With ads and gaming, Netflix is attempting an ambitious pivot

The three pillars of Netflix’s turnaround strategy

There’s some light at the end of the tunnel for Netflix: The streaming company revealed Tuesday that it added 2.4 million new subscribers in Q3, reversing a trend of multiple-quarter subscriber declines that sent its share price nose-diving from a high of $700 a year ago to less than $170 this summer.

“Thank God we’re done with shrinking quarters,” co-CEO Reed Hastings confidently proclaimed on Netflix’s earnings call Tuesday afternoon. It’s one of those statements that can blow up in your face, but Hastings does have some reason to be optimistic: In a matter of mere months, the company has announced and implemented an aggressive turnaround strategy, while also charting a path toward a subscription service that’s about much more than just movies and television.

Netflix’s foray into advertising is the first pillar of this pivot. The company will launch its ad-supported tier in 12 countries next month, and executives shared a few more details about those efforts this week.

• Netflix expects ad-supported viewing to ramp up over time. “[W]e don’t expect a material contribution in Q4’22,” it said in its letter to investors.
• One interesting disclosure was that Netflix is actually building out its own in-house ad sales team, and not solely relying on its ad tech partner Microsoft to fill those spots.
• “It’s been great to see both Microsoft and their sales team as well as our small but crack ad sales team in action,” Netflix COO Greg Peters said.
• Executives addressed concerns that the ad-supported tier could cannibalize Netflix’s higher-priced plans. “We don’t see a lot of plan switching,” Peters said.
• Peters also reiterated that Netflix was confident that its ad-supported tier would bring in at least as much money as its basic ad-free tier.

Part two of Netflix’s pivot: monetizing account sharing. Starting sometime in early 2023, Netflix will pester people to pay more if they want to continue to share their accounts with others.

• The company is very aware that this could rub some people the wrong way, which is why it is trying hard to avoid calling this a crackdown, or blame anyone for a practice that it has long openly condoned.
• One example: Instead of labeling people who are currently watching Netflix for free on someone else’s account as moochers, executives repeatedly called them “borrowers” this week. Pretty neighborly, right?
• To prepare for this definitely-not-a-crackdown, Netflix rolled out the ability to transfer user profiles to separate accounts this week.

Netflix Games is the third part of Netflix’s pivot, and we’re only now starting to see how dead serious the company is about gaming.

• Netflix has released 35 mobile games to date, and it has 55 additional titles in its pipeline, including 14 produced in-house.
• So far, those efforts have primarily focused on mobile, but the company’s VP of game development, Mike Verdu, confirmed this week that Netflix also wants to bring its games to PCs and TVs.
• To do so, Netflix is looking to build its own cloud gaming service, as Verdu confirmed Tuesday.
• That didn’t work all that well for Google, which will shut down Stadia in January. However, Verdu argued that Google’s problems were all about the business model behind Stadia, not its technology, which he called “amazing.”
• “For us, delivering games to your TV or PC, it’s a value-add,” he said. “We’re not asking you to subscribe as a console replacement, so it’s a completely different business model.”
• Further proof on how serious Netflix takes gaming is the hire of Chacko Sonny, who previously served as executive producer for Activision Blizzard’s Overwatch franchise.
• At Netflix, Sonny will oversee a new in-house studio in Southern California — and perhaps, one might speculate given his background, an expansion into live service gaming.

An ad tier designed to attract budget-conscious consumers, a push to monetize account sharing that is meant to keep Wall Street happy, and an ambitious gaming road map — these three pillars could transform Netflix into a very different company, and ultimately help it fend off competitors like Disney+ and HBO Max.

There’s no guarantee that any of it will work, and gaming in particular has long been a tough nut to crack for industry outsiders. But compared to just nine months ago, Netflix does have a much clearer plan and a new narrative to tell investors.

Executives laid the groundwork for that narrative this week, with Verdu telling the TechCrunch Disrupt audience that the company’s embrace of gaming was one of just a handful of major inflection points over Netflix’s history. And Hastings, while acknowledging that Netflix is not immune to the current economic climate, tried to exude confidence in the company’s path ahead during Tuesday’s investor call.

“All the stars are lining up very well for us,” Hastings said.

— Janko Roettgers

Note: Protocol is owned by Axel Springer, whose CEO, Mathias Döpfner, is on the board of Netflix.

A MESSAGE FROM GOALS HOUSE

It's becoming increasingly appreciated among the broader business and NGO community that the planet and people elements of sustainability are mutually dependent, and as such a focus on one at the exclusion of the other will be fruitless. But balancing profit and sustainability progress remains a more thorny debate.

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Amid record-high inflation, app spending dips

Global Q3 app spending declined by 5% year-over-year, according to data.ai’s new App Index report. App spending is still above pre-pandemic levels, with people shelling out $32.4 billion on apps during the quarter, and free apps continue to do very well.

• People downloaded a total of 38.7 billion apps across iOS and Android in Q3, the company formerly known as App Annie estimates. That’s 8% above Q3 20221 levels.
• Downloads grew 9% on Android, while iOS saw numbers go up by 6%.
• iOS still accounts for most app spending (65%), with iPhone and iPad owners shelling out a total of $21 billion for apps.

A surprise tidbit: Audible is on fire. The Amazon-owned audiobook service saw its app enter the top 10 of apps that attracted the most consumer spend in Q3. No wonder Spotify is looking to audiobooks to further grow its nonmusic revenue.

— Janko Roettgers

In other news

HP is rumored to exit the VR hardware business. The company’s G2 headset has been heavily discounted, and the future of Windows Mixed Reality is uncertain.

Microsoft’s Activision deal is about more than Call of Duty. The Windows maker’s lengthy response to U.K. regulators last week contained scathing criticisms of Sony and news that the company is planning a multiplatform game store, The Verge reported.

Meta is producing a VR horror show. Sometimes the jokes really do write themselves …

Blizzard Albany gears up for a union vote. The Activision Blizzard studio may be the next game studio with a union after 21 QA testers received approval from the NLRB to hold a formal election, The Washington Post reported.

Apple has introduced a cheaper Apple TV. The new $129 Apple TV 4K will effectively replace the HD version, which is being discontinued.

Bayonetta voice acting controversy takes a turn. After voice actor Hellena Taylor’s accusations against Bayonetta developer PlatinumGames went viral, Bloomberg reported Tuesday that the negotiations were far messier than she may have let on.

Nothing’s earbuds are getting more expensive. The phone maker is increasing the price of its Ear 1 earbuds by $50. That’s … not nothing? And also further proof that hardware makers without services revenue are having a hard time making inflation gadgets.

The RIAA now targets AI mastering. The industry association is taking issue with online mastering services that can make any track sound like it was produced by a major label artist.

DALL-E, DALL-E, DALL-E

You may have seen the meme: “PARENTS PLEASE check your child’s Halloween candy,” people on Twitter have been urgently proclaiming in recent weeks, only to reveal that they have found something completely nonsensical in a candy bar. It’s a fun jab at the urban legend of candy containing poison and razor blades, and predictably, it’s getting more absurd by the day. My favorite thus far: a warning against AI-generated candy. I personally wouldn’t mind a bag of Skite right about now!

— Janko Roettgers

A MESSAGE FROM GOALS HOUSE

Currently, much of the ‘E’ in ESG is focussed on climate only, and it is essential that companies also focus on biodiversity, recognizing nature-climate linkages in order to optimize mitigation and build resilience. ESG will prepare us for the necessary paradigm shift, driven by increasing external pressures forced upon us as a result of short-term profits.

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