Netflix ditches anti-ad principles to deal with tough times

While building Netflix into the world’s largest streaming service, one of Reed Hastings’ management mantras was for his staff to “tell the emperor when he has no clothes.”

With Netflix losing nearly two-thirds of its market value since November and analysts comparing its decline to the dot-com crash, Hastings finally heeded his own advice on Tuesday and admitted his corporate strategy could be seriously flawed.

Over the course of an hour Tuesday, the Netflix founder and CEO shed his most cherished principles and refocused a media group that turned Hollywood around to deal with tougher times of slow growth and restrained spending.

Share passwords? In 2016, Hastings joked, “We love when people share Netflix.” Now, he plans to crack down on the practice; Hastings estimated that 100 million people have been sharing accounts.

Competition? For years, he has dismissed the threat from Disney, Apple and HBO, insisting that Netflix’s biggest competitors were Fortnite, YouTube and “sleep.” On Tuesday, he admitted that Netflix needs to “take it up a notch” because its competitors have “some very good shows and movies.”

But perhaps the clearest turn was in advertising. Having always championed Netflix as an ad-free zone that allows viewers to “kick back” without being “exploited,” Hastings opened the doors to marketing money.

Casually abandoning the change in strategy during a call with analysts, Hastings announced that Netflix would be working on a cheaper, ad-supported version of its service “in the next year or two.”

A scene from the Netflix series Inventing Anna
Netflix has been lauded for its original TV shows and movies, such as the ‘Inventing Anna’ series, but this week the company said it would reduce spending on content © Nicole Rivelli/Netflix

And spend? Netflix single-handedly created a template for streaming where the stock market rewarded you for spending more money. The company blew through cash for years as investors applauded its rapid subscriber growth and a commitment to constantly produce new television shows and movies. For the first time, the company said Tuesday that it would reduce its spending on content.

“It was shocking,” summed up Michael Nathanson, an analyst at MoffettNathanson. “These guys sounded like any other management team that didn’t have the answers yet.”

The change in attitude is a humbling moment for a company that, while its subscriptions spiked at the height of the pandemic, was confident enough to start proactively canceling accounts of people who weren’t. wearing.

After a historic run on the stock market as one of the big tech companies ‘FAANG’ (Facebook, Apple, Amazon, Netflix and Google) that soared to a valuation of almost $310 billion in October, it has been reduced to $95 billion. shares in Netflix plunged more than 38 percent on Wednesday alone.

“We’ve seen a company go from growth darling to growth purgatory in an instant,” Nathanson said.

One of the most painful decisions for Hastings may have been publicity.

Its rivals had long predicted that Netflix would finally take an anti-advertising stance that Jason Kilar, the former chief executive of Warner Media, recently likened to a “religion.” But few imagined that it would come so soon.

“The way you get a billion [subscribers] it’s not continuing to charge a premium price without advertising,” Kilar said. “[Netflix] will absolutely come to that conclusion.”

Morgan Stanley expects that, in the long run, Netflix can make “billions” from advertising, estimating that the ads generate about $3 billion in revenue a year for rival service Hulu.

But analysts at the bank also questioned whether the option to offer cheaper subscriptions would boost the company’s revenue, given that it has already convinced 75 million households in the US and Canada to pay an average of US$15 a month. “As you migrate customers to a lower-priced ad-supported tier, can you generate more [revenue]? This is less clear.”

Mark Read, chief executive of advertising group WPP, said the change in strategy reflected the need to reach new customers and the clear “limits to growth of subscription-only models”.

“History has shown that successful media companies have both subscription and advertising,” he said. “Without a doubt the pressure on family budgets as well as the growing number of subscription offers has focused the minds of consumers”.

The challenge for Netflix is ​​to introduce the ad-supported membership tier without consuming its existing subscriber base or spending too much time and money building an advertising business that it once viewed as a distraction.

After years as the market leader in subscription video services, Netflix must adjust to a newcomer’s role in ad-supported streaming, learning from Disney, Discovery, Paramount and NBC. “There was never any fear that we were in trouble,” said a former Netflix executive. “The feeling was: We are leap years ahead.”

It now faces stiff competition from the world’s biggest media and technology companies, which have found success with blockbuster TV shows like Apple’s. ted lasso and HBO Succession.

Among some investors and analysts, there is a feeling that Netflix’s lavish spending should lead to better programming. “If you spend $18 billion on content, I’d like to think you can persuade people to join your streaming platform,” said one of Netflix’s top 10 shareholders.

But the fall in its share price is worrying for the entire entertainment industry, because the largest media groups in the US. allocated more than $100 billion for spending on content this year alone to try to emulate the Netflix model.

Now, Hollywood is wondering if Netflix executives seriously overestimated the size of the streaming market.

Netflix has 222 million paying subscribers, and Hastings has told investors that its “total addressable market” was any household in the world with Internet access, potentially a billion subscribers. There was plenty of room to grow and plenty of room for new competitors, he insisted.

But as its growth has stalled, analysts are delving into these optimistic assumptions. Given the issues of affordability and global access to digital payment systems, Nathanson estimates the “real” addressable market to be closer to 400 million.

Equally troubling, he questions whether Netflix has already reached full saturation in the US and Canada, where the company revealed on Tuesday that an additional 30 million people are sharing accounts on top of its existing 75 million subscribers. The number of pay-TV subscribers in the US during TV’s heyday in 2011 was about 100 million, indicating that Netflix may have exhausted its largest market.

This is bad news for other media groups because their ratings have been compared to Netflix. Shares of Warner Bros Discovery fell 5 percent on Wednesday, while Disney fell 4 percent and Paramount Global lost 10 percent.

Rich Greenfield, an analyst at Lightshed partners, pointed to the irony that streaming champions like Netflix and Disney were now embracing advertising, a key pillar of old media strategy, to revive their businesses.

“It’s scary if the only way to reinvigorate growth is to offer cheaper products that make the consumer experience worse, essentially making it more like the dying linear TV experience,” he said.

Additional reporting by Harriet Agnew

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