This installment of Insights is brought to you by Tipalti.
So, Netflix had a bad week.
Actually, by its own recent stellar standards, Netflix had a horrendous week. Quarterly earnings beat expectations, but subscriber growth was anemic, barely half what analysts expected. The U.S. subscriber count even dropped slightly, for the second time ever.
Wall Street, which had puffed up the company’s share price 67 percent the past year, did not take the news well. The stock fell more than 10 percent in a day, and now is down a fifth since May. A further annoyance: multiple law firms are trolling for plaintiffs for shareholder lawsuits.
Worse, Netflix financed its splurges on content ($13 billion in 2018, maybe $15 billion this year) in part with junk bonds, made reasonably pretty by those hefty stock prices. That may become a less cost-effective option, just when Netflix is about to get serious new competitors.
And the question is…
Several big questions now loom, over Netflix and over the entire business of online video:
- Is Netflix’s epic run done, its bold deficit-driven spending on content finally catching up with the laws of financial gravity?
- If so, can Disney+, Apple, HBO Max and Whatever They’ll Call NBCUniversal’s Thing take advantage?
- Can ad-supported services like Tubi, Pluto, Xumo, and Future Today really take advantage?
It’s important to say that Netflix could have just had a bad quarter. It’s had them before, then forges on. But the front-loaded Netflix business model has always generated some suppressed anxiety. Lots of investors hopped on the company’s bandwagon, but kvetched about potentially fragile axles.
Is a bounce-back coming?
Still, Netflix could (will) once again bounce back. After all, last earnings season, the company did warn that it expected “temporary churn” after raising prices.
And the company said it expects 7 million new subscribers next quarter. That would put it close to 160 million in 192 countries. The third season of Stranger Things debuted just after the quarter ended, and was viewed by 40 million subscribers in just four days. Move that a week earlier, and maybe Q2 looks a little cuter.
Also, the company is rolling out a cheaper mobile-only offering in India, potential precursor to a wider international strategy to capture all those customers with phones but not traditional home internet setups.
The churn arrived on schedule. But I’m pretty sure this is a temporary blip. First off, the newcomers have to actually, you know, come. Even Disney+, the most formidable new competitor, won’t fully arrive until the fourth quarter, and only in some countries.
And even Disney+ will start with zero subscribers. I’ve repeatedly said Disney will lose billions of dollars on streaming ventures, while giving up hundreds of millions in forgone syndication revenue, before it starts making many billions more. That gives Netflix some time to recover and continue building on its very long lead.
As for other newcomers, I’m far less certain about the pricey ($17/month) HBO Max, or that rather uninspiring NBCU service, now set to debut next April, with “mostly licensed content.” They too are giving up hundreds of millions of dollars in syndication revenue, while embarking on new business models, production workflows, and audience relationships. And HBO, by the way, lost subscribers this quarter, as did corporate sibling DirecTV.
Apple, meanwhile, says its offering is coming in “the fall,” but it also said TV+ would arrive last spring, and that didn’t happen. Regardless, what Apple will offer is free access to a nice slate of expensive shows to encourage people to use Apple devices. TV+ customers can watch whatever they want, including Netflix. That’s not a competitor, that’s an enabler.
AVOD’s very different challenge
Which brings us to the ad-supported, or AVOD, services. At last week’s OTT X Conference, I moderated an onstage conversation with Adam Lewinson, Tubi‘s chief content officer and a former Hollywood studio exec. It’s clear that Tubi sees itself as less a Netflix competitor than meaty supplement to “TV” viewers’ onscreen diets.
“It’s almost like premium and basic (cable) TV,” Lewinson said. “People are always going to want to watch Stranger Things or whatever that big show is. So they’ll go watch it, whether it’s HBO or Netflix or Amazon. AVOD is really complimentary to SVOD. It’s like the basic networks all rolled up into one. And this is where you find your library, the spot where you find the content that specifically speaks to you.”
Privately held Tubi says it’s the biggest AVOD service (pick your metric: content library of 15,000 titles and 44,000 hours, 20 million monthly active users, 94 million hours streamed per month, “nine-figure” content budget). And it and the other AVOD services face similar challenges, Lewinson said.
“It’s really about customers: customer acquisition, retention, churn,” Lewinson said. “Those are really at the fundamental level. If you don’t have an audience, and you can’t retain that audience, you don’t have a business, you’re not going to monetize streaming, right? And then as a subset of that, I’d say content discovery.”
The Tyranny of Expectations
Churn remains a huge issue for the SVODs too. If you can subscribe for a month, binge all the stuff you like and cancel without consequences, you’re going to do it. Just ask CBS All Access why it commissioned four more Star Trek shows, to keep customers hanging around after the latest season of Star Trek: Discovery.
Importantly, the AVODs face much different expectations than the SVOD competitors.
“I think the ad-supported companies are in a good place,” said Jon Giegengack, founder of Hub Entertainment Research, which just issued a study on the future of TV. “People have enough subscriptions where, say, if I added another one, I’d have to cut another one. There’s more people now saying they wouldn’t add without cutting something else. The ad-supported ones, especially with some exclusive content, there’s no downside to trying it out. The barriers to entry are really low.”
The AVODs provide largely what traditional TV has always provided: more or less free shows with ads wrapped around them.
“So, 85% to 90% of television historically has been ad supported,” Lewinson said. “And then 10% to 15% has been paid (premium channels), HBO, Showtime, etc. The history of television, I think, still holds: 85% of Americans have a tolerance for ads. Just don’t overdo it.”
Consumers have to ponder where they’ll put their meager entertainment wallets to work in the SVOD space. The AVOD providers have to get on as many devices as possible, then make sure customers like their interface, so they can find shows they like and keep coming back. Not simple, but insuperable either.
There will be a nasty battle for SVOD primacy, but not until the spring or later. That fight will be, as Sinclair Broadcast Group’s CEO Chris Ripley said, ‘a sea of blood.”
The AVOD services, meanwhile, are already here. They’ll have to contest with each other, the Roku Channel on their biggest distributor, and Amazon’s rechristened IMDB Channel. But at least they’re already here, using a business model people know and Hollywood can work with.
As for Netflix, I’m still convinced it will remain a routine part of the streaming diet of most viewers, though when the newcomers finally arrive in force, it’ll be less automatic. But for now, Netflix is likely to bounce back, like it has before. Let’s call this period a needed break before the real storm hits in nine months.
This installment of Insights is brought to you by Tipalti, automating creator payments for the video industry.