In the spring of 2022, Netflix’s leadership seemed unsettled as their decade-long streak of exponential business growth abruptly came to a halt. News broke of the outfit losing hundreds of thousands of subscribers, causing a stir on Wall Street. The stiff competition from Dwarfed by competitors like Disney+ and a host of other platforms launched by traditional Hollywood players made things tense.
Reed Hastings, the co-founder of Netflix, communicated some action plans to the surprised stakeholders through a video call on April 19, 2022, aiming to turn the tide. He proposed monitoring and restricting Netflix users from sharing their passwords with others, an idea he had previously rejected. In addition, the introduction of advertising, another idea previously dismissed by Hastings, was now being considered.
The viewers saw this as a desperate attempt by Hastings to save the sinking ship. Consequently, the shares of the company took a nosedive, ushering in a period referred to as “the Great Netflix Correction”. Far from being the end that many traditional Hollywood firms had hoped for, it marked Netflix’s embarkment on a strategic makeover that positioned it further ahead of traditional entertainment providers, who are grappling to make ends meet after heavily investing in streaming.
Since launching its password monitoring scheme in May 2023, Netflix’s subscriber base grew by 45 million. The company’s share value shot up by over 300% from its lowest point after the correction, recently hitting a record high.
An amazing comeback for Netflix was far from guaranteed in 2022. However, since then, Netflix has developed an advertising venture, invested in its budding video gaming division, and extended its live events around popular series like Bridgerton, Squid Game, and Stranger Things, even venturing into live sports coverage.
Jessica Reif Ehrlich, a long-term media analyst at Bank of America, commended the recent performance of the company, highlighting the successful navigation through a significant restructure. In 2023, Hastings retired as CEO, and Greg Peters replaced him. Peters joined Ted Sarandos in the role. Ehrlich added that the handover was one of the most seamless ever, with no reported interruptions.
Netflix has successfully regained its firm standing, meanwhile traditional Hollywood companies struggle to find their footing. The turnaround of Netflix signified the closure of the investors’ tolerance for losses from streaming services. Disney is the exception among older entertainment creators who currently earn profit from their streaming segment, due to their profitability since the summer.
The film industry has been hit hard this year, causing worries if cinemas will ever generate ticket sales as high as pre-pandemic levels. Formerly a source of ample cash flow, Cable television is on a steep downward trajectory, with many sceptical if streaming could ever match its financial productivity.
Shari Redstone, prompted by these stressors, decided to sell off Paramount, a company under her family’s control for many years, this summer. Correspondingly, a BofA analyst, Ehrlich, unusually urged Warner Bros Discovery management to consider a strategic change, claiming that its existing model as a publicly-traded company is unsuccessful.
These issues have had a significant effect on Hollywood’s creative sector, resulting in job reductions and fewer production budgets. The anticipated recovery post the actors and screenwriters’ strikes from the previous year has yet to surface.
A veteran TV creator and writer verify the gloomy atmosphere. He mentions that every writer feels their career is underperforming. The current job market is challenging due to a lack of opportunities.
On the flip side, Netflix’s influence on Hollywood has been steadily increasing. Sarandos heads the Academy Museum of Motion Pictures and facilitated Netflix’s recent refurbishment of the historic Grauman’s Egyptian Theatre located on Hollywood Boulevard, which cost $70 million (€62 million). His spouse, Nicole Avant, maintains a long-lasting friendship with Democratic presidential nominee Kamala Harris. Netflix has asserted its dominance by buying all the billboards on Sunset Boulevard’s Strip.
Some Hollywood members are irate at Netflix for significantly changing the trade’s financial structures. Some Academy voters hold a grudge that Netflix regularly restricts wide release for its films competing for the Oscar, choosing instead to air in few cinemas for the minimum period needed to qualify for the Academy Awards.
A Hollywood old-timer, who has served in key roles in leading entertainment firms, says, “Netflix’s unpopularity is unparalleled. They have wiped out the financial gains of every entertainer globally. They reign supreme, with no potential competitor in sight.”
“He comments: “The metropolis is in upheaval at this moment. Such an upheaval.”
The impression may have been given by Hastings that he was improvising as he disclosed his plans about prohibiting password swapping and the inception of advertisement selling.
Yet, the truth is, he alongside other top-level executives, had been debating these proposals for an extensive period, according to existing and past staff members. To ignite such plans, Hastings consigned the responsibilities to Peters, then at the helm as the chief operating officer.
