1. Netflix Gets Ads

Unless you have been living under a rock, you are aware that during this week’s earnings call, Netflix announced that after a decade or so of continuous growth, they were actually down some 220K subscribers, or about 0.09% of their subscriber base. This caused major panic on Wall Street where Netflix and other streaming stocks dropped by 30% or more and resulted in pretty much anyone with access to the internet writing a well-intentioned column about What This Means For Streaming.

Later that evening, CEO Reed Hastings admitted that they were looking into an ad-supported version. 

Why It Matters

None of this is a surprise. 

None of it.

It does not take much insight to realize that at some point all the people who wanted a Netflix subscription would have one and subscriber numbers would level off.

Nor did it take much insight to realize that if Netflix wanted to be a major player in the many, many, many places where people do not have the sort of disposable income that allows them to buy subscription TV services, they were going to have to introduce advertising.

So that’s the key takeaway here: in their exuberance about the new, people often miss the obvious. Even Very Highly Compensated People. 

That said, Netflix has a number of fixable problems that helped accelerate their reaching a point where Wall Street turned on them.

Volume Over Quality.  Netflix built its user base on the vast library of classic TV shows it had, far more than on originals like House of Cards. When the various networks and studios began launching their own streaming apps and pulling their shows back from Netflix, the company made the ill-fated decision to start pumping out as much original programming as possible.

I guess the theory was that if you put out 200 shows and 5% become hits, that’s still 10 hit shows, but the reality was that The Might Algorithm kept recommending all those Really Bad Originals to people, thus creating the impression that much of what was on Netflix was crap. Which, despite the presence of shows like Squid Games and The Queen’s Gambit, made it easier for people to decide that Netflix just wasn’t worth it. 

You could argue that Netflix was merely acknowledging that streaming now had a much broader user base than it did in the mid-10s and was looking to create more accessible programming, similar to what CBS did in the early 60s when TV went mass market by rolling out its “rural series” Petticoat Junction, Green Acres et al.

The issue is, of course, that the CBS series were both accessible and very popular, while Netflix largely seemed to have missed the mark on the second part. Hence the perception that Netflix was just rolling out a whole lot of dreck, which made it easier for the eight other giant SVOD services to make inroads.

All At Once Delivery. This was a great and innovative feature back in the early days of streaming when Netflix dropping one of its original series was treated as an event. But as the competition heated up and as Netflix's own output went into Lucy-in-the-candy-factory mode, that system became a serious handicap. 

So while HBO Max could take weeks to build up buzz for a series like The White Lotus, Netflix’s series were thrown out there to sink or swim, with short movie-like windows to build buzz. Too often they sank which further added to the perception that there was nothing worthwhile on Netflix.

Killing Off Shows Too Early. Netflix decided it was a good business practice to end popular series after their second or third season, allegedly on the theory that the shows were no longer bringing in new subscribers or helping to retain existing ones. While this may be a smart decision from a business POV, from an emotional one, e.g., for fans of the canceled shows, it was anything but. They were angry, upset and generally not pleased with Netflix, which quickly developed a reputation for sticking a fork into popular series long before they were done. 

No News Or Sports. While this has been a conscious decision on Netflix’s part, it made much more sense when news and sports were solely the province of linear TV. Now that other streaming services are getting into both, it makes it that much easier for consumers to forego Netflix.

No Ad-Supported Options. As noted, this was less of an issue in places like the U.S., Canada and Europe where people have lots of disposable income. But, as noted in our piece about Netflix in India, that high price tag is clearly a factor in much of the world.

What You Need To Do About It

If you’re Netflix, you need to accept that the same Wall Streeters whose complete lack of understanding as to how the TV industry works drove your valuation to unwarranted heights will also bring it down to unwarranted lows. Just remember that at some point this too shall pass and your valuation will slowly but surely return to normal.

In the interim, you’ve got a lot to figure out, starting with advertising. What does it look like, how are you measuring it (Hint: Self-reporting won’t cut it) and what can you do to make it different and more valuable to advertisers and subscribers. You’ll also need to launch a FAST, at least in those parts of the globe where “free” is going to be the only acceptable price point for a streaming TV service, along with a SAVOD (subscription AVOD) service.

