NAB 2022: What many were talking about

Part 2: Netflix and advertising within the realm of streaming.

By Andy Marken

“Advertising is based on one thing: happiness. You know what happiness is? Happiness is smell of a new car. It’s freedom from fear. It’s a billboard on the side of the road that screams with reassurance that whatever you’re doing, it’s OK. You are OK.” —Dan Draper, Mad Men, Lionsgate, 2007–2015

Vegas was rockin’ and buzzin’ last month as the town hosted a refreshed NAB and squeezed in the happier-than-h*** CinemaCon.

The big chatter at both shows was Netflix’s surprising drop in subscribers, reaffirming to attendees that folks can only tolerate or afford so much ad-free paid content; and obviously, the steadily dwindling movie house numbers are still a solid bet for studios and consumers.

Over at CinemaCon, Sony’s film chief, Tom Rothman, couldn’t contain himself, “Netflix, my ass.”

True, his is just one of five studios that doesn’t have its own streaming service, hasn’t sold a lot of content to the subscription streamer, and really needs to get as much support and cash from theater owners—and their audiences—before he negotiates with streaming services and/or pay TV folks.

The big boys—Disney, Warner, Paramount, MGM (now part of Amazon), Universal (part of Comcast/Peacock—have their feet in both camps and give theatrical windows ranging from 17 to 45 days before the projects appear on their services.

Content Spend—Today, video storytellers have a wide array of sales opportunities—movie houses, pay TV, streaming (AVOD/SVOD)—and they all need to keep their pipelines filled to attract an audience. Where do normal folks spend most of their viewing time? At home.

Rothman also sidestepped the fact that a third of the projects of the content creation industry went directly to streamers.

More important for the folks who produce video stories, the industry—theatrical, pay TV, streaming—will be investing an estimated $230 billion this year in fresh movies and series to make stuff for people to watch.

Studio spaces are also feeling the pinch, with new production space being built across Canada, Africa, the Middle East, and Europe, including more than 6 million square feet planned or under construction in the UK. Much of the content will never be shown in their houses because theatrical folks count on the big-budget tentpoles to attract people to put seats in seats. All the while, they gloss over the fact that: theater attendance has fallen steadily since 2002; theaters make up the difference by steadily raising ticket/concession prices; studios foot all the marketing costs to attract the audience, and that 70% of the audience will prefer to watch a movie at home (Variety).

At the same time, that level of investment can’t be maintained solely by subscription services.

Big questions

The show floor and sessions were abuzz at NAB with key questions and a ton of educated/uneducated speculation. Does the first drop in 10 years forecast the streaming giant is falling back to earth? How many ads are best in the streamers? How much data will streamers use/share to make ads inviting and effective? How will consumers balance their desire/budget? What’s next?

While Warner Bros. Discovery’s CFO Gunnar Wiedenfels was focusing on his own company’s issues of mashing and slashing everything together, he prophetically summarized the challenges and opportunities facing the entire M&E industry (theatrical, pay TV, and streaming) when he said, “2022 [would] undoubtedly be a messy year.”

And probably through 2024.

Discounting the 700,000 Russian subscribers Netflix dropped, the company—still with more than 200 million subscribers worldwide—proved there is a limit as to how much consumers will pay before they say, “enough is enough.”

Folks told Netflix’s CEO Reed Hastings, and the rest, that some level of advertising is OK in return for a reasonable any time, any place, any screen streaming entertainment. All the services, including Netflix, base their subscription prices to a greater or lesser degree on the economies of the individual countries and consumer income and budget indexes. European subscribers had already pushed back moving to ad-subsidized services, while they have been preferred since the beginning by families in Asia.

According to Statista: streaming user penetration (SVOD, AVOD) in the Americas is 40%  and expected to hit 43.3% by 2026, or 224.6 million users. Also globally, user penetration is 25.5% this year and projected to hit 29.2% by 2026, or 2.3 billion users

Netflix will face a tough couple of years as it determines the best approach and balance for paid, subsidized, and free streaming, while making continued investments in new, unique content regionally and globally.

There are more than 2.5 billion TV-enabled households around the world, and the streaming services have only attracted the “easy picking” folks. Now they need to continue to grow with an array of opportunities, entertainment, and pricing. So does everyone else—those with global aspirations (Disney including Hulu, Warner Bros. including HBO, Amazon, Tencent, iQiyi, YouTube, Paramount, and Apple) as well as regional players (Comcast/Peacock, ALTBalaji, Rakuten, Viaplay, Zee5, Shahid, BritBox, and 200-plus others). For the next few years, there will be blood on the sand!

