Netflix Ad’d value?

It was recently announced that Netflix has been in the process of both developing and testing the ability to insert targeted promotions within its programming and its got people quite excited. The reason being, is this the start of Netflix moving to an ad-funded model?

It is easy to see the potential attraction, its base of subscribers continues to grow, viewing levels are now on par with one of the larger (UK) TV channels, and with viewer data and profiles, the ability of the platform (sic) to insert the right ad to the right person is a potential game changer, what’s not to like?

However, as a content provider, Netflix is already successful and the trend is in a right place, it’s USP has always been an ad-free positioning, so why change that?  Well, of course, the reality might be a two or even three price point plan, potentially offering a subs free access for access with ads perhaps, whilst still providing an ad-free service to those that are happy to pay. A winner.

But let’s look at the numbers?

Latest BARB data suggests that Netflix continued its impressive growth in Q2 of this year, increasing subscriber households by over half a million, to now account for 9.7m households. That means Netflix is in 34% of all UK households, and they are paying (kerching).

SVOD Numbers

So, on the one hand there is plenty of scope for additional household penetration who may be happy to accept ads without having to pay, indeed, 66% of UK households dont have Netflix.

However, when we break this down by demographics, then the scope starts to look less attractive.  At the end of 2017 BARB estimated that just under 60% of 16-24s had access to Netflix in a subscribing household. Since then, Netflix has added an additional 1.5m subscribers, so some simple profile factoring and we can estimate that 60-65% of 16-24s already have access to Netflix.  As we know, this is a prime, attractive, advertising sub-demographic and they already have an ad-free Netflix access.  So, is the intention to just try and attract the remaining 35%? Maybe.   If so, then the proposition to planners becomes less attractive.  One of the biggest draws, and indeed drivers of effectiveness for TV is its mass reach brand building impact. So, if only 35% of your target audience is potentially available, then it’s less of a one stop shop, and now just one of many avenues in my marketing mix in which to place my campaign.  That’s not to say it will still not be a valuable channel for marketers, it is just not the ‘game changer’ some have made it out to be. The TV sales houses can sleep easy for now.

The other alternative of course is that Netflix takes a hit on actual subscribers in order to offer ads to clients. This is a dangerous game for any brand that has positioned itself not to accept advertising, and also one that is still doing relatively well to increase market share.  It would of course also be a big gamble, hoping the TV ad revenue would more than compensate for the lost subs. With decreasing linear TV viewing time, then there is scope, but its a risky business for sure.

Elsewhere, although Netflix continued its strong growth in Q2, Amazon Video was relatively unchanged, adding less than 100k subs in the quarter.  Now TV fared only marginally better with just over 100k additional subscribers in the quarter.

SVOD Penetration

This means that across the three main services, Netflix, Amazon Video and Now TV, Netflix is now growing the strongest. Overall, UK households subscribing to an SVOD service increased by 22% in the year to June with 41% of UK households now having at least one of the three services.

SVOD Annual Growth

As for Netflix and their plans to introduce advertising, the next 12 months should prove very interesting and the devil will very much be in the detail.

Netflix takes The Crown

It’s now official. In the latest BARB data for Q1 2018, in terms of the number of subscribing households, Netflix is now the largest paid for TV provider in the UK, knocking Sky off it’s throne that it has sat on for over 30 years.

Its been called a disruptor, a new entrant, a protagonist, but there is now no escaping that Netflix is mainstream and availability alone, the largest player in town.

SkyvsNetflix

Netflix in the first three months of 2018 saw its largest increase in subscribing households since BARB began measuring, with nearly 1m new households taking up the service early this year. It is now estimated that 9.1m households in the UK are subscribing to Netflix. That’s a 12% increase in just a single quarter.

SVOD Numbers

It’s not just Netflix that has performed well in Q1 of course, Amazon Video also continues to increase it’s footprint, with an increase of 0.6m households in the quarter, a quarterly growth of 13%, in line with that of Netflix.  Alongside these double digit increases however, Now TV experienced a relatively sluggish Q1 remaining relatively unchanged on Q4 2017.

Although these are no doubt disappointing numbers for Now TV, underlying this is a yearly growth that does indeed outpace it’s rivals (albeit from a much lower base).  Comparing Q1 figures year on year, Now TV has seen a 38% uplift in subscribers, above that of Netflix (31%) and Amazon Video (35%).  So, it’s possibly too early to tell whether this quarter is simply a blip or a slowdown in general.

SVOD Annual Growth

So, what does all this mean to the average household in the UK. Well, as already mentioned, Netflix is now the leading distributor of paid television in the UK, with 32% of all households in the UK paying for Netflix. This is followed by Amazon Video which is in 17% of homes, and Now TV in 5%.  Overall, 39% of all homes have access to at least one SVOD service, and if this rate of growth continues, this may get close to 50% by the end of 2018.

SVOD Penetration

This data highlights an interesting question of course, the UK has always had a traditional free to air cohort of homes of around 10-11m. We’ve seen in previous analyses from BARB that SVOD subscribers skew heavily towards pay-tv so potentially the biggest disruption of these services will be if they take hold in homes that have otherwise previously been reluctant to pay for television, and given the growth above, that looks like it’s already happening.  If Netflix, and Amazon can convert those types of households to embrace paying for access, then they truly are a game changer. Interesting times ahead for sure.

 

Vodding along nicely

It was a good end to 2017 over at Netflix HQ as they recently announced that worldwide subscriptions had now numbered 117 million, a rise of 8.3m in the final quarter, of which 6.4m from outside the US.  Impressive growth by anyone’s standards.

