Netflix Delivers Verdict On Streaming’s Future: It’s TV, Stupid

“It’s the economy, stupid!”

– James Carville’s description of the Bill Clinton election strategy

In observing the market’s crushing response to Netflix’s dropping subscriber numbers, it seems like those in and around the TV business might benefit from the same laser intensity as Clinton’s political guru. Despite all the bells and whistles of streaming technology, recommendation engines and global content delivery, the “business we’ve chosen,” to quote the late Hyman Roth, is TV. Thus, the Netflix challenges deliver several lessons for the future of streaming and TV not only to Netflix but to its competitors as well.

For those who may have missed it, Netflix reported its earnings yesterday and shocked the financial markets by announcing not just a subscriber growth slow down but an actual drop in sub numbers globally. The company suffered a 35% plunge in its stock price and a loss of over $50 billion in market cap in a single day. For those keeping score at home that’s more than double the entire market cap of Paramount (formerly ViacomCBS). Netflix attributed its troubles to everything from global economic conditions to increasing competition to password sharing (hardly a phenomenon that exploded in the last quarter). For a company that always considered itself tech first, I’m afraid it’s going to have to look and act a lot more like a modern TV company.

Advertising sits at the center of the business model

Around the time Netflix began shifting from DVD delivery to streaming, a partner I worked with in the Big Four consulting world confidently told a media client: “In five years there won’t be any 30-second spots.” Not quite. Netflix always took a particular pride, and perhaps glee, in noting that their service didn’t carry advertising and never would. Well folks, a surprising ship has sailed, and Netflix’s leadership announced yesterday that they will look to introduce a lower-cost tier of service with advertising in the next year or two (I’ll take the under there).

Cable TV has feasted from the dual revenue stream of both ad revenues and subscriber fees (including retransmission consent fees for broadcasters) since the explosion of new cable networks in the 1980s. Clearly the heavy ad load in linear TV has been and will be a problem, but the notion that it takes a mix of consumer subscription revenue and ad revenue to sustain a business looks as much a part of streaming TV’s future as linear TV’s past.

Amidst the flood of ad-supported cable networks, Disney Channel and HBO stood out as never having commercials – it seemed beneath these services. And yet, in the earliest days of streaming, Disney+ and HBO Max have already created lower-priced tiers with advertising. NBCUniversal’s Peacock has been delivering ads and taking sub fees since its start, as has Paramount+. Disney’s Hulu has long provided a lower-priced ad-supported tier, and several years ago they reported that their subscribers chose the ad-supported tier by a 70-30 ratio. There are ad dollars flowing dramatically into this space, with Disney’s Hulu bringing in over $1.5 billion in ad sales, Paramount’s PlutoTV already delivering $1 billion in ad sales, and Tubi accounting for over 10% of Fox’s total ad revenues.

Content is King

This hoary media-biz chestnut is often attributed to Sumner Redstone, and it still provides great comfort to producers everywhere. The explosion of grainy user-generated videos of YouTube, social media sharing on Facebook and Instagram and dance crazes on TikTok have all to some degree undermined the perceived magic of content production from a hallowed Hollywood fraternity. But if you’re in the content business, you still need big-time properties and big-time content libraries that resonate across TV generations. I know my own Gen Z daughters are huge fans of series such as Full House whose height of fame predated their own birth. The downdraft on Netflix has coincided not all coincidentally with its loss in recent years of content from Disney and of iconic TV programs such as Seinfeld, Friends, and The Office. Library gems like these are only going to get harder to create – and more expensive to license – in our fragmented media marketplace.

Marketing matters

Three years ago, I moderated an industry panel just after Viacom’s acquisition of Pluto TV, and at the time the “conventional wisdom” was that the maximum number of streaming services the average consumer would subscribe to would peak at 2.8. Since that time, we’ve seen the launches of streaming services from every major media company, we’re at an average of 4.7 subscriptions per streaming consumer, expected to grow to 5.7 by 2024. Financial markets initially loved companies diving into streaming and now…it’s not enough.

Consumers have a flood of streaming choices – did you know there are 14,000 services in the Roku store? – and are mightily confused about where to find the content they want. In the 1980s and 1990s, when you marketed a new movie on Thursday nights on NBC, people knew about it. When linear TV used its own platform to promote tune in to future shows for its viewers, that worked. But in a cacophonous media environment, Netflix and other streaming platforms have yet to figure out the most efficient and effective way to market specific content to the specific audiences that you need to drive and sustain subscribers and viewers.

Maybe the “cable guys” weren’t that dumb

Ah, we mock the thing we are to be (thank you Mel Brooks). The early streaming savants ridiculed the clunky old one-size fits all multichannel video model as they looked to a new “anything, anywhere, anytime” model. But already we see a countertrend in new streaming services. CNN+ launched barely days ago and is is already on the verge of shutdown. The new leadership of Warner Bros. Discovery has hinted of a not-too-distant move to bring HBO Max and Discovery+ together. Disney bundles Disney+, Hulu and ESPN+ into a more appealing package. Canadian telecom provider Telus is now offering Netflix, Apple TV+ and Discovery+ in a sensibly priced bundle they call – wait for it – Stream+. Can a bundle of bundles be far behind?