KPIs: Apples vs. Orange is the New Black
Ratings, Subscribers, and Netflix vs. the Media Execs
Do industrial era executives have blind spots when trying to understand the success of disruptive digital-first competitors?
Let’s take the case of media and the metrics of ratings vs. subscribers.
Traditional TV and cable execs are still struggling to understand content consumption habits from video-on-demand, gaming consoles, cable set-top box, streaming, app-based, and old school broadcasting. If they can’t keep an accurate track of ratings, they don’t get paid by their advertisers.
Just yesterday Nielsen announced they would supply ratings data for subscription video-on-demand (SVOD) services. Now, SVOD companies can report ratings to their advertisers, and get paid. The ratings data won’t be made public, however.
While 8 major network studios will get the data, Netflix is opting out. According to Variety, a Netflix spokesman said: “The data that Nielsen is reporting is not accurate, not even close, and does not reflect the viewing of these shows on Netflix.”
Why does Netflix not want to know the ratings of their shows?
1/ Different Economics Drive Netflix
Netflix just ended their third quarter with astounding revenue growth. The company reports subscriber info alongside their financial performance, topping out at 104 MM subscribers, adding 5.3 MM in total (blowing past the 4.4 MM projected). They plan to raise prices, as well, because they believe the value they are creating for customers is increasing.
The company will use the money from subscribers and increased prices (and lots and lots of debt) to increase in original content spend to $8 billion next year.This is more content than any media company has ever acquired in the history of media. More than ESPN, even, and they don’t buy sports viewing rights.
% of US Households that subscribe to VOD.
- 51.2% Netflix
- 28.6 % Amazon Prime
- 12.7% Hulu Plus
Why don’t they report ratings?
Because ratings don’t matter in a digitally-delivered subscription model.
It’s not their business.
Netflix has different economics.
(existing recurring subscribers + net new subscribers) x increased prices / ($ 8 billion of content)
“Generally speaking, these kinds of traditional ratings don’t matter in a world where success isn’t measured by specific time slot. They are especially irrelevant on a subscription service that doesn’t sell ads. We measure success by subscriber numbers and hours people watch, and we do release those figures quarterly.” — a company spokesman from Netflix said in 2016, the last time old media tried to out Netflix’s ratings with dubious measurement technology.
Their revenue growth is driven by more subscribers, more valuable content, and now higher prices, a virtuous circle.
Competing against Netflix’s phenomenal growth is hard. Competing when you are using different metrics makes it near impossible.
But there is another reason why Netflix may shy away from ratings.
2/ Ratings = negotiating power
Content creators, actors, writers, and producers still operate in both worlds: Netflix AND ad-supported content.
The Duffer Brothers of Stranger Things, Aziz Ansari of Master of None, Jenji Kohan of Orange is the New Black all have to negotiate their contract renewals along with cast members and other talent. In the traditional TV world, ratings translated into increased contract values for producers, directors, and actors.
We have to go back in time to the Golden Age of Hollywood to remember how this all started out. Actors had year-long contracts and were part of a “stable” of rotating cast members on the sets of Metro Goldwyn Mayer, Warner Brothers, RKO and other studios. The studios controlled all of production and became dominant, with actors, producers, and other players in the system unable to negotiate better salaries or fees if their content was a huge hit.
When the studios were broken up following antitrust negotiations, these types of yearly contracts fell out of vogue. The star system was born, and major actors, producers, directors, and other talent became free agents, free to negotiate higher pay for bigger audiences.
To demonstrate how big your audience is, however, you need ratings.
I recently spoke with a young content creator who had a small production deal with Netflix. He is desperate to know the ratings of his show. Knowing the ratings is a KPI from his perspective, and would help him then negotiate with Netflix, and also with other more established companies who factor ratings into the value of his work.
When Nielsen announced ratings data for streaming video on demand content, Megan Clarken who oversees video measurement products said, “Being able to follow assets across all these forms of consumer consumption, being measured apples to apples by a third party independent measurement is incredibly important for the studios, for the licensors or the rights holders of content.”
Perhaps, then, Netflix the new new thing that is based on the oldest idea in the media industry, and takes us back closer to the Golden Age, when the studios had all of the power.
What does this mean for incumbents trying to understand digital disruption?
It’s critical not to be blinded by the dominant logic KPIs that drive your growth. Netflix is a powerful disruptor in the media business. Subscribers x prices / content is truly the best game in town right now.
At the same time, all industries are transforming digitally, and power is the name of the game. While ratings fit the business model of ad-supported business models, ratings also gave creators more power to negotiate. Be wary of digital saviors who stamp on the metrics of the past.
Jen van der Meer is the Founder of Reason Street and is an Assistant Professor at Parsons School of Design Strategies. Jen is on a mission to measure the value of everything. She believes that business models can be designed to build the future we want to see.