Parallel to Hastings, Peters hailed from a technological background. Peters’ mother, a software developer at IBM, ensured he was proficient in coding, coinciding with his literacy skills development. Prior to becoming part of the Netflix family in 2008, his resume showcased employment at Tivo and Red Hat Network.
The concept of a password clampdown was met with cynicism as Peters began the implementation of regulated experiments in markets like Chile, Costa Rica and Peru early in 2023. Some market experts predicted this venture could result in a loss of clientele for Netflix.
Contrarily, it served as a catalyst that accelerated Netflix’s expansion for over a year, with the total number of subscribers ballooning to 277.6 million in the latest quarter, an increase of 16.5 per cent from a year prior.
Nearly half a decade post the inauguration of Disney+, Netflix still holds its lead in both subscription count and hours spent on the platform. As of July, it secured approximately 8.4 per cent of all US screen times while its closest rival in Hollywood, Disney, possessed a stake of 4.8 per cent across both Disney+ and Hulu.
Streaming platforms managed by other Hollywood studios – Warner Bros Discovery’s Max, Comcast’s Peacock and Paramount+ – all received less than 2 per cent of the total viewing duration.
However, with the boost from the password-sharing curb starting to plateau, market analysts are curious about the next phase of Netflix’s expansion. Its alternate primary endeavour – advertising – will require further time to substantially influence the profits.
Netflix teamed up with Microsoft to utilise its “stack” – a digital advertisement delivery system – and premiered its advertisement-supported service across 12 nations by the fall of 2022. It began to publicly reveal a list of its top 10 shows, enabling advertisers to direct their efforts towards the streamer’s most watched programmes.
Simultaneously, Amazon, a contender to Netflix with its Prime Video service, also penetrated the streaming advertisement industry, and characteristically began proposing substantially cheaper rates than those Netflix had quoted.”
In a surprise turn of events that caught the industry off-guard, Peter Naylor, the executive at the head of the advertising division, abruptly left the company amidst the annual “upfront” presentations this year. Following his departure, Netflix announced plans to discard the use of Microsoft’s “stack”, opting instead to develop an independent advertising platform. The company has since stated that it won’t rely on advertising as a major source of revenue growth until at least 2026.
Nevertheless, despite such setbacks, Ehrlich is confident that Netflix’s advertising venture will thrive once it has been fully scaled. According to Ehrlich, the loyalty of Netflix’s audience is one of the main reasons for this prediction. Ehrlich compares them to traditional pay TV bundles where viewers dedicate an average of two hours a day or 60 hours a month to watching. In her view, Netflix can guarantee they will reach consumers. As per the industry wisdom, where there are viewers, there is money to be made.
There is a general consensus in both Hollywood and Wall Street that weaker streaming platforms will either merge or cease operations within the next couple of years. Regardless, there is an anticipated fierce battle for viewer attention in the wider streaming market.
YouTube, a platform primarily recognised for its user-generated content, is also focusing on paid subscriptions with packages like NFL Sunday Ticket which are priced roughly at $480 per annum.
TikTok, on the other hand, is encouraging its users to test long-form video content, lasting up to an hour. Simultaneously, free streaming sites such as Tubi, a Fox-owned service, are gaining traction, leveraging classic TV shows.
Analysts from MoffettNathanson, a research firm, noted that “the competition is cutthroat, spanning not only subscription streaming platforms but also the broader category in its entirety. YouTube currently holds the lead, boasting 20% more TV usage than Netflix and growing at an expedited pace. It seems short-form video is here for the long haul.”
Before implementing these changes, Netflix was famed in Hollywood for its readiness to pay hefty amounts to reputed directors or showrunners for the purpose of series or movie production.
This approach contributed to Netflix’s early appeal to viewers, boosting its popularity with edgy shows such as Orange is the New Black and House of Cards. Consequently, its content budget inflated, thanks to investor enthusiasm in purchasing newly released shares in what was then a loss-making company.
“Now that Netflix has become the dominant force, they can exploit their market share,” commented an insider.
Netflix’s decision to spurn Hollywood’s traditional profit participation model, also known as the back end, has caused outrage within the industry. This system typically involves actors and directors accepting lower upfront fees with the prospect of a share of the gross revenue if the movie is successful at the box office. In contrast, Netflix has instead chosen to handsomely compensate high-profile directors such as Martin Scorsese for his monolithic mafia film “The Irishman,” and renowned showrunners like Shonda Rhimes and Ryan Murphy for their contributions to dramas such as “Bridgerton” and anthology series like “Dahmer,” respectively.
