Image source @ Visual China
The text | advertising handbook
01 Netflix will include ads in the near future
"Anyone familiar with Netflix knows that I'm against the complexity of advertising and the simplicity of subscriptions." On an investor conference call, Netflix Chairman and Co-CEO Reed Hastings said so. He then said, "But it makes sense to get consumers who want to get what they want at a lower price and with high ad tolerance."
For Netflix, this is an important turning point, meaning that the company, which was once "de-advertising" and resolute, has reversed its perception 180 degrees.
The change stemmed from Netflix's perhaps worst quarterly earnings in a decade, when its quarterly subscriber base declined for the first time: 200,000 subscribers lost in Q1 2022, and the company expected to add 2.5 million subscribers in that quarter. To make matters worse, Netflix expects another 2 million paid subscribers to continue to drain in the second quarter of this year. After the release of the first quarter earnings report, its stock price fell by more than 30%.
The peaking of paying subscribers has constrained the growth of subscription revenue, which has contributed to a subtle change in Netflix's attitude toward advertising. On an analyst call, Hastings revealed that the platform will create an ad-backed subscription scheme in the next year or two. According to the advice of some analysts, Netflix should create a subscription plan that costs $5 to $7 a month and has 5 to 6 minutes of advertising time per hour.
In fact, there has always been competition in the U.S. streaming industry for the SVOD model (subscription-based video-on-demand), AVOD model (ad-based video-on-demand), and FAST model (free TV service powered by ads). Overall, due to the decline in user willingness to pay, the macroeconomic environment and other complex factors, the SVOD model is showing a trend of gradual decline.
02 Netflix confronts investor pressure
For a long time, Netflix has been facing pressure from investors: After the stock price fell 45% from last November, investors demanded that it increase its revenue through advertising.
"I have to ask you about advertising. Otherwise, I can't get out of this room alive," a Morgan Stanley research executive told Netflix's chief financial officer at a conference in early March, demonstrating anxiety about Netflix's future growth.
"De-advertising" was once considered a core strategy of Netflix — it created premium content to attract users to pay, hoping to open up an advertising-independent monetization model. This strategy has won a lot of success in terms of content, such as "Roma", "The Irishman" and other nominations for Oscars, "House of Cards", "Squid Game" and so on have also become phenomenal works.
However, the strategy did not give Netflix a future of steady growth.
When it forecast 2.5 million new paying subscribers in the first quarter of this year, the stock plunged 27 percent. On the one hand, this is much lower than the industry's general estimate of 5.8 million; on the other hand, this seems to confirm the speculation that Netflix will be stuck in a growth bottleneck. Compared with previous years, Netflix's quarterly new paying subscribers have narrowed significantly.
There are many signs that there is also growth anxiety within the Netflix team, and they are trying to broaden their profit streams in various ways: At the beginning of this year, Netflix announced a price increase in the North American market, with price increases ranging from $1 to $2 for different packages; in addition, it also began to crack down on the sharing of accounts and passwords between different users, which would theoretically bring them 33 million new users — but not so much in reality, because many users don't see Netflix as necessary.
Data from analyst firm FactSet points out that Netflix's revenue growth will outpace subscriber growth for at least the next three years. When the company's revenue is mainly driven by the unit price of customers rather than the size of customers, many times it is not an optimistic signal: in the non-rigid demand market, the unit price increase will compress the scale of users, and the company will have the impulse to further push up the unit price of customers in order to ensure revenue, thus falling into a vicious circle.
So, this is the scene where Morgan Stanley "forced" Netflix to take advertising revenue into account.
In fact, the New York Times had already discussed Netflix's strong rejection of advertising in late 2019, quoting a quote in the article to express its doubts: "I don't know why they don't do it." Research firm eMarketer gave a more drastic judgment at the time, arguing that Netflix's peak period may be few.
At least from the CFO's speech, Netflix's original stance of avoiding advertising is softening under strong pressure. He explained that "there doesn't seem to be a religion within the company that opposes advertising," and while there are still no plans to accept advertising, he also said "never say ever."
03 The potential risks of "de-advertising"
When buying most goods, we tend to pay with one hand and deliver the goods with the other. With the completion of this action, the entire trading process came to an abrupt end.
But the process of media selling goods is relatively special because it involves "secondary sales": the first is to sell the content to the audience, the audience pays and gives attention to the media; the second is to resell the attention of the audience to advertisers, and the advertiser pays the media for advertising.
