When Netflix CEO Reed Hastings and INSEAD Professor Erin Meyer released their business book bestseller No Rules Rules in September 2020, they wrote that it was the video company’s unconventional management ethos that drove Netflix’s success over the years.
At the time of the book’s launch, Netflix stock was trading at roughly $516 a share.
Hastings describes the journey from the company’s roots as an online DVD rental business in 1997 to its launch of a video streaming service in 2007, explaining that a culture valuing innovation over efficiency, context over controls and people over process has been critical to Netflix’s outsized performance over the years.
The most infamous pivot is a well-recounted piece of business folklore. That’s when the now-defunct Blockbuster video rental chain turned down Hastings’ $50 million offer to sell Netflix in 2000. At the time, Netflix was heaving under $57 million in debt and a piddly 300,000-subscriber base. Hastings credits that rejection with driving a new focus and intensity — one that, by the time Blockbuster went bankrupt in 2010, had propelled Netflix to become one of the most valuable media companies in the world.
It may be time for Netflix to stage its next Blockbuster pivot — but it must do more than just follow the pack and bring ads into the mix. Or simply add content about the content it already has on the platform as some suggest, to build upon and expand its core.
Both strategies take the view that the Netflix’s content is its primary asset.
It’s really not. Its primary asset is not even its subscribers — it’s the attention of its users. Naturally, that’s all inextricably linked to the content it has on the platform. But to move the needle, Netflix has to monetize the attention of its users in creative and impactful ways.
Yes, ads are one way to monetize attention — but that centuries-old method is hardly innovative, nor does it take advantage of the new opportunities that digital creates.
The first instinct of most users is not to pay attention to ads, to fast forward through them if they can or to press “skip” at the first possible moment. Ads also create churn. Users accustomed to not seeing ads on streaming could find it jolting and may bolt.
As I’ve written before, embedding commerce into streaming platforms like Netflix, making buying a part of the contextual experience of watching a show, is the big opportunity — and how Netflix can boost revenue and drive profitable growth.
See more: Will Amazon Make Streaming Shoppable?
Or it can wait to be acquired by a platform that can and will.
Like maybe Walmart.
Read more: Walmart Calls Livestreamed Shopping Shows on Twitter ‘Future of Retail’
The Birth of a New Video Model
They say a picture is worth a thousand words.
This picture, courtesy of Google Finance, tells the story of Netflix in the five days since it released its Q1 2021 earnings on April 20, 2022.
It’s a long way from September 2020.
Based on the share price yesterday, April 24, 2022, the stock is trading about where it was in January of 2018.
It wasn’t the loss of 200,000 subscribers that spooked investors — Netflix, like other streaming services, has seen its existing subscriber numbers move up and down before.
But Q1 was the first time since 2011 that the loss hasn’t been more than offset by new subscriber growth. Worse yet, Netflix’s Q2 guidance is that it expects to lose 2.2 million more subs on top of that.
Read on: Don’t Look Down: Slump in Netflix Subscribers Bucks Connected Economy’s Rise
Many analysts and investors are now writing Netflix off — its best days are behind it, they say. Hedge fund investor Bill Ackman took a $400 million loss after liquidating his entire Netflix stake within 24 hours of the earnings release. This happened only a few months after adding 3.1 million shares to his portfolio.
Perhaps anticipating the earnings call drubbing, Hastings said he was contemplating an ad-supported option to attract a more price-sensitive consumer. This from a CEO who was previously emphatic about remaining true to the ad-free streaming model he pioneered in 2007 to the great joy of cable TV subscribers who cut the cord, then and now. Ads, Hastings always said, degrade the experience, and are why consumers opt for streaming platforms over ad-dominated cable options. He now says consumer choice now is just as important.
One might argue, as many have, that the no-ad, subscription-only video streaming model Netflix pioneered in 2007 is a relic, an outlier that was never really destined for long-term success for Netflix or any streaming service that adopted a model like it.
Related: Disney+, Netflix Look to Ads as Streaming Market Slows Down
In fact, Netflix’s business model does run counter to how most platforms monetize content — and have for hundreds of years. Starting with newspapers in the 18th century and now with digital media, content platforms usually monetize both sides of their platform. Advertisers pay a lot to catch the attention of users in the hopes of making a sale; those ad dollars subsidize the cost of access for platform users who pay a more modest fee to consume the content they find there.
But advertising alone may not right the ship at Netflix, or in a time frame that’s relevant to its subscriber growth and attrition goals.
Introducing ads is not a short-term silver bullet nor an easy one; even Hastings signaled that it would take a couple of years to implement such a program. Netflix lacks the infrastructure needed to power an ad-supported model, so it will have to buy or build. Both options will take time — if buying is even an option given the anti-big business M&A rhetoric that now permeates D.C.
Maybe in light of their recent stock market performance, pundits, lawmakers, and regulators might be persuaded that the “N” in FAANG has lost a bit of its bite.
Monetizing the Merch
Commerce-enabling the attention of its 220 million subscribers could be a revenue and profit-making gamechanger. Not only is this where the biggest streaming competitors also see an opportunity, it’s where consumers are already highly engaged and starting to buy things they see and like from streamed content.
Here’s why.
PYMNTS released a landmark 11-country study last week benchmarking the digital transformation of the global economy. This proprietary methodology uses the results of a 15,000+ consumer study across the countries accounting for 50% of global GDP to examine how and how much consumers engage digitally with 40 different activities related to how they shop, eat, bank, work, live, have fun, stay healthy, move, pay and are paid.
