Netflix considers ads, password sharing crackdown, live sports

In the foreword to Hamilton Helmer’s “7 Powers: The Foundations of Business Strategy,” published in 2016, Netflix co-founder and co-CEO Reed Hastings describes what happens when market leaders don’t adjust to new competitive forces.

“Throughout my business career, I have often observed powerful incumbents, once lauded for their business acumen, failing to adjust to a new competitive reality,” Hastings writes. “The result is always a stunning fall from grace.”

Six years later, Hastings finds himself in the role of an incumbent that has, for the moment, experienced a stunning fall from grace. Netflix shares have fallen more than 70% year to date. The company announced in April it expects to lose 2 million subscribers in the second quarter. Investors have sold in droves as they question the size of the total addressable streaming market — a number Netflix has previously said could be as high as 800 million. As of the latest count, Netflix has about 222 million global subscribers.

Netflix executives are now reflecting on how they failed to adjust to a new competitive reality, one which was masked by massive subscriber gains during the Covid pandemic when billions of people around the world were stuck at home. While the company has consistently churned out big hits, such as “Stranger Things” and “Squid Game,” Netflix is rethinking many of the philosophies that disrupted the industry more than a decade ago.

The change in strategy, even on the margins, is a surprising one for a company best known for disrupting two industries — first video rental and then cable TV. Instead of inventing new ways to upend what’s become a crowded streaming video industry, Netflix is reconsidering nearly all of the ways it stood out from legacy media companies in the first place.

In other words, Hastings has decided his best strategy now is to un-disrupt.

“It’s notable that Netflix is seeking growth by rethinking many of its firmly held beliefs,” said Joel Mier, Netflix’s director of marketing from 1999 to 2006 and a lecturer in marketing at the University of Richmond. “These decisions will clearly help revenue and subscriber growth in the short- to mid-term. The larger question is how they will impact the firm’s brand over the long-term.”

Netflix declined to comment.

Hastings has long proclaimed Netflix’s aversion to advertising is due to the added complexity of the business.

“Advertising looks easy until you get in it,” Hastings said in 2020. “Then you realize you have to rip that revenue away from other places because the total ad market isn’t growing, and in fact right now it’s shrinking. It’s hand-to-hand combat to get people to spend less on, you know, ABC and to spend more on Netflix. We went public 20 years ago at about a dollar a share, and now we’re [more than] $500. So I would say our subscription-focused strategy’s worked pretty well.”

Netflix is no longer more than $500 a share. It closed at $169.69 on Monday.

Since making that comment in 2020, Hastings has watched other streaming services, including Warner Bros. Discovery‘s HBO Max, NBCUniversal’s Peacock and Paramount Global‘s Paramount+, launch lower-priced services with ads without a consumer backlash. Disney plans to unveil a cheaper ad-supported Disney+ later this year.

In April, Hastings announced he’d changed his mind. An ad-supported Netflix “makes a lot of sense” for “consumers who would like to have a lower price and are advertising tolerant,” he said.

Netflix has previously argued it found a gap in the market by not worrying about advertising. Niche shows, which wouldn’t play well with advertisers, who want scale, could be valuable for Netflix if they brought in enough subscribers relative to production budgets.

It remains to be seen whether Netflix will offer its full slate of content on an ad-supported service or if certain shows will be walled off for no-ad subscribers only.

Part of Netflix’s pitch to content creators has been ordering “straight to series,” rather than making traditional pilot episodes of shows and judging them based on a hard product. Other streamers have followed suit after seeing Netflix attract A-list talent by skipping pilots.

“If you’re a typical studio, you raise money for a pilot, and if it tests well, you pick up the show, maybe you make a few more episodes, and you wait for the ratings,” Barry Enderwick, who worked in Netflix’s marketing department from 2001 to 2012 and who was director of global marketing and subscriber acquisition, told CNBC in 2018.

“At Netflix, our data made our decisions for us, so we’d just order two seasons. Show creators would ask us, ‘Do you want to see notes? Don’t you want to see a pilot?’ We’d respond, ‘If you want us to.’ Creators were gobsmacked.”

Ordering projects straight to series gave writers and producers certainty and, frequently, more money. The downside, Netflix has found, is it’s also led to series that didn’t turn out to be very good. Deadline noted 47 different examples of Netflix ordering straight to series in 2020-21 and 20 for 2022. While a few are notable, such as “The Witcher: Blood Origin” and “That ’90s Show,” most have generated little buzz.

