Yesterday’s massive drop in the valuation of Netflix stock sent shock waves through the investment community, as not only did Netflix suffer on the heels of its disclosure that for the first time in a decade they lost subscribers year over year but other media companies who serve as their chief rivals fell significantly as well.
From this perch, this was as inevitable as learning “there was an accident” after watching your good friend smoke several bowls, chug three tall boys, inhale a few mushrooms and then sneak a line of coke in his bedroom before wrestling the car keys out of your hand so he can try and beat the rainstorm home.
Netflix has been a house of cards since its original video business was built on, well, a House of Cards. Flush with its groundbreaking success after its first significant dramatic series won awards and accelerated adoption for the service’s streaming delivery option, Netflix accelerated its output and the investment in talent and venues to support the habit. It aggressively outbid established studios for creative executives, willing to file expensive lawsuits to maintain its ability to do so. It purchased and built studios around the world, including a large portion of the famed Sunset Gower lot in Hollywood that serves as its Los Angeles home, dwarfing legacy anchor tenant KTLA here and forcing competitors to either seek alternatives at higher rents or investing in building or acquiring ones of their own to satisfy their own habits. It continued to raise hundreds of millions of dollars annually from investors using expensive parties, marketing campaigns and the sexiness of groundbreaking Emmy and Oscar nominations to lure in the well-heeled, many of whom defined the “Netflix and chill” generation.
And they were in the absolutely perfect position to benefit from a pandemic. Flush with thousands of hours of both their own content and readily available libraries of acquired series that could be consumed seasons at a time as a most necessary escape hatch from the misery of lockdown, as well as a host of brand new shows at a time when traditional television was forced to turn to reruns given their inability to produce on their shorter lead time schedules, in the summer of 2020 Netflix was not only the runaway best in class, they were arguably a utility. They believed people were addicted, and they had the evidence and the data to prove it. They believed they could continue to raise subscription prices to support all of this, and they frequently did. Its competition was only beginning to form on the studio side, existing tech-driven competitors such as Prime Video and Hulu had management issues and largely little creative success, and, of course, QuiBi’s crash and burn only reinforced Netflix’s arrogance.
Flash forward to yesterday. Despite the frenzied attempt to maintain lockdown conditions by the Department of Justice and a handful of “science-driven” fiefdoms like the city of Philadelphia and the New York MTA, a growing plurality of America has decided enough is enough, masks are being shredded and a return to outdoor activities is now their necessity, not their outlier. Warmer weather is finally setting in around the country. Apple TV+ is now the home of an Oscar-winning movie, an Emmy-winning TV series and Friday Night Baseball. Prime Video is the home of The Boys and Thursday Night NFL and, soon, Lord of the Rings. One of them will likely soon add NFL Sunday Ticket to its portfolio. Many of the series that drove its tonnage have been clawed back by their respective owners. Friends now drives HBO Max. The Office and Parks and Recreation drive Peacock. Eventually, even Criminal Minds will exclusively drive Paramount+. In short, it was the victim of Repo Man, its most critical assets scattered across a supersized competitive landscape and a sirens’ song to those shows’ fans who can’t live without them but can live without an overpriced service that no longer offers any of them. 
Should declines over these sort of arguably perfect storm conditions for 1Q21 really be seen as that surprising?
So what does Reed Hastings do? Well, his solution is to take perhaps Netflix’ strongest consumer value propositions–availability and an ad-free environment–and only now start to consider reversing course and embracing their alternatives. In part, this is being done out of the necessity of finding ways to address the real potential that at least domestically the ceiling for subscriptions, and the incremental revenue every one of them provides, may have been reached. Password-sharing, which became especially popular during a pandemic where friends and relatives desperate for entertainment added to “minutes per viewing household” that helped tell the growth stories of 2020, is now being aggressively policed and technology being deployed to accelerate it.
And Netflix subs–including those now forced to become one when they need to obtain their own password–will now have the option of seeing their content WITH ads. Studies claim consumers do not mind the presence of ads in streaming TV. Well, that’s a bit of a misnomer, right up there with “do you mind wearing a mask?. A majority report they do not mind it, a fact that was drummed home incessantly in yesterday’s frenzied response to the Monday verdict striking down travel mandates. But do people like it? Even the most rabid supporters of masking freely admit they don’t and there in no real alternative–you either comply or you lose the right to many of your societal freedoms. In streaming entertainment, plenty of options do. And many are choosing them. As I type this, Warner Media just announced that over the same quarter were Netflix announced its declines, HBO Max grew its subscriptions to nearly 50 million domestically and just under 77 million globally. And this even before the new season of FLIGHT ATTENDANT gets dropped.
And as for that ad solution? Well, first you need scale to sell it, and most independent observers suggest a minimum of 30 million would make Netflix a viable “network” option, consistent with the thresholds advertisers used to demand cable networks reach before they’d choose to include it as a buying option. That means either finding new subscribers at large scale or converting enough existing subscribers into becoming that base. Yes, the lure of lower incremental cost will help Netflix get to that goal. But will its subscribers like it and will the environment for potential advertisers be so toxic that their ads will be seen as enabling and brands potentially be suppressed rather than lifted? Quite likely.
Oh, and one more thing, Movies and series obtained from outside suppliers may or not heave the rights built in already for these shows to even include advertising. If a title was sold elsewhere to an AVOD and Netflix’ deal was for SVOD, legally and/or morally the impact of Netflix adds needs to be resolved. In order to buy ads in Seinfeld on Netflix, a prior deal with Sony to have that right will have been necessary.
And it is hasn’t? Don’t think Sony won’t make Netflix overpay for it now!
I don’t know if that has to happen, or if the sea change Hastings announced yesterday will allow it to. I do know I don’t envy the task ahead for the execs at Netflix who will need to execute on at least some of these points in order to save their and others’ jobs whose fate will depend on the outcomes of any such initiatives. I’d at least like the chance to be part of it.
Until next time….