Welcome to Best of the Week, written while you were sleeping on Saturday morning.

Happy Slay A Dragon Day. I’m starting to suspect that some of these holidays are made up, you know.

Today’s writing soundtrack: Deacon Blue - When the World Knows Your Name.

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Netflix joins the mortals

Something fundamental shifted in the media world this week. After more than a decade of growing paying subscribers in every single quarter, Netflix reported a slight fall for the first time. And that triggered a big drop in in the share price.

Since Wednesday, the company has lost nearly 40% of its market capitalisation, and is now down by nearly 70% on its all time high of six months ago. From a market capitalisation of more than US$300bn+ in November last year, the company is now worth US$95bn.

In the history of finance, only shareholders in Facebook, which has lost US$510bn since September, have experienced a more drastic fall.

However, when we look back on this week, it will not be the score-keeping exercise of market capitalisation that we remember. It will be what it signalled about the forces of media economics. The share price is a symptom of a trend which is relevant for anybody who works in, or with, the media.

After a decade of swinging away from advertising as the main means of funding media, and towards subscriptions, the pendulum has reached the top of its arc.

What matters about this week’s events with Netflix is not what it means for investors though, but how Netflix management will now change their business model.

So what happened? It’s pretty simple. After more than a decade of growing subscribers every single quarter, the number stood still for the first time, and is expected to drop back below 220m in this current quarter.

As you’ll see from the graph we created below, in the scheme of things the drop of 200,000 paying Netflix subscribers is negligible, when the overall number is still 219.6m. We had to stretch the graph upwards just to make the drop visible.

The news was not entirely unexpected. In the previous quarter’s update, Netflix had already signalled that after its Covid-driven jump, growth would stall. But this week, it said it actually expects numbers to fall slightly in the near term.

Additional factors behind the fall included shutting down the service in Russia because of the Ukraine sanctions, and growing competition from other streamers.

But the actual reason for the much more pronounced fall in share price is simpler, and the same reason that other tech stocks like Facebook have fallen so drastically too. Investors had been valuing Netflix as if it still had years of growth ahead. The suggestion that this is almost as big as the company will get is what spooked investors.

In the 2021 financial year, the company reported subscription revenues of US$25bn, with a profit of $4.5bn, before paying taxes and interest on its debts.

That’s still good, but the market has decided that without guaranteed growth, it (only!) makes Netflix worth US$100bn, not US$300bn.

By the way, Netflix still has a lot of debt. In its annual report released a few weeks ago, it said its debt amounted to US$15.485bn, due for repayment at various points over the next eight years. To cover that, it can’t easily afford to drop back to making a loss, which means it cannot chase subscriber growth simply by cutting prices, unless it can make up the revenue somewhere else.

Which brings us to the main game.

Most of the attention this week was focused on Netflix “cracking down” on password sharing beyond households. Actually the language in the investor video presentation (which you can view below if you like) was carefully not about a crackdown.

Instead the terminology was about finding pricing mechanisms to allow people to continue to share their passwords with their wider families - for a price.

Much like the introduction of newspapers’ metered paywalls which began generously and gradually got tighter, in time that’s likely to mean Netflix become less flexible about the number of registered devices and concurrent streams available to each subscriber, particularly when logging on from different IP addresses. Many streaming providers are already much more strict than Netflix.

That will generate more revenue per subscriber for Netflix, and new subscribers when freeloaders suddenly find themselves cut off.

However, while that tactic will generate more revenue, it’s a lever that can only be pulled once.

The future growth needs to come from new revenue streams instead.

Netflix will soon embrace advertising. CEO Reed Hastings used the video call to walk back his previous anti-advertising stance.

He presented it as a pro-consumer move. Some customers want a cheaper price point, supported by advertising, he acknowledged. His words were scripted, I think:

"Those who have followed Netflix have known that I'm against the complexity of advertising and I'm a big fan of the simplicity of subscriptions. But as much as I'm a fan of that, I'm a bigger fan of consumer choice and allowing consumers who would like to have a lower price, and are advertising-tolerant, get what they want makes a lot of sense."

It wasn’t a thought bubble. It’ll happen.

I’m surprised this news did not hurt the market caps of traditional TV companies around the world more than it did. This will create a big new competitor in the ad-supported video on demand space.

