Why Netflix will have advertising and password control

The last few months have not been easy for Netflix. The company that was once the most innovative and beloved in streaming is now experiencing an unprecedented crisis in the industry. Netflix expects to lose more than 2 million subscribers this semester and has laid off more than 450 employees in the past two months.

In Latin America, including Brazil, the news is not good either. The company lost more than 350,000 subscribers in the region in the first quarter. Platform price increases and competition growth are the main explanations.

To turn the tide, Netflix has two big bets: having advertising on its platform and fighting password sharing. But even these initiatives show how limited the company’s alternatives seem in the face of rapidly changing markets.

An ad-supported plan would be more affordable and could help increase Netflix revenue and subscriptions. However, the company concluded that it does not have the capacity to sell commercial spaces alone, nor does it have the necessary technology to do so. Therefore, you will have to ally yourself with a competitor. The two companies most highly rated for the commercial partnership with Netflix are Google and NBCUniversal.

Google is the largest advertising company in the world. But it also owns YouTube, one of Netflix’s main competitors. NBCUniversal owns Peacock, its own streaming platform, and owns NBC, one of the largest TV stations in the United States, and Universal Studios.

Netflix will have commercials on the platform

For many years, Netflix co-CEOs Reed Hastings and Ted Sarandos have said they are against advertising on the platform. The radical change in position was announced by Hastings in April, after the disastrous result of the first quarter. This year alone, Netflix has already lost 70% of its market value.

The search for technical and commercial partners to make the implementation of advertising more viable leads to the belief that the decision was motivated more by necessity than by the strategy or will of the CEOs.

Sought by the column, Netflix reported that for now nothing is decided. “We are still in the early stages of looking at how to launch an ad-supported lower priced option and no decision has been made. At this point there is only speculation on the matter.”

This does not mean that the plan to have advertising is bad, several surveys show the public’s preference for free or cheaper plans, even if they have to watch commercials for that. Competitors like HBO Max and Paramont+, which debuted years after Netflix, already offer plans for lower prices, but with advertising. Disney+ is expected to have ads from the end of the year.

What seems to be becoming clearer is that after years of accelerated growth and a surge in subscribers during the pandemic with people stuck at home, Netflix is ​​now forced to rethink its strategy and even copy competitors’ ideas.

Fighting password sharing

Netflix’s second bet, the fight against password sharing, is a pioneering initiative. No competitor has bought this fight so far. And for good reason, no one wants to lose access to something they already take for granted. After years of sharing the password with friends and family, people don’t take the news that only those who are in the subscriber’s home will be able to access Netflix content.

Netflix itself, in 2017, defended the sharing of passwords on its Twitter profile. But the new times demand changes.

“We’re not trying to end this sharing, but we’re going to ask you to pay a little extra to be able to share with someone else,” COO Greg Peters said during an analyst conference, adding that this “will allow you to monetize everyone who is watching. and who derive value from the entertainment we are providing”.

The test started in Peru, Chile and Costa Rica, the news indicated bad results from the beginning, as I pointed out in May. Since then, public acceptance of the measure does not seem to have changed much. Latin America represents Netflix’s lowest revenue per user, according to research firm Ampere Analysis, which made the markets more attractive for testing. But note that Brazil and Mexico, probably due to the relevance of the number of subscribers, were spared.

Silence about Netflix content

It’s clear that Netflix is ​​trying to adjust. While the company consistently releases hits like Stranger Things and Round 6, it is being forced to rethink many of the philosophies that revolutionized the industry more than a decade ago but seem to make less sense today.

One example is the change in the binge watching strategy, when the company released all the chapters of a season of its series at once. Now, releases are getting more spaced out. The fourth season of Stranger Things was divided into two parts, with a release in late May and the second part only being available in early July. The final season of Ozark also had a one-month break.

Antenna data points to a problem with Netflix: The company’s subscribers today are the most first-month dropouts compared to any other service, ahead of Starz, Paramount+, Showtime, Peacock and Apple TV+ (the survey did not include Brazil). Even more worrisome for Netflix, Antenna’s data indicates that Netflix lost the least subscribers in the first month until just before the start of 2022, when the service rose to the top of the list.

By extending the release of Stranger Things and other great productions the company guarantees that subscribers will stay longer and not cancel in just one month.

In the first quarter of this year, 3.6 million people would have canceled their subscriptions (700,000 in Russia because of the company’s departure from the country, which would bring the number to 2.9 million). One of the main explanations for the cancellations would be the price increases. For the same reason, the practice of subscribing, watching what you want at once, and leaving before having to pay the second month has increased.

Management disconnected from reality?