 Constructing tiers

Budget Balancing—Consumers have quickly found that they can reach their peak entertainment budget by going totally SVOD, and today they want options.

Because of its firm stance on ad-free content, figuring out the ad thing is one of the few areas in which Netflix doesn’t lead. Hulu has had tiered pricing since the beginning, and as soon as Disney (which already includes India’s Hotstar) rolls it into their service (they only own 60%… now) we’ll see three-tier pricing—no ads, some ads, more ads.

As soon as Warner Bros. Discovery’s President/CEO David Zaslav has cleaned up the merger mess, he and his team will focus on their tiered offerings. HBO has gone through a number of tier macerations, so bringing the “new” company under a single umbrella with easy-to-understand consumer cost options shouldn’t be too difficult. The toughest part might be deciding what to call it!

China’s Tencent and iQiyi are creeping across Asia/Southeast Asia and may only have regional aspirations, but it’s a big market of about 3 billion of the nearly 8 billion people on the planet. With China’s economy in disarray, we’re certain the government won’t subsidize their growth, so tiers and profits will be important.

Big Dogs—As much as most of the M&E folks like to discount the entertainment value of YouTube, it is still the most widely used online video channel around the globe.

Folks at NAB said, “Who cares about YouTube, they’re just a place for kid and marketing videos,” but we’re pretty certain YouTube CEO Susan Wojcicki has big entertainment plans for the service, which has 2.2 billion users and 50 million premium users.

Getting the Gen-Zers involved with them early makes it easier to keep them “in the habit” as they become the millennials of tomorrow. Never take a smart female for granted!

ViacomCBS’s Paramount is long on aspirations and just beginning to expand its content base, pricing structure, and subscriptions, with 56 million global subscribers. Viacom’s Shari Redstone and ViacomCBS’s CEO Bob Bakish are moving cautiously from the bottom up with free viewing first and moving up the tiers from there.

And then there’s Comcast/NBCUniversal’s Peacock.

Little Tired—Comcast’s NBCUniversal Peacock has had a tough time learning how to fly in the D2C arena, but there is a chance it will get its second wind and take to the air.

When Comcast acquired Britain’s Sky, they became one of the planet’s cable connections to the home and pay TV giants. Both areas are highly profitable and still relatively strong and stable. Owning the last 100 feet to the home is predictable and profitable.

Pay TV is staying steady (1.5 billion globally) and growing slightly (0.5%) everywhere except in the US. More importantly, for the established players, no new folks are jumping into “their” market. Peacock is just another channel ViacomCBS Universal can use to monetize its content.

People have long told entertainment providers they’ll swap a little bit of their time to get their content free or at a nice discount.

Time is Money—While all the studios and networks headed for the same door as Netflix to snap up and grow their streaming subscribers, consumers have said loud and clear that if you treat us right, we’re happy to trade some eyeball time for your content and a few ads.

It shouldn’t have come as a big surprise to anyone that people didn’t really mind ads. In fact, they can be a nice break from the excitement and horror of the show they’re watching. They just don’t want 20 minutes of ads packed into their hour of entertainment.

Just Right—The biggest challenge for streaming services (all of them) is trying to figure out how many ads people will tolerate. Certainly, 20 minutes of ads per hour isn’t it because that’s one of the reasons they cut the bundle cord.

The key for streaming services is to develop tiers of service so subscribers know how many minutes of time she/he is “paying” for the entertainment. For example, no ads for a premium-plus subscription, 2 to 3 minutes an hour for a premium plan, 10 minutes of ads in an hour for free viewing.

Anything over approximately 10 minutes and there was no reason to spend days/months fighting with your pay TV bundle provider to escape their grasp.

The key for Hastings and his CFO (have you noticed you haven’t heard from his co-CEO, just saying), as well as all the other streamers, is to figure out the right balance for each tier—right for the consumer and right for their bottom line. Content is expensive and perishable, so you have to determine how much money you’re going to need to keep the streaming pipeline filled with new stuff and pay for other things like shareholder dividends and executive salaries.

