Netflix used to make millions from advertising. Here’s why they killed it.
Ahead of his keynote talk at the News UK Change Forum in London on 5th February, Fluxx spoke with Gibson Biddle about his time at Netflix, the day Reed Hastings (Founder and CEO) killed off advertising and his advice for media companies in 2019.
Gib led product development at a pivotal time for Netflix (from 2005–2010) when the service grew to an impressive 13 million subscribers. But crucially, it was the time when Netflix moved from DVDs into streaming.
Gib went on to lecture at Stanford and become Chief Product Officer at Chegg. Netflix went on to reach over 137 million subscribers and is projected to spend between $12–13 billion on original content this year alone.
Just how did the company that was once a DVD rental service selling ad space on the back of envelopes become the world’s biggest spender and producer of original content?
“What startups do very well is experiment wildly.”
For Gib, the key to a successful business is not losing the startup mentality of experimentation — especially when it comes to the business model.
“For many, a startup is born, it’s successful and then, for whatever reason, 5–10 years in, their risk profile changes — they take on less risk. Netflix has observed this and are consciously working to take on that same level of risk, even though they’re a company that earns billions in revenue and has over 135 million members worldwide.”
Gib describes how this mentality of experimentation has three parts: delighting your customer, building things that are hard to copy and ongoing experimentation with business models.
The past few years have seen established publishers adapt as print sales have dipped and ad revenues declined. Last year, for the first time in its history, The Guardian’s digital revenues outstripped print. With the introduction of a full paywall, The Times traded millions of readers for 300,000 subscribers, whilst moving from the red and into the black. The paper just recorded its best year since introducing the paywall in 2010.
There is a clear need for publishers to experiment beyond an advertising business model. But interestingly, despite being a subscription service, at one time Netflix did sell advertising space.
“It was 2007 when we had around 5 million subscribers. Our biggest challenge was that we hadn’t truly demonstrated to our shareholders that we had delivered shareholder value. So at the time we experimented with advertising…”
And selling ad space was very successful. “It was part of our site and envelope experience for about 2 years. And we delivered margin. If I recall, we delivered $30m in profit from advertising.”
So why kill it?
“It essentially got killed by Reed Hastings, the CEO. He walked me down the hall and said, ‘Gib, I need you to kill advertising’.”
“And then he asked, ‘Gib, who’s going to be the best in the world at advertising?’ I replied ‘Google’.
‘And what do we need to be the best in the world at?’”
The answer was personalisation.
It was a rare moment where killing off something that worked was required. In Netflix’s case it was to make the product simpler and to focus on personalisation and streaming.
The bet paid off. And to this day risk taking and experimentation are still at the heart of the Netflix product strategy.
“People are questioning the way Netflix is making investments in original content. And it is a big forward bet. It’s a bet that $10bn content created this year will be watched by new members 5 or 10 years from now.” But for Gib this is what it takes to become a great company in the long term.
“Have you happened to notice Bandersnatch?” Gib asks enthusiastically. The latest in the Black Mirror series enables viewers to decide the path of the main character — Netflix’s own ‘pick your own adventure’ story.
“It’s a fantastic experiment in content type. If you look carefully they did interactive storytelling a few years ago with kids stuff and then finally they found something bigger where the artists were willing to engage.”
For Gib, when it comes to the second part of his tripartite recipe for success, Netflix has built many advantages that are extremely hard to copy. But the one it must focus on in the coming years is becoming the go-to place for the creative community.
“Today it’s all about the relationship Netflix can create with the creative community. And that’s a new kind of network effect. Imagine if all of the creative community start saying you should work with Netflix. Now they’ve created a network of artists, which is a hard to copy advantage.”
And lastly, it goes without saying, Netflix certainly knows a thing or two about delighting customers.
Gib asks, “Do you think Netflix cares if you share your password with your friends and family?
“They don’t.”
For Gib, that’s precisely the mark of a company that obsesses over delighting its customers.
Gibson Biddle will be speaking at Change — News UK’s Product and Data Forum — on 5th February 2020. Other speakers include Jonas Huckstein, Co-founder of Monzo, and Christina Scott, CTO News UK.