Despite the layoffs at Netflix and the bad numbers, the company’s leaders are optimistic. While 300 Netflix employees were laid off in the United States, Sarandos was speaking at an event in Cannes, France, stating that the company would maintain investments in content and plan to hire 1,500 people over the next 18 months.

Other than the start of advertising, the fight against sharing passwords, and the gradual spacing of seasons, there are apparently no major plans for a change. In addition, none of the layoffs involved leaders at the top of the company beyond the marketing area, which indicates little chance of major changes in production. And that has investors worried.

“I think both advertising and password sharing are good incremental revenue opportunities that should drive more subscriptions or more revenue. There’s no doubt about it,” media analyst Richard Greenfield said in an interview with the NY Times this week. “However, neither of those two things is Netflix’s savior. Netflix’s savior is that they spend $17 billion on content and they need more Stranger Things and less Space Force.”

Regarding the content, Netflix sent an email to employees asking them to be more careful with their spending. Bela Bajaria, responsible for the company’s international content, has no plans to change the way productions are carried out. However, the comment in Hollywood is that the company should look for less authorial films and more blockbusters like 365 Days, a softporn that was released with a success of views and a fiasco of critics.

Quality decline or lack of marketing on Netflix?

One of Netflix’s problems is perhaps precisely the volume of releases. There are so many productions that there is a lack of time and money to make good marketing campaigns. In 2019, when it had virtually no competitors, Netflix spent $2.6 billion on marketing. In 2021, even with several new players in the market, investment dropped to US$ 2.5 billion.

This goes against competitors, who launch fewer titles, but invest more in publicity, and in works that generate more conversations, such as the heroes of Marvel and Star Wars, at Disney; Star Trek and Halo on Paramount+; or Peacemaker and Euphoria on HBO Max.

Apple TV+ spent $6 billion on content in 2021, compared to $17 billion for Netflix. Even so, Apple managed to win the Oscar for best picture with Coda and has hits like Ted Lasso and Severance.

Another fact seems to be that Netflix was better at producing relevant hits in the past than in the present. Stranger Things and Ozark, are phenomena of audience and critics. Spiderhead and the God’s Favorite Idiot series, two new ventures from the company, are not.

Thiago Lopes, vice president of marketing for Netflix’s Brazilian operation, left the streaming platform days ago. The executive joined the company in 2014, shortly after the Netflix operation arrived in Brazil. In March, Bozoma Saint John, global marketing director, also left the company.

About the staff cuts, Netflix says they are an adjustment to the new context. “While we continue to invest significantly in the business, we have made these adjustments to ensure our costs grow in line with slower revenue growth. We are very grateful for all these people have done for Netflix and are working to support them through this difficult transition.” .

Live Sports on Netflix

In the market there are those who bet on live sports as the best way out for Netflix. The success of the Drive to Survive series about the F-1 gives an idea of ​​the potential. The behind-the-scenes documentary of the races is a critical and audience success, and has even helped the category regain its relevance globally.

Ironically, Netflix has always rejected the idea of ​​streaming live sports, a symbol of traditional TV.

“Follow a competitor, never, never, never,” Hastings said in 2018. “We have so much we want to do in our area, so we’re not trying to copy others, whether it’s linear cable, there’s a lot of things we don’t do. live), we don’t do (live) sports. But what we do, we try to do very well.”

But that position seems to be changing. Last year, Hastings said that Netflix would consider bidding for the F-1 rights. The company would have entered the dispute, but with an inferior offer, lost to Disney in the United States. Despite reports from specialized vehicles in the American press, Netflix has not confirmed that it actually entered the competition.

Live sports streaming is a streaming audience phenomenon. The high amounts paid by Paramount to have the rights to broadcast the Libertadores games are proof of this.

Netflix is ​​also spending millions on games, but so far has not presented relevant results from the initiative. Despite the games available on the platform, apparently they didn’t increase the subscriber retention rate.

Can Netflix be purchased?

In Cannes, when asked if Netflix was for sale, Sarandos said a purchase “is always a reality, so we have to keep our eyes peeled for that”, but insisted that Netflix could grow back on its own. “We have enough scale, profitability and cash flow to continue to grow the business,” he said.

Apple has been pointed out several times as a potential buyer of Netflix. Samik Chatterjee, an analyst at JP Morgan, said that Netflix leads in terms of original content and engagement and that buying the company could help Apple differentiate itself from other content aggregators. However, the consistent growth of Apple TV+ has slowed down conversations around the topic.

But as the shifts in advertising, password-sharing and live sports show on Netflix, regardless of what executives say, the reality can change quickly.

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