I have a new opinion piece up on The Information, "A Vibe Shift Is Brewing In Streaming". The question I answer is, after a disorienting six months in the streaming marketplace, what will replace the “streaming wars” paradigm?
There has been lots of discussion about Netflix's future after CFO Spencer Neumann's appearance at the Morgan Stanley Technology, Media & Telecom Conference.. Kevin Mayer, Co-CEO and Founder of Candle Media, added fuel to the fire with this tweet:
I think Mayer could not be more wrong here.
I know why he is saying this: Hulu’s economics (where average ad revenue per user > subscription price of $6.99) are Disney+ and HBO Max’s shared objective in going into ad-supported streaming. At 70MM subscribers in the U.S. Netflix has ~60% greater scale than Hulu.
So, if Netflix launched an ads business, it would have instant demand from advertisers. In turn that would go a long way to answering questions from investors about Netflix's future growth model.
Perhaps.
But, I think it's worth revisiting Neumann's quote about ad-supported streaming from the Morgan Stanley Conference:
“For us, it’s not like we have religion against advertising, to be clear. What we’re focused on is optimizing for long-term revenue and big profit pools, and we want to do it in a way that is a great experience for our members. So, we lean into consumer experience, consumer choice and what’s great for our creators and storytellers. So, if at some point we determine something we have the right play or win in the space and it meets those dimensions, then great, but that's not something that's in our plans right now."
I think Neumann is essentially telling investors here that advertising is not something that Netflix envisions being a good experience for members, and therefore not driving long-term revenues or profit. I don't think he's wrong.
On this point I think it's also important to highlight a second point he added:
“Again, never say never, but it’s not in our plans. Other folks are learning from it so it’s hard for us ignore that others are doing it. But for now, it doesn’t make sense for us.”
I took this to have two meanings:
This second point is a big one because Neumann could also be saying, "if our competition wants to take on the risks of an ad-supported model, which we have found is not worth the risks, it will only be upside for us". And I do think he is implying that.
What are those risks?
I think there has been collective amnesia around the Hulu growth story. When its acquisition by Disney (via Fox) was finalized, its growth was largely stalled at around 20MM to 25MM subscribers. Its ARPU has largely hovered between $12 and $13 since 2019. But, it has grown to ~45MM subscribers since the Disney acquisition in large part because of Disney+ bundle of Hulu, ESPN+ and Disney+.
In the same period of time, Netflix has reached ~70MM U.S. subscribers without ads and without a bundle.
Meaning, all available evidence, to date, suggests the Total Addressable Market (TAM) for ad-supported streaming in the U.S. may always be smaller than the TAM for Netflix. There are other factors like library size and original content - both of which Hulu has always lagged behind Netflix.
There are three other factors worth considering.
First, the ad business is still very much a relationship business.
Not only does Netflix currently not have these relationships with advertiser in place, but those relationships are about problem-solving for when ads aren't delivered in the right context or against brand-safe content. That is a problem YouTube has navigated for the past decade (and is still navigating in the creator economy). Netflix would need to start from where YouTube was eight years ago.
Second, the connected TV ad business is very much a black box business. Journalist and consultant Mike Shields wrote about an emerging "credibility problem" in the Connected TV (CTV) marketplace:
I’m not saying that some of the numbers being thrown around in CTV smell fishy, but they don’t smell great, particularly if you go out in the world and talk to people.
Netflix *is* a black box that reports its own metrics. Incorporating advertising means:
Adding advertising to Netflix adds complexity to a business that is already unusually complex for a media business.
These two points suggest a third factor, which I think Mobile Dev Memo's Eric Seufert did an unusually good job of fleshing out in Netflix already operates an ad network. Next stop: Content Fortress:
I’d argue that Netflix possesses all (or most) of the machinery required to launch an advertising business. Netflix’s personalization engine is already generating tremendous value for the company and it could be cross-utilized for serving third-party advertising to the same effect. But I don’t think Netflix should use its personalization engine for serving third-party advertising (and, frankly, I don’t think it will). Rather, I believe that Netflix could create a powerful Content Fortress using this technology that would unlock far greater commercial value than an advertising business could.
He fleshes this argument out a little later in the essay:
Instead of selling its personalization machinery and placements to advertisers, Netflix should offer them to content creators as a means of distribution through a publishing business. In other words, Netflix should become a Content Fortress. Netflix could use its smartphone app to distribute games and other types of content, powered by its personalization engine. And these third-party developed apps, while still published under the Netflix label, should be freemium and not gated by the Netflix paywall. As these products grow, so does Netflix’s data set of non-video streaming engagement data, allowing it to drive cross-promotion between published apps in a sort of first-party audience network. And these apps could also cross-promote users back to Netflix, potentially allowing the company to attenuate its subscriber growth slowdown.
I think this argument highlights what Kevin Mayer gets wrong: of course Hulu seems like the obvious business model for Netflix, Disney+ and HBO Max.
But, Netflix brings an entirely different set of technological, cultural and operational moving pieces to streaming than Disney or WarnerMedia (or soon-to-emerge Warner Bros. Discovery). It is a software business, first, that is able to integrate gaming software into its streaming platform. In contrast, Disney licenses its gaming IP to third parties and WarnerMedia's Jason Kilar can push for a more aggressive gaming strategy behind-the-scenes (as I highlighted in WarnerMedia & Netflix's Narrow but Fascinating Challenges in AVOD & Gaming).
In other words, Eric Seufert's implicit point is Netflix may indeed need more than streaming to drive growth in its business model. But, understanding what they will end up doing relies less on looking to media's past, and rather forcing ourselves to imagine which business models Netflix executives believe its software makes possible.
Gaming is one of them.
Whether Netflix becomes a content fortress or not, or a gaming business, or something else, the past won't be precedent here.