Netflix Inc slipped 35% on Wednesday, which wiped out almost 54 billion USD in its market value after it reported a decline in its subscriber base (1).
The streaming giant closed at 226.19 USD in New York, extending its tumble this year to 62%, making it the worst-performing stock in the Nasdaq 100 and S&P 500 indexes. It has a 0.8% weightage on the Nasdaq 100 and 0.3% on the S&P 500. The stock witnessed its biggest plunge since October 2004.
The streaming service surprised Wall Street by losing 200k users in Q1 since 2011. Projections also suggest that it would lose another 2 million users in the second quarter.
“One of Netflix’s biggest problems is that it’s far too easy to stop using the service,” said Russ Mould, an investment director at AJ Bell (2). Consumers who are feeling the pain of inflation will be scrutinizing their spending, and streaming services, he says, are a quick way to save money (Suggested Reading: IMF 2022 Forecast For the Global Economy).
The company recognized two major difficulties: ample account sharing and rising competition (3). Netflix could respond by pursuing one of three expansion plans to maintain its market dominance.
#1 More Ads and Cheaper Membership
Netflix suggested on Tuesday that it’s ready to consider creating an ad-supported tier of its service, which has enticed traditional TV fans with ad-free series like Stranger Things and Ozark and commercial-free movies like Don’t Look Up, despite years of resistance (4, 5).
However, since ads are something many users initially opted for Netflix to avoid, they could pose a serious threat.
“Think of us as fairly open to delivering even more competitive prices with advertising as a consumer choice,” Netflix co-CEO Reed Hastings said during an investor meeting (6), adding that figuring out an ad strategy may take months.
Mike Law, CEO of Carat, Dentsu’s huge media-buying unit, remarks, “It would be a very swift turn. They have a huge user base, so it’s not like they’re one of the newbies that haven’t built up a large subscription base.”
“They have a lot of reach, which is a good thing. But what does their advertising model entail? How much information about their audience are they ready to share? It would take a while to build the infrastructure,” Law added.
Netflix would also have competitive pressure for the largest advertisers, and it would begin last. After all, Netflix will be joining other streamers who have already initiated a race for ad cash.
Challenges in Chasing Ad Cash
HBO Max, which is now part of Warner Bros. Discovery, has already shown interest in airing advertising before several HBO films (7). Disney+ has also stated that it will launch an ad-supported tier, and more specifics are expected to be revealed at the start of the upfront.
Another streaming platform, Hulu, has already started reaching out to local and regional advertisers rather than just the big national advertising that major media outlets seek (8).
Because Netflix is commercial-free, many new streamers have been hesitant to air as much advertising as traditional television. But Netflix’s latest development could prompt them to become more aggressive, says Brian Wieser, Global President of business intelligence at GroupM, a WPP-owned media-investment entity (9).
Netflix has a reputation for taking bold creative risks, but it may need to tread carefully regarding advertising.
As a pioneer, the company has created its own path in the streaming industry for years. However, if it decides to sell ads, it will compete with companies like Apple, Procter & Gamble, and State Farm, which have long relationships with huge ad spenders.
In addition, Netflix may have to be more open about how many customers watched each of its series and for how long to win ad dollars. Netflix, which has long been accustomed to eating at its own table, would have to follow the rules of someone else’s establishment, much like its new ad-supported competitors.
Advertisers have been ready to collaborate with the streamer because they want to reach audiences who enjoy those shows. Marketers have realized that an association with the production is valued more than the need to surround it with traditional advertising in an era when large crowds are harder to come across.
“They’ve been allergic to commercials for as long as I’ve paid attention to them,” Wieser says. “Even if they only want to try it, that’s huge.”
According to analysts, commercials are expected to earn Netflix an additional 4 billion USD in revenue by 2030. It will be difficult for Netflix to say no to that.
Nonetheless, Netflix’s efforts to bring marketers closer to its content will be under scrutiny.
By 2025, the gaming business will be worth $268 billion (Suggested Reading: Microsoft’s New In-Game Ads Network Could Be a Gamechanger). Netflix’s mobile app membership already includes access to playing games.
It might take advantage of its in-house creators’ head start to create games that attract and maintain new audiences. To gain a loyal fanbase, Netflix might sign media-rights deals with major esports titles like League of Legends.
#3 Sports Rights
Netflix has remained committed to producing documentaries on sports, but not live or prerecorded games. However, CEO Reed Hastings might make an exception for Formula 1.
“The Formula One rights were sold a few years ago. We weren’t among the bidders at the time, but we’d consider it now,” said Hastings (10).
Drive to Survive; a Netflix docuseries, is partly responsible for F1’s 39% viewership surge from 2019 to 2021 (11). The fourth season of the show is presently under production.
According to Hastings, to stream any other live sport, Netflix would need a level of exclusivity that most leagues don’t provide.
He explained, “we don’t own the Bundesliga; they can make arrangements with anybody.” “However, that level of control would be mandated for us to be able to provide a secure transaction to our customers.”
The success of Drive to Survive and Michael Jordan’s The Last Dance has spawned a slew of new sports documentaries, including a Netflix-produced show on Bubba Wallace, a NASCAR driver and the PGA Tour and a recently released movie about former Formula One champion Michael Schumacher.
Other streaming services, such as Amazon Prime, have invested billions in sports. The change to sports streaming is starting, and Netflix may be one of the first to gain a foothold.