Netflix plans to start ordering more pilots and slow down on its straight-to-series development process, according to people familiar with the matter. The hope is the end result will lead to higher-quality programming and less fluff.

Netflix doesn’t plan to lower its overall budget on content. Still, it does intend to reallocate money to focus on quality after years of adding quantity to fill its library, the people said. Executives have added more original programming in recent years to avoid a lasting reliance on licensed content — much of which has been pulled back by the media companies who own it to fill their own streaming services.

Another Netflix hallmark has been its long-held decision to release full seasons of series all at once, allowing users to watch episodes at their own pace.

“There’s no reason to release it weekly,” co-CEO Ted Sarandos said in 2016. “The move away from appointment television is enormous. So why are you going to drag people back to something they’re abandoning in huge numbers?”

Still, in recent years, Netflix has experimented with weekly releases for some reality shows instead of bulk drops. Thus far, this hasn’t extended to scripted streaming.

“We fundamentally believe that we want to give our members the choice in how they view,” Peter Friedlander, Netflix’s head of scripted series for U.S. and Canada, said earlier this month. “And so giving them that option on these scripted series to watch as much as they want to watch when they watch it, is still fundamental to what we want to provide.”

But people familiar with the matter said Netflix will continue to play around with weekly releases for certain types of series, such as reality TV and other shows based on competition.

Netflix’s resistance to weekly scripted release may be the next thing to go.

Netflix has always rejected bidding on live sports, a staple of legacy media companies.

“To 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 that’s linear cable, there’s lots of things we don’t do. We don’t do (live) news, we don’t do (live) sports. But what we do do, we try to do really well.”

Yet, last year, Hastings said Netflix will consider bidding on live Formula One rights to pair with the success of its documentary series “Drive to Survive,” which profiles each racing season.

“A few years ago, the rights to Formula 1 were sold,” Hastings said to German magazine Der Spiegel in September. “At that time we were not among the bidders, today we would think about it.”

This month, Business Insider reported Netflix has been holding talks with Formula One for months for U.S. broadcast rights.

Adding live sports may give Netflix a new audience base, but it flies in the face of Netflix’s recent aversion to spending big money on licensed programming.

For many years, Netflix dismissed password sharing as a quirky side issue that merely demonstrated the popularity of its product. In 2017, Netflix’s corporate account tweeted “Love is sharing a password.”

But as Netflix’s growth has slowed, executives see password-sharing crackdowns as a new engine to reinvigorate revenue growth. “We’re working on how to monetize sharing. We’ve been thinking about that for a couple of years,” Hastings said during the company’s April earnings conference call. “But when we were growing fast, it wasn’t the high priority to work on. And now, we’re working super hard on it.”

Over the next year, Netflix plans to charge accounts that are clearly shared with users outside the home additional fees.

“We’re not trying to shut down that sharing, but we’re going to ask you to pay a bit more to be able to share with her and so that she gets the benefit and the value of the service, but we also get the revenue associated with that viewing,” Chief Operating Officer Greg Peters said during the same call, adding it will “allow us to bring in revenue for everyone who’s viewing and who gets value from the entertainment that we’re offering.”

CNBC reported earlier on how the password-sharing crackdown is likely to work.

Netflix has become famous for its 2009 culture presentation, which laid out the company’s values. One of the company’s core tenets speaks to innovation. “You keep us nimble by minimizing complexity and finding time to simplify.”

Netflix has benefited from being a pure-play streaming company for years. While other media companies, such as Disney, have lagged because of a conglomerate discount and slow-growing or declining legacy assets, investors have loved Netflix’s one-trick pony: streaming growth.

But that, too, is slowly changing. Netflix announced last year it’s dabbling in video games. Netflix currently has 22 video games on its platform and aims to have 50 by year end.

Adding a new vertical to streaming video may help Netflix give investors a new reason to bet on the company’s future growth. But it also potentially cuts at a long-held Hastings’ tenet: that focusing on movies and TV shows is what sets Netflix apart.

“What we have to do is be the specialty play,” Hastings told CNBC in 2017. “We focus on how do we be, really, the embodiment of entertainment, and joy, and movies and TV shows.”

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— CNBC’s Sarah Whitten contributed to this story.

Disclosure: NBCUniversal is the parent company of NBC and CNBC.