Gray Days Ahead For Netflix?

I’m consistently perplexed at the gravitas that certain media companies seem to have with an investment community that appears disproportionately inclined to believe they have upside.  The reaction to Netflix’s earnings reports where they “overachieved expectations” by merely losing 970,000 (heaven forbid, NOT the “roughly 1 million” subscribers in 2Q22, versus the 2 million that they had projected, and to see an overall uptick in all media stocks as a result seems to be, well, more than a generous assumption that the path they are embarking on may turn their current trajectories around.

Outside of Las Vegas Boulevard, with a few degenerate gamblers who bet the under cheering them on, were Netflix a sports team I don’t know too many thoroughfares that would throw a ticker tape parade for the business equivalent performance of a third place team that had been picked to finish fifth.  Were this Little League, they’d probably get a participation trophy.

But with bravado and arrogance that evokes the likes of Bezos, Munk and even Adam Neumann, Reed Hastings not only predicted that Netflix will gain back their 2Q losses in 3Q and then some, he boldly predicted the death of linear televison by the end of this decade.   It all will start later this week when their most expensive film to date, THE GRAY MAN, is dropped.  Directed by the Russos who directed THE AVENGERS, this is an action thriller featuring Ryan Gosling and Chris Evans, two top box office attractions,  in the lead.  At a $200M cost, it is a significant chunk of the $17B Hastings and Ted Sarandos have committed to invest in original content to make the platform more enticing, and potentially to drive eyeballs to the advertising tier they are envisioning as the industry game changer.

Wow, that’s a lot of cow manure to unpack.

Yes, they’ve picked an opportunistic time of year to drop a title, what with COVID anxiety growing yet again and the majority of big summer theatrical releases already come and gone.  But if Metacritic is any example of what we’re getting, so far it’s been received as mediocre as their subscriber numbers should have been.  As of this writing, its Metacritic score is 51, with less than 20% of posted reviews above 80.  That score is only slightly higher than Sony’s esoteric WHERE THE CRAWDADS SING, which is the epitome of an arthouse theatrical release.  There’s little doubt it will attract attention among the Netflix faithful, at least among those subscribers whose passwords are still active (fortunately for Netflix, their plans to make those changes are so far only limited to Latin America; for at least the time being if your in-laws aren’t watching you still can).   But is THIS going to be the magic bullet to entice 1 million NEW subscribers?!?!

I distinctly remember the panic and consternation that overtook the industry as DVR penetration climbed for many years, peaking in the late 2000s at just more than half of U.S. TV HHs.  DIRECTV and DISH drove that growth, with fancy boxes with large capacities increasing the potential for time-shifted viewing so much it forced Nielsen to create “streams” of data beyond live viewing.  When you expanded the growth line into the 2010s, the belief at the time was that live viewing would be obsolete because of Tivo et al.

Well, Netflix, and to a lesser extent Prime Video and other digital video aggregators, changed all that.  Where’s Tivo today?  Where’s DIRECTV?  Live viewing to scripted television is indeed down dramatically, but it certainly exists with sports and news, and yes, advertisers will continue to pay a premium for that.  Funny how that reality is justifying the massive increases in rights fees for an increasingly large array of sports and leagues, including advertiser-supported streamers.  Netflix does not yet have of those rights. and will need success in the AVOD space in order to even have the chance to bid down the road for them.

So does advertising change the equation?  Well, maybe; Netflix did command more than 1 trillion viewing minutes during the 2021-22 “regular TV” season, nearly double that of any competitor.  But as Deadline reported yesterday, Chief Content Officer Ted Sarandos conceded that not all licensed product will be available for advertisers’ consideration when the tier is scheduled to begin in January–and was ambiguous about exactly which entitites that will entail.  Of course, Netflix originals will be able to be bought.  But a large chunk of those ’21-’22 minutes were composed of viewership to large libraries of acquired series such as CRIMINAL MINDS, which just this month moved to Paramount+ and will soon have new original episodes added to the 15 seasons that have just been clawed back,  Were I an astute buyer, I might already be reaching out to Jo Ann Ross and her team to see what and when I could go on that bandwagon–from the library episodes alone, it’s a lot sooner than I can do business with Netflix.

The real secret sauce may lie in their announcement earlier this month that Microsoft will be Netflix’ partner in their ad business.  Microsoft has just acquired Activision, and titles like Call of Duty do have advertising and scale, and are targeting a coveted audience in younger males that continues to bleed older and broader as time goes on.  So minutes of viewing may soon be replaced by minutes of engagement, and advertisers appear more willing to invest in eyeballs they know are on the screen rather than doomscrolling.  (Whether gamers pay attention to ads is a whole ‘nother story, but that’s besides the point).

And as far as the “death of television” prediction, Reed–consider this:  Since the beginning of the 20th century every single time a new content medium was invented with the fair of making the incumbent obsolete, each challenged business has survived, albeit at lesser scale and perhaps with pivoting.  Print still exists.  Radio still exists.  Over-the-air TV still exists.  In fact, you predicted in the middle of the last decade that it would be gone by 2020.  Sure, a few other things have happened to change the conversation, but you weren’t precient then.

Were it my money, I’d think twice about thinking you’re any more accurate now.  Alas, with no money of my own to invest at this time, you couldn’t give a you-know-what what I think.  But if you, dear reader, happen to have a few spare bucks lying around with your e-trader, I’d humbly advise you look elsewhere for a brighter outlook than the Gray that appears to be Netflix’s immediate future.

Check in with me in October.

Until next time…


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