Streaming services already offer lighter ad loads: 4 to 8 minutes per hour, compared to 17 minutes on day/time TV. While consumers have said they would like even fewer ads (financially impractical), there is a way to make ads palatable. Services need to get rid of the old-fashioned commercial block and try options like pre- or mid-movie/show mini ad groupings.

Rather than buy/sell ads in the old way your father did (thousands of households), streaming allows services and marketers to selectively deliver specific audience segments and categories based on comprehensive user information. That makes the subscribers more interesting and more valuable. Imagine the thrill of seeing ads that offer information on interesting places to visit because you’re planning a holiday, underwear because yours have holes, or car info because you’re considering a new vehicle, rather than 15 ads from ambulance-chasing lawyers.

To bother viewers less, streaming services are starting to move away from the traditional block of commercials and experiment with ad breaks, interactive ad formats, and other new models enabled by the Internet.

Nearly 60% of the people surveyed by Morning Consult indicated targeted ads are informative. Half indicated they were helpful. They just do not like stupid ads. Relevance is key. And tricky. Now that streamers have developed a greater database of viewer information to help them green-light content, folks want to see ads that can be more targeted, but not too targeted, and personalized, but not too personalized. There’s a balance the streamer and advertiser have to strike that enables them to reach the right audience with the right message, while respecting their privacy. There’s a fine line between being valuable and of assistance and being creepy.

Advertisers have been eager to get into business with Netflix for years.

There’s a big difference between their nearly 222 million worldwide subscribers and 74.6 million in the Americas, compared to Disney’s 196 million globally and 42.9 million in the Americas; or Warner Bros. Discovery/HBO’s 100 million globally and 55 million in the Americas.

In addition, they have a rich subscriber database and know how to use it. Rich subscriber data and lighter ad loads should enable them to charge more for ads as long as they can manage the expectations of subscribers and marketers. Publicly available viewer data for streaming programming from any/all the entertainment monitoring services remains slim.

Disney, Warner Bros. Discovery, NBCUniversal Paramount Global and all the rest have a long relationship with advertising but are extremely shy about divulging any viewer data.

The two streamers not included in this discussion are Amazon Prime and Apple TV+ because they have taken different paths.

Amazon has probably reached its price ceiling, having raised its annual membership to $139, which helps when they’re spending about $500 million on the first chapter of The Lord of the Rings and signed on Thursday Night Football. The addition of MGM’s content helped the company record more than 175 million Amazon Prime members. And to attract the free, ad-supported viewers, they renamed IMDb TV to Freevee (really?) and have committed to expanding the programming budget for the service.

 With an Oscar sitting on its shelf for CODA, Apple TV+ clearly made its mark in the content creation/streaming arena, despite a relatively quiet launch. They also know how to run with what works—ordering two more seasons of Ted Lasso, reboots of Saved by the Bell, Punky Brewster, and Gossip Girl, and more old series are being planned or released.

The move into the streaming video marketplace was inevitable for Apple because it already had a strong relationship with content creators and, most important, with screen users. With more than 1.8 billion device users worldwide, the company also has an active installed base of iPhone, iPad, Mac, Apple Watch, and Apple TV units. In addition, it has loyal, almost devoted, users of their music, health care, games, and written materials, and in all, more than 1.8 million applications worldwide. Apps that 825 million people pay to use.

And it’s all in a walled garden that prides itself on privacy, security, and content.

Now they may be ready for the next move. The most interesting and intriguing rumor is that they may begin a “don’t buy it, lease it” program, which could dramatically boost hardware in users’ hands and homes and include levels of content consumption.

Damn! Suddenly, they could be a competitor and potential partner with every other streaming service, everywhere. Still, that’s only a rumor.

But there were more questions than answers regarding what the next generation of subscription and ad-driven entertainment will look like. Streaming service opportunities are definitely on the short list for content producers, services, and advertisers.

Everyone, including consumers, is interested in expanding their reach beyond appointment TV as they explore new ways of monetizing content. Streaming intelligent, informative, interesting commercials will be an exciting learning experience for everyone, including consumers who can’t continue paying for five or more subscription services. But we think the industry is up to the challenge.

(Source: “Mad Men,” Lionsgate)

As Don Draper said in Mad Men, “Send him in.”

We’ll find out more about how folks have progressed when we visit IBC and NAB.

Read Part 1 of Andy Marken’s NAB report here.