Week In Review: Netflix With Ads Takes Off, Peak TV Shuts Down

1. Netflix With Ads Takes Off

After what seemed to be a bit of a slow start, Netflix With Ads appears to actually be getting some traction.

The estimable Lucas Shaw at Bloomberg reports that the service now has around 1 million ad supported viewers and, more importantly, fulfilled its forecasted deliveries to advertisers, many of whom allegedly paid sky high CPMs.

But here’s the even more important piece: Netflix With Ads does not appear to be cannibalizing Netflix Without Ads, something many had predicted.

It was, to be fair, a somewhat rational conclusion, since, as we’ve pointed out, around two-thirds of U.S. households already have a Netflix subscription, and, when you consider the fact that mobile phone penetration is only 80 percent, that’s not a whole lot of potential ad-supported subscribers. Especially when you consider that many of the people who don’t currently have Netflix are not constrained by price, but rather, by lack of desire.

That said, Netflix With Ads secret weapon is about to be unlaunched and if it works, it will significantly change the way TV ad dollars are allocated.

Why It Matters

That secret weapon is the crackdown on password sharing. 

Netflix is about to lower the boom there and it is likely to play out in two parallel scenarios.

For all those now-adult children who have been on their parents account since middle school (and were likely to have been the ones who actually set the account up), 

Netflix is offering them the opportunity to stay on that same account by paying a few extra dollars a month for a sort of family plan that lets off-premises family members continue to use the same log-in and all that. 

Mom and Dad will likely still pay the bill and those households will remain ad-free, though Netflix does get to count all those new adult children of current members as new subscribers, significantly boosting that stat and giving Wall Street a chubby.

So that’s one group, but the other group, People Who Still Use The Passwords Of People They Barely Know Anymore— old roommates, ex-girlfriends, friends of friends who once signed in at their house and weren’t aware anyone else was using their account—those people are prime targets for ad-supported Netflix, as chances are pretty good they either (a) don’t have the money for a full $15/month subscription, (b) don’t watch Netflix enough to make a $15/month subscription worth it, or (c) both.

So watch those Netflix With Ads subscriber numbers jump up in the year to come.

And here’s why that really, really, really matters.

Disney, which is taking a somewhat opposite tack and raising prices for ad-free subscribers, is also growing its ad-supported business. Ditto HBO Max, Paramount and Peacock. Hulu’s been growing too, despite uncertainty about its future, and Apple and Amazon run ads against all those sporting events (NFL, MLB and MLS) they’ve gotten their hands on.

And at some point in the next few years that is going to create a critical mass of streaming ad inventory.

As we’d noted in our recent report on the FASTs and advertising, companies that spend nine figure budgets on TV have not been thrilled about shifting large portions of their budgets to the reruns that make up the majority of ad-supported streaming avails in March 2023.

But fast-forward two or three years, and it will be easy for their ad agencies to explain to them that ad-supported SVOD is the new prime time and that the FASTs are the new cable (hence the title of our report.)

This will allow them to wrap their heads around the wisdom of moving billions of dollars worth of ad spending from network prime time to Netflix and other SVOD services.

Which will completely disrupt the way everyone looks at TV advertising while causing massive ripples throughout the industry, right on down to the wisdom of continuing to produce a separate slate of shows for prime time broadcast TV.

But that’s a whole article in and of itself.

What You Need To Do About It

If you are Netflix, for the love of all that you hold holy, resist temptation and do not start running pharma ads, especially during your original programming. Nothing will convince people to upgrade to the ad-free tier faster than a pharma ad with its 60 seconds of death, diarrhea and old people doing tai chi.

Otherwise, keep on keeping on, you are doing great, you’ve got a stellar staff on board and better still, advertisers actually want to work with you.

If you are the other SVOD services, same advice about pharma and don’t be discouraged if it takes a few years for big spending brands to shift big chunks of their ad budgets. Nothing in this industry happens quickly.

If you are one of the FASTs, buckle your seatbelts too, because as those billions shift over to streaming, you will be the prime beneficiary. You’ll mostly be a reach vehicle, the way cable was, but remember that the cable/broadcast split was around two-thirds/one-third, with cable getting the bigger slice.

2. Peak TV Shuts Down

There’s a famous South Park clip about Netflix having a special hotline set up to greenlight any half baked idea. 

It hit home because it did not seem to be all that far from the truth—streaming services were cranking out series—over 500 originals a year—at a breathtaking rate, and, as might be expected, most of them sucked.

That didn’t really matter much to The Powers That Be, all of whom were firmly wedded to the notion that More Original Content meant More Subscribers. 

I don’t think any of them could have told you why, either, other than that all their competitors were doing it, investors seemed to smile favorably upon companies that were doing it and well, more at-bats meant more chances to hit a home run.

All that seems to be coming to a close right now, as per a recent report from MoffettNathanson’s Robert Fishman and the industry is sure to be better for it.

Here’s why.

Why It Matters

There’s the obvious reason: producing lots of mediocre programs does not draw in subscribers—if anything it turns them away. It’s costly and time-consuming and draws marketing dollars away from the kind of shows that might actually get some buzz.

Most creative attempts, whether it’s a book, a painting, a song, a poem or a TV show does not strike a chord with audiences. Which is why the ones that do stand out, and why streaming services should be spending time and effort in promoting them.

But that’s just a part of it.

There’s the money part too.

Now stop me if you’re heard this here before, but without the tens of billions of dollars from carriage and retrans fees, programmers do not have the ability to spend freely on production the way they once did.

Those tens of billions of dollars—and you’ve no doubt heard this one here too—allowed the media companies to behave like lottery winners, throwing vast sums of cash at production companies, encouraging shoots in exotic locations—the more exotic the better—and otherwise behaving without much fiscal responsibility.

All parties must come to an end though, and this one will land particularly hard. Fishman estimates that 2023 will see a one percent year-over-year growth in spending versus the 25 percent we’d seen in recent years.

That’s all part of a serious belt-tightening that’s going to have to happen in the industry as it comes to terms with a new reality: streaming can be a very lucrative business, but without carriage and retrans fees, it will never be wildly lucrative, the way it was in the 90s and 00s.

While it may seem fashionable to puckishly mock Warner Brothers Discovery for their financial austerity, it often feels like they are the only ones who get where this is all headed, that deep cuts will need to be made to make this all work, but that there’s also plenty of money for everyone.

Just not nearly as much as there was before.

What You Need To Do About It

If you’re in the production industry, accept that the gravy train has dried up. For now, anyway. I suspect we will soon see a flow of sitcoms and procedurals that operate on a 25 episode season, in a very similar manner to network TV, where programming chiefs order a handful of episodes at first and then extend that to a full season if a show is a success. 

Syndication, and the money that can be made from it is a seriously untapped asset for the streaming services and there’s far more money to be made from six 25-episode seasons than there is from six 10-episode seasons.

Plus it’s a kinder schedule for all of the creative staff involved, as it allows them to have the Hollywood equivalent of a full-time job and to plan their lives around kids and spouses.

If you’re in the marketing department of one of the streaming services, congrats. This is going to make your life much, much easier and you can really show off your chops (and all that digital data) once you only have a handful of shows to promote.

If you’re a consumer, this is going to make it much easier for you to find the shows you want to watch. Or at least keep track of them.

Either way, it’s a net positive.