This special secondary sales process brings about the binary revenue structure of the media: first, content revenue, such as membership income of video websites, distribution fees of newspapers and magazines, and film box office revenue, etc.; second, advertising revenue, which covers various types of hard and soft broadcasts.
For Internet platforms that control traffic, they can either rely on content revenue or advertising revenue, or they can adopt a hybrid model of both, and Netflix is clearly a solid believer in "content revenue". However, if you track its earnings data, you can see that this model, which relies on a single revenue pillar, is facing sluggish growth pressures.
First, the growth rate of major indicators began to slow down.
For example, the growth rate of streaming media revenue has declined year by year, from 37.28% in 2018 to 19.22% in 2021: the annual growth rate of paid membership has also narrowed from 26.26% to 11.64%; in addition, the annual new paid members have also declined, from 36.6 million in 2020 to 18.18 million last year.
Second, the strong payment market tends to be saturated, and the level of payment in emerging markets is not high.
Of the 18.18 million new subscribers last year, the North American market, which is the home base, accounted for only 7%, indicating that Netflix's expansion in the region has become saturated. At the same time, 40% of the new users came from the Emea, Middle East and Africa markets, and 39% from the Asia-Pacific market.
It is worth noting that due to the difference in disposable income levels, there is a more obvious gap in the willingness to pay in the three major markets: in 2021, for example, North American users are far ahead with $14.56 per month, while markets such as Europe and asia pacific are only $11.63 and $9.56. This means that Netflix looking for increments outside of North America will inevitably have to confront the problem of declining user value.
As a result, the expectation of subsequent sluggish growth in membership revenue has put the topic of "whether to accept advertising revenue" back in front of Netflix, and investors expect platforms to include advertising revenue to increase ARPU (average revenue per user) performance.
This pressure has increased even more after Disney+ announced the inclusion of advertising revenue.
As one of Netflix's competitors in the streaming space, Disney+ has also been equally adamant about advertising — in an earnings call in late 2017, Disney's then-CEO made it clear that he "does not intend to sell ads on Disney services." Just five years later, the events took a dramatic turn for the deeper reasons from Disney's hopes of boosting the dismal ARPU performance from Disney+'s pure membership revenue.
For too long, the media's binary income structure has determined that they could have walked on two legs, and not every media outlet has the ability to withstand the instability of artificially cutting off one leg.
04 The monetization dilemma of Aiyouteng
Similar to Netflix, domestic long-form video platforms are also generally facing the torture of monetization models
In mid-December last year, iQIYI made a round of adjustments to membership prices, and the price of different packages increased by between 9% and 20%. Coincidentally, Mango TV members also followed up with the price increase a week later.
For the price increase, iQIYI gave the reason that "the subscription price of the video platform is low, which affects the healthy development of the industry." At an industry event, iQiyi CEO Gong Yu also pointed out that the price currently paid by audiences to watch quality content is "too cheap".
If directly compared with the average monthly price of the North American streaming platform $10 (equivalent to 63.6 yuan), iQIYI does seem to have room to increase the price of members - according to the financial report data estimates, iQIYI's paid membership ARPU value in 2021 is 173.37 yuan. However, if you compare the per capita income of China and the United States in 2021, iQiyi's pricing level has actually converged with Netflix.
Even if the pricing is not low, iQiyi's membership revenue shows signs of lack of follow-up. In 2021, iQIYI disclosed membership revenue of 16.713 billion yuan, an increase of only 1.35% year-on-year; if observed on a longer timeline, its membership revenue growth has declined year by year since 2017.
It is worth noting that Chinese video platforms generally regard "de-advertising" as the most important VIP benefit when promoting members in the early days. Therefore, when more users become members, the platform's advertising resources are naturally greatly compressed.
In 2016, online advertising revenue accounted for 50.28% of iQIYI's total revenue. But then, the proportion of membership revenue began to rise all the way up, and the proportion of advertising revenue began to decline sharply. The status of the two was completely reversed in 2018, and by 2021, membership income has become the bulk of iQiyi's revenue, and the proportion of advertising revenue has narrowed to 23.13%.
While the reason for this phenomenon cannot be entirely attributed to the dramatic growth of membership by video platforms, the rise of new traffic platforms such as short videos has indeed diverted advertiser budgets. But in China, the strong negative correlation between membership and advertising makes the problem very tricky. Consumers who buy memberships have seen video platforms as private venues, and they have become extremely sensitive to the intrusion of external information such as advertisements.