However, this extravagant outlay seems to have reached its pinnacle, at least for the present time. Veteran producers and writers claim that as Netflix has already staked its claim as a significant force in the industry, the company no longer needs to offer financial incentives to entice talent to work with them, they argue that Netflix can now take advantage of their considerable market presence instead.
Following a dip in subscribers in 2022, Netflix decided to limit its content budget to a total of $17 billion, despite this being reduced to $13 billion during the Hollywood strikes last year. Intriguingly, despite the decrease in new content during this period, the company’s subscription numbers continued to climb. According to Third Bridge analyst Jamie Lumley, unlike its counterparts in traditional television, Netflix’s engagement figures did not suffer during this period.
Furthermore, Lumley points out that seasoned media groups, in response to the pressures of the strike, resumed the licensing of their series to Netflix after initially halting this practice upon the launch of their own streaming platforms. Releasing older series on Netflix granted them renewed popularity, an outcome famously exemplified by “Suits” featuring Meghan Markle, which leapt to the position of the most streamed show of 2023.
This revelation encouraged Netflix to reassess its approach to new content production, concluding that it’s not necessary to produce as much as it initially thought. This epiphany allows for more freedom to take risks with different types of content, with the company stating they intend to increase their content expenditure from the current $17 billion though have not provided a timeline for this.
Netflix has garnered a reputation for its cheaper to produce but widely popular “unscripted” programming, which includes reality shows such as “Love is Blind”, “Selling Sunset”, and “Is It Cake?”. The company ventured into the world of live streaming with a slightly flawed stand-up performance by comedian Chris Rock in March. Analysts predict that this foray into live streaming could pave the way for live professional sporting events and other content to boost audience interaction further.
Netflix’s capability to air live events will face a significant challenge on Christmas Day, as it is set to broadcast an NFL game. This has led to rumours that the streaming giant might compete with the likes of Amazon and Apple for sports rights. However, Sarandos, a key figure at Netflix, has rebuffed these suggestions, stating his disinterest in paying for full-season rights that mainly benefit the partner.
In a recent noteworthy move, Sarandos has brokered a $5 billion deal spanning 10 years with World Wrestling Entertainment’s weekly Raw programme in America. This venture represents Netflix’s largest step into live event streaming, laying groundwork for potential future partnerships with professional sports leagues.
“Wrestling has a historically devoted following, which is complemented by its weekly content,” Lumley comments. This regular programming reduces the need for Netflix to consistently generate new content, according to him.
Some critics, however, perceive the wrestling deal as a departure from the more sophisticated content that was the hallmark of Netflix’s early years. “If quality is equated with highbrow, literary scripted shows, then Netflix has pivoted away from that speciality in recent years,” says Robert Thompson, a professor at Syracuse University’s Newhouse School. He adds that while wrestling and live stand-up comedy have value, they offer a different experience compared to more refined scripted shows.
Despite ongoing discussions about the quality of its content, Netflix still managed to scoop 24 Emmy awards, including four for Baby Reindeer. However, it fell second to Disney’s production arm, FX, known for popular series like Shogun and The Bear.
In spite of Netflix’s ambitious marketing strategies and eight nominations since 2019, the coveted Best Picture Oscar still remains out of its grasp. Nominated titles include Roma, The Power of the Dog, and All Quiet on the Western Front. Whether Netflix will continue its aggressive pursuit of prestige films remains a hot topic in Hollywood, especially following the exit of Scott Stuber, the former head of the movie division, who had famously attracted top filmmakers with the aim of achieving Oscar glory during his seven-year term.
In the face of rumours suggesting his successor, Danny Lin, might deviate from the established course of Stuber, Sarandos reaffirmed a relentless desire for improved film production. He cites Emilia Pérez, the recent Cannes victor, and a version of August Wilson’s play, The Piano Lesson, as evidence of their unswerving dedication to quality cinema.
Irrespective of whether they win the Best Picture award, and notwithstanding the challenge of complimentary streaming, Netflix has for the time being hardened its status as the leader in a bruised Hollywood industry.
As a top-ranking official from a competing Hollywood firm opines, “Each ten-year period is dominated by a preeminent media company. For this decade, that company is Netflix.” This document is copyrighted by The Financial Times Limited 2024.