Profitability, monetization and audiences: our analysis of the Netflix model
Just recently, Disney and Apple announced that they would be jumping into the content streaming game alongside Amazon Prime, Crave TV and Netflix. The latter, having pioneered this relatively new market, is having to adapt to increasingly fierce competition. Though Netflix is saying “we’re not worried” about the arrival of these new players, the situation raises plenty of questions regarding the effectiveness of the broadcaster’s membership-based financial model. To date, Netflix has more than 150 million subscribers around the world, while Disney anticipates having 60 to 90 million subscribers within five years. With growing supply and screen time that can only increase so much, one question begs to be asked: should Netflix vary its revenue sources so it can continue to produce and promote original content? And if so, how can it monetize its content in an increasingly competitive market?
We invited three people to join us who’ve had plenty of opportunities to think about business models, monetization and digital advertising in a cultural context. Meet Marie Nicollet, Digital Transformation Strategy Consultant, Pascal-Philippe Bergeron, Practice Lead, Platforms and Algorithms, and Francis Devoy, Digital Media Team Lead.
Francis Devoy: While the duopoly of Google/Facebook is a major draw for advertisers, we are seeing the arrival of a new ad platform that’s growing in influence: Amazon Search. At the end of summer 2018, Netflix launched a self-promotion campaign which took the form of short promos for other content appearing between episodes. Needless to say, it was not well received.
The question this led me to ask, the one that prompted me to invite you all here, was this: does Netflix really want to get involved in this side of things? Is it appropriate for it to copy the model of the other giants and collect data on its audiences? What is Netflix’s advertising potential and how can it monetize its content?
Marie Nicollet: The Netflix model, which is 100% subscription-based, is now profitable, or at least it was on the publication of its latest Q4 results. Its recent self-promotion initiative was pushing its own original content. In my opinion, and according to the strategy it’s presented, it has no intention of opening this up to third parties. The idea is more about creating stickiness and engagement. Because that’s Netflix’s big challenge – making sure it doesn’t lose subscribers to Amazon Prime, Disney, Apple, etc.
Francis Devoy: Personally, I never saw any advertising potential for Netflix. Although in thinking about the number of in-house productions they make, it seems to me that they could do some discreet product placement.
Pascal-Philippe Bergeron: You said something that struck me, and that was that the ads Netflix ran were poorly received. The reason they were so unpopular, is because what Netflix did was the very definition of double dipping. If you pay for a service, like Netflix, that continues to increase fees in a way that suggests that monthly membership fees are its sole source of revenue, and are then told “your viewing data is going to be sold so we can show you ads,” that’s double dipping.
Marie Nicollet: People complained because the cost went up, but actually, Netflix’s margins went down! In Q4, they reached 5%, down from 16%, even 18% in other quarters. The original content creation that it’s investing in is extremely expensive. So it needs more subscribers. Moreover, as we mentioned, it is no longer the only one competing with traditional television.
Francis Devoy: There’s no question the arrival of Disney will change the rules of the game.
Marie Nicollet: The real battle is no longer over audience share for television programming, but over television screen time. Currently, Netflix estimates that it has 10% of total television screen time in the United States. That would make its main competitors YouTube and Fortnite.
Francis Devoy: So, would it not be in Netflix’s best interest to pivot towards a model where it offers only original content?
Marie Nicollet: Netflix is currently producing a series about Airbnb rentals. We don’t know if this was done as a partnership between Netflix and Airbnb, but opportunities like this, that allows it to explore native content, would definitely be appealing as far as advertising revenue is concerned.
Francis Devoy: I completely agree. Whether it’s with Airbnb or Uber, making branded content in the form of a TV series would allow users to develop an affinity for the brand in a more instinctive, indirect way.
Marie Nicollet: For now, Netflix is putting all its eggs in the subscription basket, but the numbers are showing that this is a risky model considering the cost of producing original content and the level of competition from the other giants of the web. Potential solutions could be the creation of co-branded original content, or product placement. These forms of advertising are different from what we’ve seen online these past 10 or 15 years, and might end up being something more native, more subtle.
Pascal-Philippe Bergeron: Product placement could actually be very interesting for Netflix. There’s currently very little brand promotion within the broadcaster’s series. With Bandersnatch, the interactive Black Mirror episode, the idea was to test a narrative with multiple streams. If they can do this, the logical conclusion is that it would also be possible to do multiple product placements.
Francis Devoy: So by giving users the harmless ability to choose between products, Sugar Puffs or Frosties in this case, it would be possible to collect data and share the results with the brands.
Pascal-Philippe Bergeron: Exactly! There could also be a more discreet way of doing this. White label is a very effective content mechanism. It wouldn’t be poorly received and it wouldn’t be double dipping. It’s a potential way to more effectively amortize production costs for original content.