IPG Media Lab
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IPG Media Lab

What Netflix’s Recent Woes & Moves Tell Us About the OTT Market

Brands should heed the shifting dynamics in the OTT space as pandemic-spurred acceleration in streaming growth comes to an end

Photo by Dima Solomin on Unsplash

What’s Up with Netflix Lately?

This week, Netflix announced that it has selected Microsoft as a “global advertising technology and sales partner” to help it launch an “ad-supported tier” that the global streamer announced in April. The selection comes as a surprise, both in terms of the quick turnaround since the initial announcement and Microsoft’s somewhat overlooked status in the larger digital ad ecosystem.

However, upon reflection, partnering with Microsoft to jump-start their ad business does make a lot of sense for Netflix, especially considering the cloud service business and the gaming business that Microsoft also operates. At the moment, most of Netflix’s services worldwide still run on Amazon’s AWS servers, and the company has spent a good part of the last 12 months trying to bundle original video games into its streaming service. Partnering with Microsoft on ad operations could ladder up to a broader partnership that leverages Microsoft’s Azure cloud services and its various gaming products led by the Xbox to expand Netflix’s offerings and capacity down the road.

Of course, the quick turnaround on jumping start is not without reason, either. Netflix has been under quite the pressure from investors to prove that it can sustain its growth after the accelerated growth it (and other streaming services too) experienced during the worst periods of the Covid-19 pandemic. Some would argue the strategic about-face regarding whether to include advertising in their service is also a response to its stalled subscriber growth in the U.S. this year.

For years, Netflix has been held up as the poster-child for the cord-cutting movement and the market leader in the streaming wars. Yet, recently it seems to have hit a snag after years of unbridled growth and global expansion. While lockdown measures during the pandemic boosted Netflix’s subscriber base and stock price, underwhelming subscriber numbers in recent earnings reports sent its stock price tumbling, so much so that it has practically lost all of its pandemic-era gains by mid-May.

Even consumer sentiments are becoming a bit mixed on Netflix, especially following its most recent subscription price hike. which boosted its most expensive plan to $20 per month, marking the third price increase for Netflix since 2019. According to Whip Media’s 2022 Streaming Satisfaction Report, while Netflix still ranks №1 among the nine subscription VOD services tracked for both user experience and content recommendations, when it comes to “perceived value,” it comes in dead last; HBO Max ranks highest and Disney+ is in second place. By all accounts, it looks like the streaming audience has developed a love-hate relationship with the industry’s biggest subscription streamer.

Moreover, Netflix’s recent woes are reflective of the broader downturn for the OTT streaming services. Analysts are quick to attribute it to the so-called “return to normal” as consumers start to venture outside and return to out-of-home entertainment options like movie theaters, concerts, and theme parks. Recovery in Disney’s theme park business as well as the movie box office this year certainly lends strong evidence to this theory.

Source: Disney via Bloomberg

Streaming’s Golden Growth Era is Over — And That’s OK

Looking beyond the obvious shift in consumer preference, however, Netflix’s recent troubles are also indicative of the emerging shifts in the market dynamic of the entertainment content industry. For a while, the frenzy around the streaming wars, with seemingly every major content owner rushing to launch their own direct-to-consumer streaming services, has obscured the fact that SVOD services usually entail a lower per-customer profit margin compared to other distribution channels.

The pandemic may have smashed the theatrical windows wide open and funneled more viewers to at-home viewing, but theatrical releases still hold an important strategic position for movie studios due to the higher profit margins it creates, even after the exhibitors take their cut — not to mention its capability for eventizing a release and build valuable IP franchise.

The recent underwhelming box office performance for Pixar’s Lightyear offers an interesting example to explore Disney’s calculations behind its release strategy and the resulting market dynamic. For the past two years, Disney had made the latest Pixar feature films — Soul, Luca, and Turning Red — available to stream with no extra cost on Disney+. It’s a move that makes the perfect sense at the time, given the widespread concerns that parents share for their unvaccinated children. Yet, by the time that Lightyear was released exclusively in theaters, families with Disney+ subscriptions have become accustomed to watching new Pixar releases at home. This shift in audience expectations on what they can access at home vs. in theater likely played a big part in the movie’s underperformance, despite the franchise halo of Toy Story.