Corralled by Think TV, Australia’s TV players are moving fast to create their own walled gardens for AVOD trading. There should be no bigger priority. The connected television is where everyone will make their stand.

It’s part of a much bigger trend. As we’ve previously covered on Unmade, Ten’s owner Paramount will launch the ad-supported, channel-based Pluto TV in Australia shortly.

On a global level, Amazon is also gearing up for ad-supported video. This week it announced a major rebrand of its ad-supported video service. This launched as IMDb TV in the US in 2019 before rebranding to IMDb Freedive and launching in the UK in September last year.

From next week, the offering will be known as Amazon Freevee. It will begin to expand to other markets, including at some point Australia. The company registered the trademark in Australia 11 days ago.

Thanks to Amazon’s US$8bn purchase of MGM Studios last month, Freevee has got plenty of archive content to support the service.

There was one other massive development in the streaming space this week. Warner Bros Discovery announced it is closing its news streaming service CNN+, just a month after launching.

The reason was office politics rather than poor execution. Since the launch, the merger of Discovery Networks and AT&T’s WarnerMedia, which owned CNN, has been completed. The new management don’t like the strategy. They want just one streaming brand, and that will be based on HBO Max.

The decision probably makes the launch of the HBO service in Australia likely sooner rather than later. At present, Foxtel Group has the rights to HBO content, although that expires at the end of next year.

This week, the London-based James Gibbons was named as Warner Bros Discovery’s MD for Australia NZ and Japan. In what seems to be a pretty hefty a clue about the timing of the launch of the service Gibbons will move to Asia next year. You don’t appoint a local boss unless you’re planning on doing more than reselling the rights to somebody else.

No wonder Foxtel has called off the IPO. Binge without the HBO content will be pretty thin.

I wonder how Foxtel is thinking about its own ad-supported tier for its streaming offerings. Unlike its rivals, the company has the advantage of an established sales house in MCN, which sells ads onto the Foxtel broadcast platform.

This embrace of advertising by the digital giants signals several things.

For one, the playing field is levelling. Venture capital-funded media companies often enjoy the luxury of not needing to worry about making immediate profits while outspending traditional rivals to create market share. Look at the way Buzzfeed ate the lunches of local Australian publishers before falling back down to earth when the VC money stopped flowing.

The tech-based platforms also benefitted from being valued at much higher multiples, because of that promise of growth. That helped them outcompete traditional media companies for the best employees because they could offer stock options. But once the value of stock options are falling, it gets easier to poach people away because there’s less incentive for them to stick around. Which means they have to pay the same as everyone else to retain good staff.

But the biggest signal from all of this is that the major shift of the 2010s has peaked. The swing to subscription revenue as the main priority is at the top of the arc. Not that it will go away, but advertising is coming back into fashion.

As former Digiday boss Brian Morrissey argued in his newsletter a few weeks back, multiple revenue streams are the secret to successful media businesses. To combine the views of Morrissey with those of consumer psychologist Adam Ferrier: The best number of brands may be one, but the best number of revenue streams is several.

This should be a relief for marketers. A challenge brands have been facing was how to get the attention of consumers hanging out in walled gardens that exclude advertising.

If there’s one message to take from the events of this week, it’s this: Advertising is back, baby.

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Unmade Index

Australia’s listed media and marketing companies echoed the wider ASX yesterday, with prices slumping after the US Fed signalled that it will start putting up interest rates more aggressively than expected. The move will put pressure on Australia to do the same, or see a weaker dollar which would further worsen the cost of living crisis.

The Unmade Index is currently hovering just above 900 points, almost 10% down on the start to the year.

Communications holding group Enero, owner of ad agency BMF among others, had a particularly bad day yesterday, falling more than 4%.

Of the media stocks, outdoor advertising firm Ooh Media suffered the most, falling 1.85%. Domain was the only Unmade Index stock in positive territory.

Weekending

Time to let you enjoy your long weekend. Because of Anzac Day, there won’t be a Start the Week podcast on Monday. If my colleague Damian Francis is fully over his Covid, we’ll do it on Tuesday morning instead.

As ever, we love to hear from you at letters@unmade.media.

Have a great weekend.

Toodlepip…

Tim Burrowes

Unmade