Netflix should let 1,000 apps bloom

NETFLIX has had a rough 2022. As of Mar 21, its share price was down 38 per cent year-to-date, back to pre-Covid levels after an earlier pandemic boost.

The culprit: slowing subscriber growth.

The streaming giant has pulled a few levers in recent months to address the slump. In January, it raised prices in Canada and the US. 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 chief finance officer 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 personalisation 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 personalisation infrastructure contains everything needed for serving personalised ads, and it could be co-opted to do that."

As far back as 2015, Netflix said its personalisation and recommendation engine was so effective, it added US$1 billion a year to the company's revenue (mostly by reducing churn).

Seufert tells me that Netflix - which makes US$30 billion a year on subscriptions - could "instantly scale" an ads business to US$2 to 3 billion. LinkedIn (more than US$3 billion a year) and Amazon (more than US$31 billion) are 2 examples of platforms that built large ad businesses separate from their main moneymakers.

Is an ad network the best solution for Netflix?

Creating more value

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 is a breakdown:

• A new ad landscape: Apple's new iPhone privacy policy means that you cannot transmit data from users to apps, significantly reducing the efficacy of mobile ads (Meta says the new policy will cost it US$10 billion in 2022).
• First-party data is more valuable: Platforms that rely mostly on their own user 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 is how that would work: Someone creates a Netflix-branded fitness app. Based on people who view fitness-related content (that would not 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 2 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 monetise, 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 6 months, it has acquired 2 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 it "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". BLOOMBERG