NBCUniversal got the attention of Hollywood and TV viewers everywhere last week, announcing a five-year deal to take The Office back from Netflix and put it on its own streaming service starting in 2021.
The value of the pact is estimated at $100 million per year, according to those familiar with the terms. So, what exactly is NBCU buying with all of that cash? Not subscribers, technically, given that the company plans to give the streaming service away initially to pay-TV subscribers of Comcast and Sky. The main answer appears to be the opportunity to reinforce its decades-old, still-lucrative advertising business.
The Office, according to Nielsen research, ranked as the most watched show on Netflix in 2018, with 52 million minutes streamed — more than 20 million more than Friends.
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The question is, how many of those 52 million minutes will transfer to the show’s new home? The team responsible for Sky’s well-regarded streaming apps is hard at work assembling the NBCU product, one of the benefits Comcast foresaw when it shelled out $40 billion for Sky last year. Longtime cable maestro Bonnie Hammer is leading the content charge.
Advertising, though, is what really sets this move apart from other platform-hopping of late. Crackle Plus, Tubi TV, Pluto TV and other ad-supported streaming players have shown that there is an audience for ad-supported streaming. How big an audience? That remains unclear. But The Office (and other shows likely to re-join the NBCU fold) represents the biggest bet yet made by a traditional company that customers will be just as eager to binge-watch a show with commercial interruption.
Not for nothing was ad sales chief Linda Yaccarino the main messenger at NBCU’s upfront presentation last May, teasing the plan to ensure many shows would be “coming home” to a familiar, ad-supported environment. Her proclamation was followed two days later by WarnerMedia sales chief Donna Speciale’s promise that “in this chaotic industry, we are simplified.” While Disney, most notably, and WarnerMedia, CBS and Viacom all covet a subscription-driven relationship with their customers, the fact remains that they have a lot more experience selling ads than acquiring subscribers.
“It comes down to core competency,” one digital executive who has business dealings with a wide range of programmers told me. “Media companies have been used to doing certain things extremely well for decades. Now, they have to develop a whole different set of muscles. Algorithms, customer retention. So many things they’re not used to doing. That will likely be a big test.”
Mark Kelley, an analyst with Instinet, is among a growing chorus of observers who see Netflix eventually leaning toward advertising. He wrote in a recent research note to clients that Netflix could bring in more than $1 billion a year by introducing a free, ad-supported tier. Hulu offers such a basic service for $6 a month, as well as an ad-free version. WarnerMedia’s soon-to-launch service will feature both a subscription offering and a free version with ads will follow.
Welcoming ads “could provide a lift to free-cash flow, reducing the need for Netflix to raise debt frequently, especially beyond 2021 into a potentially rising rate environment,” Kelley reasoned.
Reinforcing previous studies, Hub Research issued a report Wednesday that found 53% of current Netflix subscribers would keep it if it introduced ads but charged $2 less per month. If the company shaved $3 off, 60% would keep it. Ads would prompt 12% to drop the service even with lower prices.
Netflix content chief Ted Sarandos often faces the question about advertising. In an appearance two weeks ago at SeriesFest in Denver, he told moderator and Liberty Global CEO Mike Fries that “ad-free” is core to the fundamental proposition of Netflix. When The Office deal was announced, Netflix’s Twitter account took note of the “sad” occasion, but also tweaked NBCU by inviting subscribers to binge-watch the show “ad-free” on Netflix.
And therein lies the thorniest question — will viewers, having become accustomed to watching hundreds of episodes of a show (a supply known only to traditional broadcast shows, given their economic model), accept ads? And what are the implications for advertisers? In the short term, the incremental reach afforded by AVOD is appealing and well-priced, but as the rates inevitably climb, will the viewership be there to support the spend?
The stakes are not small. Traditional TV advertising is still a $70 billion annual business, so every cent that migrates to digital is now seen as desirable by the traditional content purveyors.
Brian Wieser, who tracked the media business for years as a Wall Street analyst before joining GroupM as global president of business intelligence earlier this year, sees plenty of upside in AVOD. “Advertisers will always look for opportunities to match their brands with high quality content,” he told me, “and consumers will generally tolerate advertising around content they want to watch regardless of whether it has or has not been on an ad-free platform.”
As with Disney’s much more comprehensive pullback of properties from Netflix, which will come at the cost of hundreds of millions a year in foregone licensing revenue, NBCU’s Office play contrasts with years of prior behavior. In his chat with Fries, Sarandos recalled that traditional media companies for years were glad to realize “found money” from their libraries through licensing out to Netflix. They were largely convinced that the Los Gatos startup would never last.
“Most of Hollywood was convinced that the tech guys would come down and clumsily write big checks and would be all gone pretty soon,” Sarandos said, adding that traditional players seemed to feel, “‘We’ll be here like we have been been the last 100 years doing this. We’ve seen this come and go, come and go.’”
Fries, whose cable systems in Europe are the continent’s largest in terms of market share, sees even the most promising new streaming efforts, like Disney+, as “a smart hedge” rather than an entirely new mindset. Even if they reach the high end of their guidance, attaining 90 million global subscribers by 2024, streaming will still be barely 10% of total revenue.
On a program level, The Office is also a hedge of sorts. But if it is joined by enough compelling new and library titles, and viewers and advertisers embrace the idea that streaming need not be ad-free, it could put NBCU firmly on the streaming map.
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