Recently, Netflix had its first drop in US users in nearly a decade. The streaming giant’s subscriber base fell by 130,000 in the US– the first drop since 2011 according to the Wall Street Journal. Netflix has always been an expert at playing the long game (remember when they used to ship you DVDs?), but as streaming competitors pop up like Hydra heads, what does the future of entertainment monetization look like?
Major media and entertainment companies are currently arming themselves for the great streaming wars. In less than two years’ time, Disney+ will debut with exclusive Disney content for $7 a month– a full $8 less than Netflix. Not to mention AT&T’s HBO Max, Hulu (both ad-lite and premium), Amazon Prime, CBS All Access, Apple TV Plus, and NBC’s Peacock streaming service. Netflix has never faced streaming competition like this before, and it recently lost two of its major assets.
HBO Max stole back Friends (valued at over $100M) and NBC reclaimed the streaming mega-hit The Office.
But Netflix has so much original content, right?
Sure… and a recent Nielsen study found that Netflix relies heavily on broadcast network re-runs to engage subscribers. Its five most popular shows — “The Office,” “Friends,” “Grey’s Anatomy,” “NCIS” and “Criminal Minds” — all come from NBC, ABC or CBS.
Netflix has made its stance on advertising very clear: it’s not going to happen. The company said in a letter to investors that, “when you read speculation that we are moving into selling advertising, be confident that this is false.”
And they have good reason to stay true to their premium subscription-based roots. A new Hubspot study found 23% of respondents would likely drop their Netflix subscriptions if the service added advertising. With a business model fully predicated on subscribers, they can’t afford to lose that many subscribers.
The latest on the what if front: analysts at Nomura’s Instinet have calculated that Netflix could generate more than $1B in ad revenue per year if it launched a plan with advertising, with $700M of that dropping to the bottom line.
Simply put, Netflix needs debt relief. After all, they spent $12B developing original shows in 2018 (88% more original programming in 2018 than 2017 according to Forbes). Plus, $15 a month is about to look mighty expensive next to Disney and NBC’s $7 a month.
Of course, all hope is not lost for Netflix. Without the Friends and Office mortgages to pay off, Netflix has a lot more cash to burn. And though they may be ad-averse in the traditional ad sense, Netflix does flaunt blatant marketing partnerships. Season 3 of Stranger Things, for example, features deals with Coke, Nike, Burger King, and Baskin-Robbins.
As streaming companies continue hemorrhaging cash to make original content, advertisers will put more pressure on services like Netflix or HBO to open up to ads. Audiences also will soon have more options than ever to choose from when it comes to streaming content. Will Netflix stay true to its subscriber roots or fold to the lure of advertising debt relief dollars? Whichever way it goes, I’m still using my college roommate’s account.