Another obvious reason for the comparatively low profit margins of streaming services when it comes to monetizing in-demand, tentpole releases is the fact that at-home viewing is charged per subscription account, instead of per headcount as theaters do. Netflix’s recent move to crack down on password sharing by making people who share their accounts pay more exemplifies this disparity. Upon announcement, the plan swiftly drew public ire, further damaging the service’s perceived value.

The underlying economy of shifting from cable TV to OTT streaming partly underlines a common consumer desire to save and only pay for channels (aka streaming services) that they actually watch frequently enough to justify the subscription. At this stage of the “streaming wars,” the subscription fatigue has fully set in. More than half of those (53%) who pay for streaming services spend at least $20 a month on their subscriptions, according to a Nielsen study, but only 15% are willing to pay $50 a month or more for streaming services. For the majority (68%) of U.S. households, $30 is the upper limit for their streaming budget, and that barely covers both a mid-tier Netflix subscription and an ad-free HBO Max subscription. No wonder why so many people are turning to ad-supported streaming services like Tubi or Pluto TV to supplement their streaming needs.

Source: Nielsen data via Axios

Is Rebundling the Next Move for OTT?

With ad-supported tiers launched (or in Netflix’s case, launching soon) for most premium streaming services, it would seem that the underlying economics for streaming is undergoing a recalculation. Amazon Prime Video and Apple TV+ are the two only holdouts, and both are backed by deep-pocketed tech giants who are mostly using their respective streaming services as a loss-leader to acquire and retain more customers for their broader businesses. For everyone else, it is time to add commercial breaks and hope that a lower subscription cost would entice more users to sign up.

The other notable trend that is changing the SVOD viewing experience is the slow death of the binge-watch. Yes, Netflix is still releasing most of its TV shows by the entire season, but increasingly, streaming services are experimenting with weekly release schedules to prolong the life cycle of their shows and keep them in the cultural discourse. The motivation is pretty self-evident: pivoting from full-season drops to batched releases helps keep viewers — and advertisers — around for longer. For the binge-watchers, they’d simply have to wait until the season finale drops to start their binge.

One apparent solution to the current fragmented streaming landscape may be a remake of the cable bundles for the digital era, and, as analyst Ben Thompson points out in a recent Stratechery article, “the cable companies are better suited than almost anyone else to rebundle” the disparate streaming services available into one neat bundle deal, thanks to the fact that they already have a billing relationship with the customer by also being the internet provider in most cases, which, in turn, makes them particularly effective at customer acquisition.

Of course, tech companies have also had the ambition to remake the cable bundle via their respective TV apps and connected TV interfaces. Recently, Comcast made its Xfinity TV streaming app available on Apple TV devices, proving once again that, in the world of streaming, content availability goes both ways in the shared quest for more viewers. Should Apple, Amazon, or Google finally get Netflix to agree to integrate their content into the “Up Next” watchlist of their respective CTV interfaces, they could make Apple TV (the app) or Amazon Channels, or Android TV the ideal platform for a rebundling. And if Netflix continues to spiral, that concession does not seem entirely out of the question.

Lastly but certainly not least, the emerging trend of bundling video game services natively into connected TV interfaces will open new ways of thinking about the value of a streaming bundle. Samsung Gaming Hub went live last week with native integration with Twitch, Xbox Game Pass and more video game services. If Microsoft is planning to further explore the possible channels of expanding the reach of its Xbox cloud-streaming services, it’d dovetail nicely with Netflix’s continuous effort to bring video games into its service to bring Xbox Game Pass to new devices and platforms. If this trend gains momentum, before long, streaming services may have to differentiate between gaming content and video content. After all, the video game industry is already undergoing a “Netflix-fication” transformation itself, as game publishers and console makers explore the all-access streaming subscription model that resulted in our current home entertainment landscape. The convergence down the line when a rebundling of content services seems inevitable, gaming content will likely be part of the conversation as well. And on that front, Netflix is still ahead of all of its competitors.



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Richard Yao

Richard Yao

Manager of Strategy & Content, IPG Media Lab