The streaming giant can use its infrastructure and user data to build a valuable app ecosystem.
Netflix Inc. has had a rough 2022. As of March 21, its share price was down 38% year-to-date, back to pre-Covid levels after an earlier pandemic boost.
The streaming giant has pulled a few levers in recent months to address the slump. In January, it raised prices in Canada and the U.S. Last week, it unleashed every subscriber’s worst nightmare and rolled out a plan to crack down on password-sharing (unlucky netizens in Chile, Costa Rica and Peru are the first to be affected).
Perhaps most surprising is the company’s latest position on ads, which it has long shunned. Netflix CFO Spencer Neumann raised eyebrows at an investor conference when he said “never say never” in regard to ads on the streaming platform. While it currently has “no plans” for advertisements, Netflix competitors have already made the leap: HBO Max offers a lower-priced subscription tier that includes ads during the shows while Disney+ announced it will roll out a similar offering later this year.
Writing in Mobile Dev Memo, analyst Eric Seufert notes that Netflix has all the pieces in place for an ad network:
The components of a scaled personalization engine are not substantially different from that of an advertising platform. With the exception of a bidding system and an interface for creating campaigns, Netflix’s personalization infrastructure contains everything needed for serving personalized ads, and it could be co-opted to do that.
As far back as 2015, Netflix said its personalization and recommendation engine was so effective, it added $1 billion a year to the company’s revenue (mostly by reducing churn).
Seufert tells me that Netflix — which makes $30 billion a year on subscriptions — could “instantly scale” an ads business to $2 billion to $3 billion. LinkedIn (more than $3 billion a year) and Amazon (more than $31 billion) are two examples of platforms that built large ad businesses separate from their main moneymakers.
Is an ad network the best solution for Netflix?
With its audience (222 million subscribers) and infrastructure, Seufert believes that Netflix could create more value by building a publishing platform for app developers. Here’s a breakdown:
- First-party data is more valuable:Platforms that rely mostly on their ownuser data (content interactions, purchases) are much less affected by Apple’s changes.
- The Netflix opportunity: The streaming company has a lot of first-party data on its subscribers that would be very valuable to app developers (who are otherwise stuck with less accurate mobile targeting). Netflix can use its existing mobile app to attract and host content creators.
Here’s how that would work: Someone creates a Netflix-branded fitness app. Based on people who view fitness-related content (that wouldn’t be me), Netflix promotes the app to those users. The company can extend this exact model across verticals to create an entire app ecosystem, which Seufert calls a “content fortress.”
While the benefit is clear for mobile app developers, Netflix wins in two ways:
- Free apps are top-of-funnel: They can cross-promote the core Netflix streaming service (and reverse the growth slowdown).
- Another revenue stream: However the apps monetize, Netflix can take a cut in exchange for hosting them in its ecosystem (this business model is also “more defensible” than selling ads, per Seufert).
Netflix is already aggressively building out a mobile game business. In the past six months, it’s acquired two mobile game studios and has plans to build out a library of content. The games are bundled within the existing subscription, though. Under the content fortress model, the games would be free and used to drive new users to the Netflix app.
Former Viacom exec Andrew Rosen writes in the PARQOR newsletter that Netflix’s new ad stance is just a signal that its “knows subscription alone may not drive its business forever.”
A content fortress for mobile developers is certainly an option to consider. It has advantages compared with ads — not least that it would be far more popular than “no more password-sharing please.”
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