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Next year’s upfront week schedule is already starting to take shape, with NBC taking the stage on Monday, followed by ABC on Tuesday, and Netflix on Wednesday.
Netflix hosting an upfront event for advertisers in 2012? It’s not as crazy as it sounds, despite the company’s very public declarations that it has no interest in the ad business. CEO Reed Hastings and his team ought to reconsider his position on advertising, considering how lucrative the TV market continues to be, and the fact that a “network” like Netflix which reaches 23 million users and counting — a reach that is in short supply even in the broadcast business these days.
Buyers are betting that Netflix — despite a $250 stock price, a surging subscriber base and revenue north of $2 billion last year — will become an upfront player sooner rather than later.
“When does Netflix get into the ad business, that’s the million-dollar question, my friend — been thinking about that one for a while,” said Vik Kathuria managing partner, corporate strategy and digital investment at MediaCom.
“I’m guessing at some point when content costs become prohibitive and they are going up against deep-pocketed competitors like Amazon and Apple.”
Content costs are already soaring, particularly given Netflix’s recent eye-popping $100 deal to acquire House of Cards , a Kevin Spacey thriller which in the past would have likely fallen into the hands of an HBO or Showtime. Netflix is clearly going after more original content; talk prior to the upfront was that Netflix might save NBC’s The Event (it didn’t). The New York Post reported earlier this week that Netflix is talking to Scripps and others about acquiring shows.
Beyond content costs, Netflix’s Web streaming costs are said to be approaching $2 billion a year. The company is getting to a place where the majority of its revenue could be soaked up in operational costs, despite its rapid growth.
So wouldn’t a few hundred million or more in ad revenue help a ton? And isn’t that well within reach, considering that fourth-place NBC last year brought in $2.4 billion?
Justin Patterson, senior analyst with investment bank Morgan Keegan, isn’t buying it.
“They’ve been pretty adamant against advertising,” he said. “As the business grows larger and larger, with more subscribers per household and globally, the price paid for content deals becomes less and less. When you spend 2 billion on streaming, $100 million for a show isn’t crazy. For the most part, Netflix has been very intelligent about purchasing content.”
And Patterson sees plenty of untapped TV library content that Netflix can snatch up for cheap. But other analysts, incuding Wedbush Securities’ Michael Pachter, have said it’s vital for Netflix to differntiate with premium original shows to compete with HBO and other networks.
That’s where advertising would provide an ideal cash infusion — and the perfect vehicle to promote new Netflix series. While the company is praised for its custom algorithm that powers its recommendation engine, there’s no guaranteee that engine will promote House of Cards, or any other series Netflix acquires, enough to make it worth the company’s while. After all, the company will likely soon find that it’s a lot easier to promote a new show to 10 million potential viewers in one shot during Grey’s Anatomy than in a Netflix queue.
But what if everybody, Netflix subscriber or not, could stream the House of Cards premiere, brought to you by Ford? Couldn’t the company count on hooking at least a few hundred thousand new subscribers while earning a nice bit of revenue?
Or what if Netflix subscribers could get a free month or two each time they agreed to sample new series premieres? We’ve already seen efforts to induce consumers to watch ads for virtual currency. Netflix credits sound pretty good.
The trick, of course, would be to not overload Netflix’s content with ads. Suddenly running 30-second spots prior to every movie would be suicide, causing subscriber outrage. But done gradually, it’s likely that Netflix users would grow accustomed to some level of advertising. People over 30 will remember a time when going to the movies meant an escape from ads — those days are long gone, but people still go to the movies in droves.
Patterson isn’t convinced — yet.
“If it becomes the case that House of Cards becomes unprofitable, they’ll probably back off,” he said. “But the real question is, what happens with YouTube’s movie service, which is lackluster right now, get more serious?”
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