The Commercial Debacle: Did Netflix Just Make a Huge Mistake?

It’s been everywhere on the internet — Netflix is going to start showing commercials. It seems a bit cyclical: streaming eats cable, then becomes cable. Boycotts have been discussed, accounts have been canceled, and articles have been written.

But is it true? As is often said, “a lie can fly halfway across the world before the truth has its boots on.” And, as with many things, the truth is really somewhere in between.

It Began, As Most Things Do, On Reddit
A few days ago, Reddit users began reporting that there were ads on their Netflix accounts. It makes sense that it was reported on Reddit first: it appeared to be a roll out that only hit some customers. As users were binge watching their favorite shows, commercials for other Netflix content began to pop up in their feed. Though these commercials could be skipped (contrary to what was initially reported), it was still distressing to users who had jumped ship from cable specifically for their ad-free streaming bliss.

Netflix quickly countered that these weren’t commercials, but rather recommendations. Netflix was attempting to market — or rather, suggest — shows and movies to users based on the content that they had previously watched and liked, as a way of curating content for their user base. Despite this, users were less than enthused.

Turning Off the Commercials
There is a way to turn off commercials, but only for the time being. if users go to their profile and account settings, they are able to toggle off “test participation.” But that only solves the problem for now. If the commercials (or recommendations) no longer become a test but instead a permanent feature, there won’t be a way to opt out.

On an individual level, users can always skip the recommendations that they are given. Of course, for many television watchers, this first means finding the remote or turning on the controller.

Netflix Gets Aggressive With Its Expansion
As a company, Netflix has been doing very well. It has been growing steadily internationally, despite the presence of a multitude of other streaming services. Netflix has been able to increase its subscription costs and has been adding millions of subscribers every quarter. With that in mind, it may seem strange that Netflix is being so aggressive about growth.

However, Netflix has also sunk an extraordinary amount of money into its content library. Netflix’s annual revenue is $11 billion and the cost of its original content is up to $8 billion. In fact, despite a revenue of $11 billion, Netflix only makes around $178 million a year. That’s good — and constantly getting better — but it’s still a little narrow, when you consider the fact that Netflix has been bumping up its original content and losing much of its core, non-original catalog.

It’s possible that Netflix is being aggressive about its recommendations and its internal marketing because it wants to create new viewers for its original content. And it isn’t a bad strategy. If viewers want Netflix content, they have to come to Netflix.

Unfortunately, this play is happening throughout nearly every streaming service, from Hulu Exclusives to HBO Exclusives. With the proliferation of new streaming “stations,” users may very well soon be subject to a new type of “cable” that they need to purchase piece by piece.

All-in-all, though, Netflix has had a good year, and it’s likely to continue growing. Cord cutting has become a common trend, and Netflix has been able to build out a substantial library of popular shows. However, there are some signs that cracks are starting to form — not only due to commercials, but also in complaints regarding cut content. Netflix has steadily been decreasing its non-original library, and this is something that many users have noticed. Many have also cited a lack of quality in it’s current original content.

Moving forward, investors may want to continue looking at Netflix’s profit margins, especially as compared to the amount of money Netflix is pumping into its original content. If Netflix overshoots or misjudges, it’s possible that it could spend itself into a hole with nothing but unwanted content to show for its purchasing power.

Regards,

Ethan Warrick
Editor
Wealth Authority