Just two years ago, Netflix founder and CEO Reed Hastings had said he had zero interest in advertising, saying “There's not easy money there.”
But things have changed quite dramatically since for the streaming pioneer. Netflix is now aggressively moving to launch its ad-supported tier, which, reports suggest, will launch by the end of the year. It just hired two top executives from Snap to run its advertising business that, Wall Street Journal reports, could be priced higher than all the other streaming platforms. Netflix has since denied they have decided pricing or the timing of the rollout but it's unlikely they will heavily cannibalize their core product by pricing it too low. However, the two hires do make it clear that Netflix is hitching its future growth on advertising as subscriptions plateau.
Back To The Future
This, in some ways, marks a significant moment for media. I had written earlier about a subscription equilibrium in media and news in particular—a point at which subscriptions reach a saturation point and growth plateaus. Is this it? It's perhaps still too early to tell. But what we are seeing are stratospheric shifts in the media landscape.
All this comes at the end of an earning cycle for media companies that can be best described as a mixed bag even for Netflix's competitors. Disney+ claims it topped 220 million subs, (though with a lot of help from Hulu and ESPN+) making it the largest streaming network by numbers; and Warner Discovery, born out of last year's merger between the entertainment giant that owns HBO and the reality network, has decided it still likes TV, or at least the money they make from it.
Less than 18 months ago, everyone was measured on how deep they have gone into streaming and subscriptions. Advertising was being eaten by the tech giants and it made sense to build subscription moats where you have more data on your consumers. Netflix showed the way a few years ago proving you could build a large business purely on streaming and subscriptions. In news media, New York Times recently crossed 10 million subscribers—that's more than five times its number in 2016.
During the peak of the pandemic, subscriptions grew at an enormous rate while advertising-dependent mediums suffered. This led to major industry-changing pivots by large players like Disney and Warner into streaming. Netflix subscriptions leap frogged growth by a couple of years to reach 220 million.
But all that's coming a full circle—and it always does in media—as the world opens up again.
Subscriptions for large players like Netflix have flat-lined just when everyone else has spent billions aping Netflix's strategy. Netflix's decision to introduce an advertising tier was once thought improbable if not impossible. Warner Discovery has already said it plans to refocus HBO back to TV, taking out some content from its streaming network HBO Max. Warner Discovery pulled the plug on CNN+ saying it sees no viable revenue model for it. CNN will now stay focused on cable though it might have some of its content on Warner Discovery's impending streaming super-app.
Clearly, the economics isn't working. It's back to the drawing board. Ironically, all this upheaval comes at a time when streaming has, for the first time, surpassed cable TV viewing in the United States.
Running Out Of Ideas
Media's biggest challenge over the last few years has been its inability to find new business models that's not just an extension of earlier models. All revenue models, no matter how they are marketed, boil down to subscriptions and advertising. Streaming subscriptions, while new in the digital medium, is just an extension of the subs model, in Pay TV, newspapers, etc. People were used to paying for content before the internet made it all free, so it always made sense to get consumers to pay for it online. Advertising is even less changed. It has just moved in the same form to the digital mediums.
Several media companies have tried e-commerce and other revenue streams, none of them have been able to do it at scale or come close to bringing a steady source of income just yet. Even Amazon, which runs the largest e-commerce platform in the world and is among the larger streaming networks, hasn't done anything dramatically new to its streaming offerings.
And in all this, content costs have only increased, making it impossible to be profitable. Rings of Power, the new Lord of Rings offering, for instance, has cost Amazon a whopping $715 million to make and even though it had a record 25 million viewers on its first day, the economics of how all that money will be recovered is still unclear.
With subscriptions plateauing, media companies are falling in love again with advertising, though, ironically the tech giants who get a lion share of the advertising pie are themselves facing unsettling times. The advertising juggernauts—Facebook and Google have seen ad growth slowing. Facebook's growth slowed for the first time in years. The next tier of tech companies like Snap and Twitter have slowed even further. And all of them have announced lay-offs after years of headcount growth. This is why Facebook has pivoted to a new narrative with the metaverse, which will probably take years to bear fruit if at all; Snap is focusing harder on AR; Twitter is doing everything to hold Musk to his agreement to buy it. So, it's not all rosy in the advertising world, especially with several new entrants. TikTok has increasingly been taking a big chunk of both attention and dollars and then there's the thousand-pound gorilla that's Apple.
Here in India, our market is a microcosm of what's going on everywhere else but with differences and a delay. Ours is a market, which hasn't really fully developed into a fully viable subscription market and our digital streaming ad pricing is still too low to make it sustainable. The cricket rights for digital streaming for IPL recently crossed television for the first time, which reflects the growth of streaming but it is most likely that Viacom18 who has bought those rights will lose money. But streaming is no doubt the future. It has already disrupted entertainment economics in the country, most heavily felt in Bollywood and will upend sports viewing as well, the last bastion of cable TV.
While the opportunity is large, media executives everywhere need to think a few steps ahead and outside of the box. What we need is a complete revisioning of how content and viewership is monetized. Until then, we are just the hamster on that unstoppable, uncontrollable wheel.
The views expressed here are those of the author's and do not necessarily represent the views of BQ Prime or its editorial team.
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