Netflix reported a drop in net subscribers for the first time in 10 years and missed its 2.5 million subscribers target; this resulted in stock dropping by 35%, market cap dropping from US$155 billion to about US$98 billion. According to Bloomberg, as of Wednesday, 20 April. Netflix was the worst-performing S&P 500 so far in 2022, with stock down 63% year to date.
William Ackman's hedge fund, Pershing Square, dumped his entire stake and booked a US$430 million loss. As a result of that, Netflix then announced that they would be creating a new tier with ads. But before we discuss the ad-supported tier, let's look at why this happened and the macro trends that led to this.
First macro trend, in any industry, excessive returns attract competition; Netflix enjoyed the monopoly for a long time. However, big players such as Apple, Amazon, and Disney entered the game and started taking the share. There was a time when Netflix said its competition was not Disney or HBO; it was sleep, YouTube, and Fortnite. But now, while streaming as a business model is still growing, Netflix's relative share is going down; you see HBO Max, Disney+, and prime video are expanding their content libraries.
The second macro trend we should look at is which content creator is trending; historically, no one has been consistently on the top for a decade. Except for Pixar, its strength is its studio technology; Netflix was a tech company that embarked on a studio journey - and it should start behaving like one. The identity of studios is the product that it has built, being the key differentiating factor.
What is the social moat that Netflix has created? No shareability and network effect, yes, it tried TikTok-like features with all the comedy clips, and it tried giving free games.
Netflix should tackle the problem of retention not just by content but with tech, by gamifying watching; this reduces sharing passwords and creates a moat around the platform; think more tech solutions for retention (which Netflix never had to do previously) because the content was Netflix's moat all this while, but looks like it's not anymore.
The third macro trend is that people are coming back to work; they don't have as much time as they used to have before. The price of Netflix was adding value to them during the pandemic because of the high watch time, but not anymore, and combine that with competition and inflation, the value goes even lower.
And finally, Netflix lost 700k subscribers as part of boycotting Russia. If we are talking about Netflix entering into the ad-supported tier, this will bring them substantial revenue streams if they do it right, and I'm sure they can. This decision is so good for the marketing ecosystem to have more inventory coming outside the walled gardens, maybe one more walled garden in the future.
You don't have brand safety issues. The content category is obvious and can target people accurately. And if Netflix enters into content advertising, such as changing the cafe's name on the screen or changing the branding of a specific product, it opens up a new revenue line for the company. Having said that, what Netflix has to think about is:
What is its differentiator?
If the ad-free experience is gone, Netflix is competing with tons of OTTs, especially Asian OTTs with hyperlocal content, and they have deep pockets funding both tech and content production. It's proven that content is not going to be the only differentiator for them.
Adding ads means Netflix has to battle the privacy updates that Apple made and Google is about to make; this prevents the company from serving the right ads unless they are native and limit password sharing. This makes Netflix dependent on Apple and Google; look at what happened to Facebook.
For any ad business to succeed, it needs scale and distribution, which comes with a localised self-serving tool with an easy learning curve; otherwise, you are dependent on resellers/agencies; at this point, Netflix can't control the price.
What Netflix is trying to do is to come out of the vicious cycle it is stuck in, content gives subscribers, subscribers give money to make content. While an ad-supported tier is one of the ways, Netflix can also do more.
- Selling merchandise, which is very small right now but can massively scale. Netflix has shows that have a massive following.
- Setting up theme parks to celebrate the relive the experience of the story.
- Arranging Netflix's own comic cons to increase the fan base.
- Selling NFTs of the shows/characters.
- Funding a series with NFTs and sharing the returns.
- Arranging social screenings in the metaverse.
If Netflix can establish an ecosystem, it might be able to retain users and make some additional revenue. Netflix is an amazing company with a great culture. I was totally amazed when I read the book about its culture - it has the talent, the culture, and the dollars to do it.
It's easier for people like me to comment on the strategy of a company that is one of the richest in the world and many aspire to work for, but one cannot help but wonder where does Netflix see itself with this?
The writer is Ravi Shankar, CMO, Carsome.
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