At the same time, the membership of the video platform is not just needed, which makes the price elasticity of the entire industry very high, and the price increase will inevitably bring a lot of customer churn - as iQIYI's ARPU value increases from 161.84 in 2020 to 173.37, its paid membership scale has decreased from 101 million to 0.96 billion. Moreover, compared with the pricing of overseas peers, the consideration of the willingness of domestic users to pay, and the inclusion of uncertainties such as the new crown, there is little room for Chinese video platforms to continue to increase membership prices.
Unlike at home, foreign streaming platforms don't seem to have created the illusion of a natural opposition between "membership" and "advertising" for audiences – Disney+ didn't come out completely free after announcing that it accepted ads, it just launched a cheaper version, and this binary revenue structure is also widespread in other streaming platforms, including Hulu.
In other words, it sends a signal that advertisers help users bear part of the cost of watching content, rather than outsiders invading the user's private domain. Compared with the erroneous message transmitted by the early "de-advertising" of domestic video platforms, this is obviously closer to the essence of the facts, and also reserves a broad space for video platforms to expand revenue.
05 After riding the tiger, look for a breakout point
iQiyi is not the only case of declining advertising revenue, and Tencent Video is facing similar pressure.
Combing through the changes in Tencent's advertising revenue over the years, most of its growth is also due to "social and other advertising revenue", while the "media advertising revenue" that includes Tencent Video has slowed down or even declined.
The reasons for the decline in advertising revenue are diverse: on the one hand, the inventory of hard resources with strong exposure advantages such as pre-patches has begun to decline; on the other hand, advertisers' budgets are indeed attracted to other inventory with stronger appeal and immediate effect. For example, some entertainment vertical media have mentioned that the investment of long-term video variety shows has become "bleak", and programs with a high degree of topic such as "Semi-Familiar Lovers" have even appeared in the whole process of "naked broadcasting" without sponsors.
In the face of severe challenges, Aiyouteng is also actively saving themselves through various ways.
A common way to do this is to aggressively move closer to performance ads. At the end of 2019, iQIYI laid out the performance advertising platform "Qilin", hoping to quickly help customers such as regional brands capture target consumers through technical means. Tencent Video and Youku are also connected with e-commerce conversion scenarios such as WeChat Mini Program and Taobao respectively, hoping to achieve the goal of direct traffic conversion and eliminate advertisers' impression that the conversion effect of video platform ads is not obvious;
Another way is to combine other resources to release value under the blessing of the IP aura.
iQIYI Qilin licensed its "Ethos Luoyang" IP to local developers in Luoyang to jointly develop theme hotels, script killing and other peripheral formats; Youku has specially formed a team to create a "two-party ecology", the so-called "two-party ecology" refers to assisting IP sponsors or episode implanters to open up other transformation scenes under the Ali ecology, such as the title "This!" It is the bravery of "Street Dance" that has realized cooperation with Ali platforms such as Ele.me through Youku, and similar practices can partially enhance the attractiveness of cooperation to advertisers.
But at the same time, we must also see that there are various hidden worries in the self-help of Aiyouteng.
Moving closer to performance advertising has the problem of "attacking the enemy's strengths with its own shortcomings", compared with the advantages of accurate distribution and rapid conversion of platforms such as short videos, it is difficult for long video platforms to fully make up. More importantly, short videos benefit from the limited duration of fragmented content, so there is a lot of room for loading ads in the video stream, but long videos do not have similar advantages;
In addition, the model of using IP halo to combine other resources to release value will fall into the strange circle of content entrepreneurship "making hard money" - it may improve the value of traffic, but the monetization efficiency and imagination space are also relatively limited.
Therefore, the core problem faced by IYoteng is that under the resonance of multiple external factors, it is difficult to ride between "membership income" and "advertising revenue".
However, there are also some optimistic signs in the haze.
As users pay more and more attention to personal privacy and tighten data authorization, purely data-based user-targeted advertising is facing a decline in efficiency. With the combined efforts of the executive, the legislature and the public, this trend is almost irreversible in a short period of time. Potential changes in efficiency will naturally lead to adjustments in advertisers' budget structures, such as more CMOs beginning to return to the emphasis on "content" itself, and viewing advertising as a long-term project to build brands in the long term rather than seeking conversion in the short term, and the change of mentality will benefit long-form video platforms.
Of course, in the context of users' increasing hostility to advertising and advertisers still attaching importance to ROI, such good news is difficult to reverse the decline of long video platforms, but at least to some extent, it will improve their current relatively embarrassing living situation.