For Embattled Netflix, Ads and New Partnerships are Key to Turnaround

For the streaming world and for Netflix, the first half of this year has been something of a reckoning. The company lost 70% of its share value on news that it is hemorrhaging subscribers. Discovery bought a large portion of Warner Bros. and its streaming service HBO Max as it launches its own fledgling video service, and the sector is bracing for more canceled subscriptions as families get hit by inflation and consume less media after pandemic highs. 

Through all the churn of personnel and continual emergence of new platforms, a few currents are clear. Ad-supported tiers will come to define video experiences across the sector. Bundling content services with other products, including broadband, hardware, and other services, makes the streaming calculus more profitable. And, a venture into the realm of sports can open doors to new demographics and inroads to new viewership. The throughline, of course, is that the model Netflix built is being undermined from underneath it, and only through dynamic leadership and strategic pivots will the giant keep up with its peers.

Netflix will release its ad-supported tier later this year, and estimates that the option will bring in 40 million unique viewers by the end of Q3 2023. Though Netflix always promised to remain ad-free, the move is a financial no-brainer, and one seen across the industry. In December, Disney’s platform Disney+, which just surpassed Netflix’s subscriber count, will also launch its own ad-supported program. Roku just brought on Chris Collier of Fox Entertainment to bolster its advertising and content services, signaling new emphasis in that area. 

The market largely sees this shift as a strategy for stemming the bleeding of subscribers by offering a cheaper option, but its impact will be far more profound. Though losing its user base, Netflix already has better revenue per subscriber than Disney, largely because it has built out its Content Delivery Network and has more experience in the streaming world. It might be losing the subscriber war, but the money is still there. Ads, however, could transform their model entirely. 

For decades, a combination of user subscription (previously through cable fees) and advertisement pays for content production costs across all of TV. Netflix, since its inception, has only offered a premium option in which consumers don’t have the option to contribute to content costs through advertisements they watch. Netflix now has the opportunity to replicate the old model of cable TV, supported by ads and subscriptions, this time with almost complete vertical integration. They can cut out production studios, networks, and cable companies, all while letting users watch what they want, when they want. 

Streaming advertisements also radically change the financial calculus of content and subscription. Advertisements on streaming platforms, as Hulu and other competitors have already recognized, allow for far more personalization, as the platform can target consumers based on their interests and preferences – these will let Netflix charge advertisers a premium. 

Moreover, Netflix will now have a revenue stream that gives their large investments far greater returns. Netflix announced it currently expects to spend roughly $17 billion per year on new content going forward, a tremendous sum, but still more modest than the growth that some analysts expected. When Netflix currently invests in big budget films, it generates no revenue from the box office, cable deals, or purchases and rentals on streaming platforms such as Prime Video. The only return on a new film for the company is that it might entice new subscribers, or make hesitant customers loyal to their account. 

But now that Netflix will show ads, more minutes watched will mean more revenue. So, a hugely successful film might boost subscriber counts, but also generate extensive revenue through advertisements. The current pricing landscape suggests that this revenue could be game-changing. Netflix has announced plans to sell advertisements, in conjunction with Microsoft, at $65 per 1,000 impressions, valuing each ad at $0.065. If we assume Netflix serves roughly as many ads as a standard film on television, Netflix would bring in $5.20 each time a consumer watches one of its original films. For comparison, that one viewing would constitute over half the revenue it earns for one user’s basic monthly plan. Even if subscriber count continues to falter, users who spend a long time on the service might profoundly boost the company’s bottom line. 

Aside from the grand promise of advertising, various forms of bundling undergird much of the streaming world, and Netflix might consider this path. Many of the big players in the so-called “streaming wars” are really not just streaming companies. Disney, of course, operates a multinational media and entertainment empire, which helps fund its roughly $1 billion streaming loss and offers significant synergies for bringing its fans to its platform. Moreover, Disney is so keen on bundling that its CEO Bob Chapek is considering lumping the three streaming sites it owns (Disney+, Hulu, and ESPN+) into one service once it takes complete ownership of Hulu. 

Amazon’s prime membership, which confers access to a suite of free content on its video service, also offers consumers large discounts on shopping and shipping through Amazon’s ecommerce site. Before HBO Max was bought out, it was used as a perk by AT&T as the cell giant tried to lure consumers into mobile plans. Once subscribed to the service, it was far easier for HBO to retain them. And, Apple is able to promote its Apple TV+ streaming service easily through its native hardware Apple TV (which can also play almost every other streaming service). 

All to say, Netflix stands alone, and pursuing these various dimensions of bundling – with other services, with non-streaming entertainment, or even hardware producers – might do it some good. The recent purchase of a Danish video game studio is a promising sign that the company sees the way the wind is blowing, and hopes to diversify. 

If Netflix looked around, they might also notice their competitors moving quickly into sports arenas. Disney carries sports on Hulu (through network agreements), ESPN, and ESPN+; Apple TV+ has inked a deal for exclusive rights to some MLB games; Amazon has made waves by acquiring the rights to Thursday Night Football, and Peacock and Paramount+ both offer a slew of sports because of rights owned by their parent companies (NBC and CBS respectively). 

The appeal for platforms is straightforward. Committed fans for a given game are compelled to subscribe, and keeping those subscribers after that is far easier than enticing new ones. Netflix might take a cue from their surging rivals and look to get off the bench and onto the field when it comes to sports streaming. 

As a final note, Netflix has taken its pole position in the streaming world for granted, and failed to offer deals that attract cash-strapped demographics. For example, Amazon, Hulu, and Paramount all offer discounts for students, hoping to lock them in as future customers early, and unlock a demographic that might not be able to afford every service at full price. For Amazon especially, this is a winning formula – students are incentivized by the deal to create their own Prime account, which usually means both subscription fees but also more spending, as parents no longer hold the keys to students’ ecommerce habits. Amazon has reached an impressive 56% of the 18-24 age group, while this group remains Netflix’s weakest demographic. 

Just three days ago, Netflix Chief Accounting Officer Ken Barker gave up his $2.4 million job after just three months amidst the company's accounting woes. Though its precipitous plunge in valuation is likely behind it, the company’s struggles are far from over. Solving them might mean a hard strategic pivot based on the insights of their rivals, who themselves got their start by following Netflix’s path into the streaming world it pioneered.