they will have to disrupt again to remain ahead. That may require them to take the advertiser’s dollar in some form, and with the targeted audience opportunities their content breadth offers, it would surely be a dollar advertisers would fall over themselves to give them.