Your ad service is going to be very popular with advertisers who will see it as a way to ensure that their CTV advertising is running against premium brand safe content. So there’s going to be a whole lot of scrutiny on how you are handling the whole operation as tens of millions of dollars will likely be flowing your way. So a few tips from us: 

• Make sure you hire pros. Find people who have done this before. People who can talk to both traditional TV people and digital people. While it sounds simple enough, this is a huge gap in many CTV operations.

• Be transparent about where ads run. This is the number one complaint we hear about CTV—brands have no idea which shows their ads appeared on, let alone which ad pod or segment of the show. Solve for this and you will see even more money flowing your way.

• Don’t be constrained by today’s ad units. Because Netflix is digitally delivered, there’s a whole lot you can do in terms of getting creative: interactive, longer ad units, sponsorships…this is a great opportunity.

• Be conscious of privacy. Yes you have a whole lot of data about your viewers but creepiness is not something that is easily forgiven

• Remember that brands like TV for image advertising and reach. They don’t mind if some of the people who see their ads are not in their precise target. This isn’t like display advertising so don’t get hung up on direct response-like metrics. Think big branding messages on the order of Just Do It.

Password sharing is an issue but a quick caveat here: many people subscribe to your middle price tier so that they can let their kids/elderly parents watch on their account. Forcing those people to pay for extra viewers may mean that they pull back to the most basic tier, so just be sure the math works out there. Ditto the fact that many of those people being forced off of parental accounts may not bother to subscribe on their own because they don’t watch often enough to justify the extra $15/month. And then there’s all that negative social media and bad PR.  It’s a tricky path, so be careful.

Finally, I would continue to move away from all-at-once releases for new series. Weekly may be old school, but it has many advantages and people seem to like it.

2. Apple Gets Football

While the official announcement has yet to come down, every media outlet seems pretty convinced that Apple is going to get the NFL’s Sunday Ticket package, thanks to some inside info from Puck’s Matthew Belloni. The package, which could cost as much as $2.5 billion per year (chump change to Apple), is currently with Direct TV.

Why It Matters

Sunday Ticket is designed for super fans. It includes all out-of-market games and costs $293.96/year or $73.49/ month during the season. Getting it would establish Apple as a key source for sports on streaming, as they already have an MLB deal.

More than that, it gives viewers a reason to continue to subscribe to Apple TV+ once they’ve finished watching Ted Lasso and, when combined with the low $5/month price tag, should help to reduce churn.

We’ve discussed Apple’s notion of making Apple TV+ a “sometimes” service rather than an “all the time” service, meaning that it’s more of a must-have add-on for quality programming (think HBO circa 2007) than the only app you’ll ever need.

This can only help with that while bringing in sports fans who might not have much desire to watch Ted Lasso, CODA or The Morning Show.

There’s also the ad thing.

Running both the MLB and NFL games gives Apple a chance to run advertising during the games and to build out its growing ad business.

Apple has made a big deal over privacy and so I’d expect the ads to all be sold contextually, meaning that rather than target specific households by using the data they’ve collected about them, brands will be able to reach “football fans” who presumably share a broad set of characteristics, including the ability to afford a $300/year streaming NFL subscription.

If you’re a beer company or a razor manufacturer, this is your audience anyway, and Apple can use this as an opportunity to show the industry how to handle advertising in a very privacy compliant manner. 

What You Need To Do About It

If you’re Apple, take a bow. Going after sports was a very smart move as sports fans are loyal viewers and if, as I suspect, the ultimate goal of Apple TV+ is to be a marketing tool, then this will help sell iPhone, Macbooks and Apple watches to this generally affluent audience.

Just remember the need to learn from all the mistakes you made with the MLB launch both in terms of tech and in terms of staffing.

If you’re one of the other Flixes, there are other sports rights deals out there too and you would be smart to try and get one them. Netflix is suffering because (among other things) they don’t have news and sports. 

Don’t be like Netflix.

And Another Thing

We’ve been beating up on CNN+ for the last few Week In Reviews, and now news is breaking that the new Discovery-Warner team is shutting the service down. Variety’s Brian Steinberg confirms the rumor that has been flying around that launching the service was sort of a rogue act by the outgoing Warner team and that the current team wants to incorporate CNN into Maxcovery+, their new superapp, a move that makes a whole lot of sense to us, as noted last week.