ANALYSIS
The ominous prediction of former Sky TV chief executive John Fellet has come to fruition.
Years ago, when everyone was raving about ad-free content on Netflix, he reiterated many times that the commercial model didn’t make sense and that ads and increased prices would ultimately be needed to pay for the enormous content libraries being created.
This week, Sky TV-owned streaming service Neon will join Netflix and Disney+ by introducing advertising on basic plans.
The price of Neon’s standard plan will increase by 11 per cent from $17.99 to $19.99 a month from January 11. The cost of a basic Neon plan will be held at $12.99 but viewers will see ads before content streams, or when it is paused.
Streaming rivals Disney+ and Netflix have both recently introduced ads on basic plans, but neither has so far announced any plans to bring the option to New Zealand. (Netflix Basic With Ads costs A$6.99 across the Tasman). Depending on how these experiments go in other markets, it’s only a matter of time until local Netflix and Disney users also have to contend with ads.
What’s remarkable about this shift is that none of these companies have been punished by the sharemarket for breaking what was once a fundamental promise to all users. The number crunchers behind the scenes are applauding the utterly groundbreaking idea that one could possibly boost revenue by selling advertising.
We saw hints of this during the writers’ and actors’ strike. At a time when we would have expected Netflix to suffer from creatives not working, it was rewarded by Wall Street with an increase in its stock price because of reduced costs from the strike.
The analysts also knew the company had a catalogue far larger than any living human ever had time to watch so, even if the strikes had dragged on, Netflix would ultimately have been okay. (Pundits also saw its crackdown on password sharing also paying off after the initial backlash.)
We’ve also seen growing scrutiny on companies such as Netflix for overbidding on projects – some of which never saw the light of day.
An excellent piece written for the New York Times by John Carreyrou, the journalist who blew the lid on the Theranos story, tells the remarkable story of how Netflix won a multimillion-dollar bidding war in 2018 for a sci-fi series that was never shown.
Netflix would burn through a budget of more than $55 million on the series being developed by filmmaker Carl Erik Rinsch but the company never received a single finished episode.
This all unfolded at a time when the number of scripted TV shows being produced had soared from 200 to more than 500 in a decade, as streaming companies poured in investment dollars to win control of the rapidly growing space.
Even today, the total debt at Netflix sits at more than US$16 billion (NZ$25.8b) – an amount that has been allowed to accrue because of how quickly the company has grown since switching from DVD deliveries to streaming.
But as the streaming industry matures and growth slows because of market saturation, the focus shifts to other business metrics such as profitability. We are now seeing that shift, with Netflix being rewarded for cost reductions and looking for new ways to make money.
The promise of limitless ad-free content for the cost of a few coffees a month was always going to reach its expiry date. The economics never made sense, given the huge expense that goes into creating a catalogue so large it would take four years, eight months and eight days of non-stop bingeing to get through.
Prices have steadily ticked up and that will keep happening. Those who want cheaper access to the content will ultimately have to endure the drudgery of advertising – and this will be an area that also evolves.
We have seen this all play out before with the evolution of YouTube. The company once offered limitless content that was never interrupted by advertising but we now have to contend with pre-rolls and mid-rolls even if we want to watch a three-minute review on a pair of football boots. If you want to avoid the slow-motion torture of waiting for the “skip ad” button to appear, you have to be willing to fork out for a subscription.
In being so callous in its use of advertising in even the shortest videos, YouTube has made online users accustomed to the idea of having their viewing experience relentlessly interrupted. In a way, YouTube is the channel that’s given the streaming giants permission to roll out their own advertising.
The one New Zealand organisation that will not like this shift is TVNZ, which will become increasingly dependent on digital ads – particularly those sold via its TVNZ+ service. The state-owned broadcaster recently inked a partnership with AWS as part of a push to get 50 per cent of its revenue from digital advertising by 2028.
As streaming companies make this shift into advertising, TVNZ will find itself going head-to-head with the likes of Netflix, Disney and Neon in convincing companies to advertise via its services.
Make no mistake; Netflix wasn’t just being charitable when it released a voluminous 18,000-row spreadsheet cataloguing customer viewing habits at the end of last year. This was done specifically to send a message to advertisers about the popularity of the service. The biannual release will drive home the message every six months that Netflix is the place to get customer eyeballs.
The fact that Netflix remains selective in what it releases and that this data cannot be compared objectively with any other platforms will do little to dissuade advertisers from tapping into the service. Fighting against this media mammoth with all its tech and data will not be an easy task for a local player with a fraction of the Netflix budget.
For the viewer, this ultimately means that advertising becomes a tax on the poor. The people who can’t afford to pay for the upper subscription tiers are left suffering through those annoying interruptions.
NYU Stern professor and entrepreneur Scott Galloway described this best when he elaborated on the cumulative effect of avoiding ads every time he watched Netflix.
“At $156 per year, I’ll pay Netflix $4680 over the next 30 years to avoid over a year’s worth of ads,” Galloway wrote.
“If you could pay $4680 to extend your life by a year, would you?”
These are the types of equations we will be doing in the coming years over what we are and aren’t willing to pay for.
The question isn’t really whether we would pay to extend our life by a year. It’s rather, how many years can we afford to extend it by?
Damien Venuto is an Auckland-based writer with a background in business reporting who joined the Herald in 2017. He previously hosted The Front Page podcast.
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