May 3, 2022

The Pivot to Advertising Has Begun

Subscriptions are unbelievable. You have recurring revenue that, ideally, compounds month after month. Nothing else matters because you have growing subscriptions. And then it stops. Suddenly, you report a loss in subscribers. And panic ensues. Suddenly, you ask: should I have been so anti-ad all these years?

This is the question Netflix is asking right now.

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Now let’s jump in…


According to The New York Times:

After announcing financial results for a difficult quarter, in which Netflix lost subscribers for the first time in a decade, Mr. Hastings told investors on Tuesday that the company planned to look into a lower-priced tier supported by ads “over the next year or two.”

“Those who have followed Netflix know that I have been against the complexity of advertising, and a big fan of the simplicity of subscription,” he said on the company’s earnings call. “But as much as I am a fan of that, I am a bigger fan of consumer choice. And allowing consumers who would like to have a lower price, and are advertising-tolerant, get what they want makes a lot of sense.”

And the justification for it makes sense when you realize that consumers are deciding these subscription/ad blended products are right for them. In that same article:

The number of subscribers for the ad-supported services has soared. By the end of last year, 129 million people used an advertising video-on-demand service, according to Insider Intelligence, a market research firm. By 2025, the firm projects, that figure will rise to 165 million users. Likewise, video advertising revenue shot up 51 percent last year to $39.5 billion, according to the Interactive Advertising Bureau, a trade organization.

So, you’ve got a business that is starting to reach saturation on the subscription product, but since everything has to grow forever, it needs to find new revenue sources. And thus, the pivot to advertising has begun.

This makes a lot of sense for all parties involved. Whether we’re reaching peak subscriptions or not, people are becoming more aware of how much they are spending each month. And when competing with a lot of other streaming platforms, retention becomes unbelievably essential.

Therefore, giving users a choice between ads or non-ads is a great way to retain subscribers and, likely, increase the number of net new subscribers the platform has. And it’s not even a revenue hit. If we look at Disney’s Q1 earnings, it’s clear that subscribers with ads make about the same amount. The ARPU in 2022 was $12.96, down from $13.51 in 2021. The ad product is $7.99 per month versus the $12.99 for ad-free. Despite the $5 difference, Hulu can make up for it in advertising.

It’s a pretty sweet situation, and I suspect that, were Netflix to introduce an ad product, it would find that it does not see any drop in revenue. On the contrary, its ability to acquire more subscribers on the cheaper plan should actually increase revenue from where it is today because it is a more affordable option, and more people will subscribe.

But I can already imagine subscribers panicking about the potential of advertising appearing on Netflix. And Netflix will have to make some choices about how it wants to interfere in its subscribers’ lives. Fortunately, this Twitter thread is the best type of consulting that Netflix could ever get on the topic. I encourage everyone to read it.

In a nutshell, the author looks at the different steps of the customer journey: “login, search, start, pause, still watching?” to name a few. Each of these has a risk of bounce. For example, if you’re cruising through the app, you’re not at risk of bouncing, and seeing an ad is almost expected. On the other hand, seeing an advertisement in the middle of watching a video is likely a high-bounce behavior. Again, look at the thread to see it in full detail.

Once you understand the different behaviors and where users are more/least likely to bounce, you can start to experiment with advertising. When starting with a blank canvas, there is a ton of low-hanging fruit that can move the needle.

Publishers should also try to do this sort of behavior mapping. Too often, we force ads on users without considering the likelihood that they’ll stay or leave. But if we assessed our products and understood what the user is doing and might expect at different parts of their journey, we’d be able to identify better advertising experiences.

Why does the chum box perform so well? Sure, in part, it has to do with it being hyper-click bait. But I would also argue that success is, in big part, because the ad is at the end of an article. The user has finished something and is now being introduced to an advertisement. It’s a clean flow.

The natural end-state of this suggestion is that every publisher introduces an exit-intent ad. Since the user is obviously getting ready to bounce, extract one last ad impression, right? That’s the wrong way to think about it. We have to consider our readers as long-term customers rather than one-off visitors. Therefore, an exit-intent advertisement (often big, loud, and annoying) is likely a negative brand hit.

But maybe that doesn’t matter. As with all things, we have to balance our need for revenue and the user experience. The problem is that revenue appears quickly, and losing users over the long-term due to bad user experience takes time. So before you know it, your audience could be a shell of itself, and revenue is down.

The reality is that companies increasingly realize that it’s an advertising and subscription world, not an either-or. But for those that are pivoting toward ads, find what fits your product. It may not be the standard offerings that everyone else does.

Vice to sell only studio or, maybe, everything

The Information has a story out that Vice is exploring a sale of its studio business.

Vice Media is exploring the possible sale of its studio business, looking to take advantage of rising valuations for production companies in recent months. But a sale of the business would deprive Vice of its biggest business and would raise questions about the future direction of the firm.

The media firm is working with investment bank PJT and LionTree to explore the sale of the studio, said people familiar with the situation. Vice has struggled for several years to turn profitable and it faces pressure from investors, including TPG, to repay $1.1 billion in debt it owes. The move follows several deals done for production companies, including Reese Witherspoon’s production firm Hello Sunshine, as the expansion of the streaming market has driven demand for content.

I understand why it is doing it. Unfortunately, Vice has been shackled with a ton of debt, and it is doubtful it will ever get out from underneath it. It attempted to go public via a SPAC, which would have helped, but it was too slow. And so, if it ever wants to try and grow again, it needs to get rid of TPG’s hold.

Following up on The Information’s story, CNBC reported that Vice had hired financial advisors.

Several buyers have expressed preliminary interest in acquiring Vice outright, people familiar with the matter said. While finding a single buyer would be a simpler solution for Vice, given potential issues around valuation and the company’s outstanding debt, it also is exploring options to sell the company in parts, the people said.

Discussions with potential buyers are ongoing, the people said. No deal is assured or imminent, they said. TPG isn’t interested in acquiring all of Vice and instead is looking to monetize some of its investment, one of the people said.

This is a tough situation for Vice to find itself. On the studio front, I think it’s late to the party like it was with its SPAC. Netflix, the biggest spender in the streaming world, has realized that it shouldn’t overpay for content. That will have an impact down the board on how much these studios make. Hindsight is always 20/20, but peak studio was likely a few weeks ago.

But the reality is, some sort of sale—whether outright or in pieces—is probably the best bet for the company. Owing $1.1 billion limits its ability to do much of anything. If it can clear many of these investors (TPG in particular) off the cap table, it’ll give Vice the ability to invest in its future, ideally as a sustainable media business. The question is how much investors are willing to lose on this. Disney, which invested $400m, already wrote off its entire investment in 2019. Will others?

At this point, it feels as if a reset is what Vice needs. It’s no good for current investors, but the parts might be worth more than the whole. And if that means each part can start to grow again—likely under new ownership—then that’s the move to make.

Between BuzzFeed remaining depressed from a valuation perspective in the public markets and Vice now having to consider part or the whole of itself, it seems that we’re almost at the end of last decade’s media extravaganza. It’ll be interesting to see what comes in this decade.

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