Read the report: New 11-Country Study Shows Digital Transformation Has Reached Only 27% of Full Potential
These 11 countries collectively are a little more than quarter of the way to full digital transformation. Singapore and Spain lead, Japan lags, and the U.S. is nearly tied with U.K. for third place on the list.
The big collective “aha” is that there is tremendous potential for business leaders, entrepreneurs and investors to build on the digital infrastructure that exists — and to lay new tracks to introduce payments and commerce into environments where consumers already hang out, are highly engaged and open to new contextual commerce experiences.
Like video streaming.
It won’t come as a surprise that we found consumers everywhere in the world are highly engaged in activities that are more social or more for fun — and they engage more frequently with those activities.
One such activity is video streaming, the top ranked activity across all 40 that we studied and across each of the 11 countries.
Sixty-one percent of the consumers we studied engage in video streaming, and nearly a third do so on a daily basis. Seven times more consumers engage daily in watching videos than shopping on a marketplace.
See also: Today in Data: People Are More Digitally Engaged When They’re Having Fun Online
Consumers have had many years to hone their streaming platform behaviors. Many Millennials didn’t have to cut the cord. They never had one: their digital media streaming habits were shaped by Netflix and others, including social platforms like Facebook, where many users consume most of their news. Streaming videos is also a highly social activity, which is a big part of why its users remain sticky and highly engaged.
Making streaming transactional will become a new sales channel for brands and for the content platforms that enable it. Imagine this. You’re watching your favorite show, and a little hover appears on the screen next to a product, a piece of clothing, a car, a watch, dishes or a lamp — whatever. That prompt signals that the particular item can be purchased. Swiping or clicking yes allows you to buy it without leaving the show — or put it on your streaming video watchlist to purchase once the program ends.
Related: Shopstreaming On The Rise In US, But Remains Aimed At Female Shoppers
It’s a possibility made more real when streaming platforms with all of their eyeballs and viewer engagement are also connected to a commerce engine and purchases enabled via a one-click-to-buy experience.
Once that happens, more content producers will adapt programming to those commerce opportunities in order to convert highly engaged eyeballs into a new revenue opportunity.
Breaking the Ad-Supported Mold
In 2007, Netflix was the streaming video leader, and many who entered the space since have adopted its no-ad, subscription model strategy. Those players are now pivoting to the more conventional ad-supported content model. Disney+ says it plans to introduce a lower tier ad-supported option later this year. Hulu has introduced an ad-supported option, and reports good results so far. Why not, I guess — might as well grab money from wherever you can get it.
But it takes an enormous number of eyeballs to make advertising a big bottom-line contributor. You Tube generated more than $28 billion in ad revenue in 2021. But YouTube also had roughly 2 billion users also show up every day to view its content. Ads are also very much a part of the YouTube TV experience, since many of its 85 channels are live TV shows. Their 3 million subscribers also pay a $65/year annual membership fee.
Related: YouTube Makes Push To Attract SMBs With Live Shopping Event
Spotify launched in 2008 with a free ad-supported content model in addition to premium content. Fourteen years later, Spotify reports that its ad-supported music content drives 12% of revenue, and is growing at a faster clip than its premium content package subscribers. Although those ad-supported users drive eyeballs, they don’t drive profits — at least, not yet. Ninety-five percent of Spotify’s profits come from its premium subscribers.
Looking ahead, the business model pioneers in the video streaming space will be those that have commerce as part of their core or could get there quickly: Amazon and Google. Each has the payments and commerce infrastructure needed to make the brands inside of the shows on those platforms shoppable in the moment, creating new revenue streams for streaming platforms, show stars, and that brands that want those impulse buys. Amazon has more than a running head start, since it has payments, commerce and video inside the same ecosystem and can turn on that commerce tap at scale. Its move into sports programming creates a whole new set of contextual commerce possibilities, too.
Google has the pieces, but hasn’t integrated them yet. Its streaming commerce playbook has almost certainly already been written and is very likely being tested.
Then there’s Apple, which can bundle its steaming services into a membership offer, like Amazon does with Prime, but lacks a commerce engine to deliver an embedded commerce experience.
So, where does that leave Netflix?
Their short, short-term opportunity is to do the basic blocking and tackling of any other content platform: more and better content, with ratings and relevant recommendations. And a big rethink of the sharing password surcharge, particularly in light of the increase in monthly subscription fee which is rubbing many of its loyal subscribers the wrong way. Netflix also seems focused on building out its gaming platform and creating content/gaming mashups that appear promising.
See more: Netflix to Launch First Mobile Game Paired With ‘Exploding Kittens’ Animated Series
But to remain relevant three years from now, the reframing of the conversation at HQ must really walk the No Rules Rules talk. The real competition isn’t Disney+ or Hulu — and an ad-supported model will do little more than bring it to parity with its core streaming competitors. That me-too approach doesn’t seem to be in keeping with the No Rules Rule playbook.
The real competition is Amazon and Google, or any player that can and will commerce-enable the attention of its users. Or a new entrant who will figure out how to monetize attention without reverting to the same model that newspapers here in Boston used four centuries ago to monetize theirs.
Or Netflix, which could use April 20, 2022 as the day it staged its next Blockbuster pivot.
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