As the country eases out of the Covid pandemic lockdowns, many people are returning to sports, travel, events, and other activities that were limited during the past 16 months. But that doesn’t mean that all the increases in gaming, video viewing, and other at-home activities will disappear. My research shows that consumers will ease back into movie theaters and many will maintain much of their increased level of video viewing and consumption of other at-home entertainment activities.
The SVOD (subscription VOD) services were often noted as big winners throughout the Covid pandemic, but even these behemoths of content are starting to see slowing in their growth and recent price increases have not gone unnoticed by the consumer.
What will Netflix (and others) do to keep their revenue expanding at a dramatic rate (which their stock prices seem to demand). They have many things they can consider doing:
- Higher prices
- Limit sharing of passwords
- Add free content that is advertising supported or even create a branded Advertising Supported Video on Demand (AVOD) service .
- Add sports content and charge a supplement for sports content
- Add games that would generate advertising, in-app purchase, or supplemental charges for gaming content.
Wall Street analyst Michael Nathanson of MoffettNathanson Research recently pointed out the dramaticsuggests Netflix might have to look at adding revenues from the advertising and sports businesses.
I think there are other areas Netflix could consider too – such as games, as well as perhaps some “creator” platform down the road, more want YouTube and TikTok offer creators, influencers, and the ordinary person.
Nathanson, and I share his interest, is particularly focused on the opportunities for Netflix (and presumably for the other SVOD services) in driving new revenue through advertising. “Although Netflix management continues to strongly dismiss the idea of advertising, we think that view will be seen as a strategic mistake if future rates of subscriber growth start to fall short of Street expectations,” he said.
I have seen in my own consumer research a broad range of reactions to advertising and content – some folks say they want no ads, and are willing to pay, others say they will never pay for content and are fine with watching ads, and of course, many folks fall in the middle. A recentconfirmed that there is a real opportunity for advertising on content that is usually or had previously been advertising free. Also, remember that a few of the VOD services have had hybrid arrangements where you pay for the plan, but some content still has ads. Most notably Hulu had this model for many years.
Other notable executives in the media industry share this point of view of Nathanson’s. Dave Morgan, long-time advertising digital technology entrepreneur, said in an email exchange with me, “There is no question that Netflix will continue to dominate subscription based video on demand, but if it doesn’t soon build its own ad-supported streaming service, it’s going to have to buy one in three or four years. Netflix needs revenue streams to compete with the adjacent market subsidy power of players like Amazon and Apple since they don’t need to make money selling video subscriptions.”
Nathanson projects a revenue CAGR for Netflix in the years ahead at 14% and asks, “Is a 14% revenue CAGR over 2021-2025 enough to justify Netflix’s premium equity valuation? Compared to other Internet names, Netflix stands out with lower anticipated revenue growth than peers despite a relatively high valuation.”
Netflix has raised its prices and altered its terms of service for multi-person families (limiting password sharing to some extent) in the past, including recent changes, and no doubt, Netflix will continue to explore their options for driving more revenue through price increases. I imagine future price increases will be modest and will result in some customers abandoning Netflix. It is unlikely that price increases can bring Netflix back to high revenue growth numbers.
Adding advertising to some of the content, or to another tier of content, makes sense to me. The things that make a successful SVOD service are many of the same things that make for a successful AVOD service – lots of good content, available on multiple devices, with easy to use, rapid technology. Netflix is a noted user of analytics for business decisions and they can easily test and evaluate this approach. Maybe they already are?
As Nathanson also suggests, sports content is an opportunity for Netflix to bring in more revenue. Netflix might try and find some content to acquire like European Football, which NBC added to their programming quite successfully a number of years ago, at a reasonable price. If Netflix wants to capture near-exclusive deals for NFL, MLB, or NBA games, the price tag is going to hit them hard in the EBITDA. A big sports play by Netflix would be a, but I expect Netflix would only do that if they saw some great receivers open down the field.
Other further “out” new revenue ideas might cover gaming as well as a platform for creator content (formerly called user-generated content).
In the gaming area, Netflix could develop games that are focused on their IP as well as launch new IP, just as they have in video. Such games could be attractive to many consumers across the various platforms of mobile, Web, PC and console, not to mention ConnectedTV (an emerging platform for games too). Netflix could offer a game-subscription for additional revenue, or it could monetize their games through advertising and in-app purchase, which would not be consonant with Netflix’s pass monetization practices. Or Netflix could drive the creation of new and IP-games that would be sufficiently attractive to get new customers to sign up for the Netflix video package just to get the games. Amazon has tried an Amazon Prime video program around gaming and game content (Twitch) to unknown success.
Even further out is the idea of Netflix creating a platform, with creator tools, for their customers to make creator content – videos, audio, games, interactive story-telling, etc. The creator content will be distributed widely across the Netflix consumer audience, immediately competing with YouTube, and that creator content may become another reason for people to join Netflix and stick with Netflix.
Likewise, perhaps other competitors in the VOD space will move into gaming, creator content, and content focused on the Connected TV. Sounds like the business people in streaming have plenty to work on to build their growing revenue and profitability.