Income from ads is cyclical, building long term cache isn’t.
Every few months an analyst will make a statement of some kind about how much money Netflix could make if only it would give into reason and begin running ads on its streaming service. Late last year Needham analyst Laura Martin recommended the company introduce a lower-priced membership tier that included ads. That’s not a new idea, as earlier in the year another analyst estimated Netflix could bring in an additional $1 billion, something that would help offset the debt it’s building up in an effort to keep producing original material.
Media buyers are veritably chomping at the bit to throw their money at Netflix, eager to reach an audience that is highly engaged and on the forefront of the continued changes the media industry is going through. Still, CEO Reed Hastings is virtually alone in the streaming marketplace in steadfastly turning away such entreaties, unwilling to get into the game of aggregating and selling user data and unconvinced significant revenue can be pulled away from Google, Facebook and Amazon.
Instead he’s committed to keeping Netflix as the one major company people can use that’s free of constant consumer appeals and the subsequent problems regarding data privacy and so on.
That stand explains a number of recent developments and announcements.
Netflix the Awards Contender: If there was any question as to whether Netflix deserved to be mentioned in the same breath as the “major” studios, the fact that it wound up with more Oscar nominations this year than any of those other names should put it to rest once and for all. It clearly wants to make this a cornerstone element of the brand, constantly putting out well-regarded features from top filmmakers that will compete for recognition, which increases their lifespan on the service.
Netflix the Mass Market Pleaser: On the other end of the spectrum, Netflix is following up the six-movie deal it signed in 2015 with Adam Sandler with a new four-movie deal, confident the audience for lowbrow comedies featuring Sandler hanging out with his friends that are perfect for nodding off to is a big portion of its subscriber base. That’s not a huge leap to make given the company recently reported members have watched 2 billion hours of Sandler’s movies, a not-insignificant number.
Netflix the Exclusive Provider: Many were writing Netflix’s obituary when WarnerMedia announced it was launching its own streaming service, which came with the loss of “Friends” on the platform. Other services from other companies mean “The Office” and other popular library titles will no longer be available. But CCO Ted Sarandos isn’t concerned, convinced subscribers will simply dive into one of their original productions when looking for something to watch. While it almost certainly stings, at least publicly company execs are saying they’re not losing any sleep over these developments.
Netflix the Producer: As Eric Kohn points out, after spending a few years on massive purchasing binges, Netflix has been scaling down its acquisition activities at Sundance and other festivals recently. It will still sign big checks when the deal is right, but those are largely for documentaries that offer something novel, not the kind of project you can easily develop in-house. Like other streaming services, it sees those original productions as key marketplace differentiators, and often uses its on-site recommendations to draw particular attention to new releases.
Subscriber gains are going to vary from one quarter to the next, as has been the case over the course of Netflix’s existence as well as that of Hulu and other services. Such fluctuation is going to necessarily impact ad revenue, so many of those numbers being thrown around by analysts are idealistic at best, not to mention the significant costs of scaling up a team to handle those sales. And, more importantly, it makes the company’s continued viability dependent on those ad sales, which as the newspaper industry is finding out is a precarious position to be in.
Instead what Netflix is building is long term brand value. Those four attributes mentioned above will continue to pay dividends long after the next big trend in online advertising comes and goes, and that’s what Sarandos and Hastings are trying to build, despite the constant pressure from analysts and commentators.