Netflix needs a new growth engine. Ads are not the best way forward
After its first loss in subscribers for 10 years, Netflix had to change tact. The introduction of a cheaper ad-supported service is an attempt to regain momentum. In a press release, Netflix said:
"While it's still very early days, we're pleased with the interest from both consumers and the advertising community and couldn't be more excited about what's ahead."
Celebration might be a little pre-mature though. Smart strategy is all about doing what others can’t do. Offering ads is hardly among them. If anything, it makes it more difficult to distinguish Netflix from its competitors.
Why Netflix thinks this is the right strategy
Over the past decade Netflix has been a growth machine. The fierce competition from Amazon Prime, Disney+, Apple TV, and HBO Max undermines the feasibility of this business model. Investors, therefore, wanted a path to sustainable profit, one that ads offer. Projections are encouraging. Morgan Stanley for example predicts up to $3bn from ads by 2026.
So combined with a clamp down on password sharing and increasing subscription fees, Netflix is doing what mature companies typically do. They start to look at their competitors and over time become more and more similar.
That’s not the Netflix of old. That Netflix gave cable companies a kicking, precisely because their fees were high and ads plentiful. And when they doubled down on this strategy, Netflix took even more of their customers.
Netflix won, because it offered something no one else could. The new move is lazy in the sense that the strategy is not sufficiently distinct. Luckily, Netflix can turn this around.
What Netflix should do
The first original Netflix production was Lilyhammer, a Norwegian show. That’s telling. Disney might have a much bigger catalogue and own some of the most desirable franchises but Netflix is ahead in terms of international reach. No other streaming service managed to capture global audiences with hit shows from Korea (Squid Game), Spain (Money Heist), Germany (Dark), or France (Lupin). Netflix should add to this strength with additional partnerships and a few acquisitions in geographies where they have been less present. An obvious target could be iRoko TV, a Netflix style platform specializing in Nollywood productions.
The second big move for Netflix has to be the establishment of an additional growth engine. In a recent article James Allen and Chris Zook set out how a company can do this. In 80% of the successful 100 cases they studied, the profit pool of the market targeted by the engine two business was sizable, rapidly expanding or shifting. The best example: Amazon Web Services. Jumping onto the cloud computing wave, AWS has an operating margin of 30%.
To identify such an opportunity—one aligned with your capabilities—you need “a strong sense of insurgent mission, an obsession with the front line, and an ownership attitude”, Allen and Zook argue. 87% of the most successful engine two businesses had those attributes. The good news is that Netflix’s Reed Hastings built exactly this type of culture. This means that an aggressive pursuit of new opportunities has a decent chance to deliver. And once it has found one, it can unleash the scale and assets of engine one, i.e. the maturing streaming services.
Netflix has a future but ads is not it
Slugging it out in a maturing industry is less fun than riding the wave of growth. The good news is that Netflix has options. Settling into a saturated market quietly is not how Netflix became an investors’ darling. Its early—initially even too early—move from mail deliver to streaming was inspiring. Let’s see if Netflix can do it once again.
