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Straight Talk Media & Entertainment

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Much analysis of Netflix focuses on the growing billions of dollars it is spending on original TV shows and movies – and rightly so. There's nothing like exclusive content to attract subscribers and set a service apart from the competition. But the online video giant has also been investing more year on year in creating another major barrier for its rivals: marketing.

Netflix has confirmed that it will spend more than $1bn on marketing this year, up from $991m in 2016; recent spending patterns suggest the actual total could exceed $1.2bn. Here's why it matters to the future of TV:

  • Netflix has set the bar for making a billion bucks go a very long way. The speed at which Netflix's global online-only business model has scaled means it has realized – and will continue to get – a major return on its marketing budget even as it grows. Netflix's marketing spend per subscriber has hovered between $10–$11 worldwide and $7–$8 in the US since 2013 and has fallen from $42 in 2012 to less than $13 in 2016 for its international footprint. Compare that to Sky UK, which spent over £26 ($34) per subscriber in 2016, based on the £287m that Nielsen estimates the pay-TV operator spent on advertising that year. True, pay TV tends to deliver more revenue per subscriber, but Netflix can probably live with that trade-off in exchange for global leadership.

  • It's co-opting – rather than competing with – pay-TV marketing dollars. As Netflix has become less of a "Spotify for TV"-like threat and more of an HBO-like partner, operators have realized they have more to gain from integrating the service into their platforms – not least because that's what consumers want. Asked what their perfect TV service would look like, 37% of consumers surveyed by Ovum stated that access to Netflix and other premium online video services would be "important" and 26% "very important." As a result, many operators now spend much of their own marketing budgets promoting access to Netflix as a key reason to subscribe to their services.

  • Direct-to-consumer pretenders face greater challenges. Netflix's marketing spend presents fewer problems to pay-TV operators than broadcasters, studios, and rights-holders looking to compete directly with Netflix – many of which have relatively few customers. Even Hulu will have just 16.3 million subscriptions at the end of 2017 compared to Netflix's 54.1 million, according to Ovum's forecasts. To put this in perspective, if Hulu was to match Netflix's US marketing spend this year, it would be looking at an outlay of $32 per subscription – equal to up to four months' fees. This kind of investment would be around $200 for the long tail of other offerings with only a few million subscribers and less deep pockets. (I know that marketers wouldn't seriously entertain such spend; my point is to highlight the delta between Netflix and its rivals.)

  • New bundles offer hope – and anxiety – for subscale players. One option for services that lack the marketing muscle of Netflix is to team up with those that do. These include: pay-TV operators looking to evolve their platforms and packaging for modern audiences; telcos seeking to differentiate their commodified home broadband and mobile services; and, of course, Amazon, Apple, and Google and others looking to harness the power of TV for their all-encompassing ends. The risk with this approach is that a subscale player could face obscurity of a different kind as the power of the partner grows and the value of the co-opted brand fades into the background.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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