So, clearly non-US growth is becoming a major revenue stream to Netflix, but where does the UK come in all of this. Well, BARB, has now released their latest data for quarter 4 2017. Arguably, one of the best estimatse of subscription numbers in the UK, their Q4 data is based on a sample of over 12,000 randomly selected households.

After a slow Q3 for all the major players, it seems the winter months, and potentially the Christmas and holiday season has rejuvenated interest.  In the final 3 months of the year, BARB estimates that Netflix subscribers grew by 662k households to 8.1m homes overall, a quarterly growth of 8.8%.  It further means that the UK represented around 10% of the entire of the non-US growth in subscriptions in the final quarter, suggesting the importance of the UK for it’s platform. The recent announcement of a tie-up with Sky just goes to prove this point.

Amazon Video likewise, saw an increase of 424k homes to a base now of 4.3m households, a whopping 11% quarterly growth.  Now TV posted the most modest increase, of just 54k households, but that still means it achieved a year on year growth of an impressive 40%.

SVOD Numbers

What this means for the UK, is that there are now over 10m homes in the country that subscribe to an additional SVOD service, as well as their traditional linear TV services. and the take-up doesn’t yet look like stopping.

SVOD Penetration

Not yet in a majority of homes, but growing, SVOD services are now in over 36% of all homes, Netflix in 28.8%, Amazon Video in 15% and Now TV in a respectable 5%.

If rates continue, then in as little as 36 months, SVOD services could be in the majority of UK homes, a tipping point when it really can be said to be ‘mainstream’.  Whether this will happen however is debatable of course. But what does seem to be clear, is that the need for additional content viewed in a non-linear fashion is becoming a staple part of our viewer preference, and this will almost undoubtedly have an impact on scheduled television for years to come.

 

Premier Pricing

In just under two weeks (8th February), the initial bids of the next round of Premier League football rights will be tabled. It’s always a fascinating time, of rumour, intrigue and speculation.  Just how high will the price go for the mother of all giffen goods?

As with the previous deals, there has been talk of significant increases in bid prices, both fueled by rumour of new entrants into the marketplace, but also due to changes to the package structure by the Premier League.

For the first time, over half of all Premier League games will be televised, which basically means, if you’re a season ticket holder to a major club, don’t expect to be watching your team at 3pm on a Saturday much longer. New packages and time slots mean late night Saturday games, together with full rounds of fixtures offered across three midweek periods, and a full fixture lineup over one bank holiday period.  For both the viewer and the broadcaster, there are significant changes afoot. 

These new slots have been seen as a way of enticing new entrants, such as Amazon, Facebook etc, into the domestic market. But given the times that these games are likely to be shown, it is potentially more likely that these packages will have international rights as the main part of their strategy, forcing games to be shown in the evening, UK time, to offer better viewing times stateside and therefore attracting higher international prices in the largest consumer market of them all.

But, going back to domestic rights, it really is anyone’s guess as to what the end value will be. The Business Insider recently suggested that they expect total rights to increase by a whopping 40% on the current £5bn paid by Sky and BT. Their justification is the apparent entry into the market by Amazon, something which was also suggested by Ampere Analysis. Interestingly, Ampere quote a direct Amazon representative suggesting they are interested in bidding. This is the first time there has actually been a confirmation from a third party that they were interested in bidding, which is significant.

Thinking about both of these claims. Business Insider is suggesting a 40% increase in rights, so, in effect an increase of £2bn for what is just an extra 32 televised games, or £21m a match. Obviously in reality the price differential is actually applied to all matches, so increasing the value of each and every match by a more reasonable £2m. But ultimately, what is the market for making this money back? The advertising model is just not going to cut it, so any new entrant without a subscription model is going to have to accept a loss leader on the £12m a match fee, with the gain being the opportunity to be a ‘disruptor’ in the UK pay-tv market. 

Which essentially leaves just Amazon. But again, let’s do the maths on this and go back to the Business Insider piece, which suggests that its model is to attract Premier League rights, force cord cutting and increase their subs to video, which is currently £79 a year. Recent BARB analysis clearly shows that existing Sky, Virgin and BT subscribers already over index significantly with Amazon subscribers, so, there is a good chance that even if cord cutting did occur (a big if I might add), then a significant chunk of these households would not be turning to Amazon Video, simply as they already have it. And further still, if Amazon were to want to get any sort of return on the investment, then the £79 a month fee would have to be significantly adjusted. Therefore, it is likely that if Amazon do come in, then it will be at the lower end of the scale, most likely for the new packages and at a value (per game) far below those currently being offered for current packages.

But what about the current incumbents, the ones that have, up to this point, actually got their wallets out? Will they succumb to the same worries as previously, blink first and up their bids? The better question might be, can they?

Taking Sky, after a difficult 2016, subs have held steady across 2017 with both subscribing households and sports subscribers relatively unchanged, as measured by BARB. Access to all the sports channels on Sky is £27.50 a month, although average household monthly rates are likely to be higher on the basis of HD upgrades etc. Generously, if we assume a household monthly cost of £32.50, and taking BARB data as a gauge, then there are 4.6m subscribing ‘sports’ households (including Virgin Media), meaning a ‘sports’ revenue of £1.8bn a year for residential channel subscription. Yearly costs of the current Premier League rights for Sky come out at £1.4bn (£4.176bn/3). Clearly there are other revenue streams, from commercial subs, Now TV (which incidentally BARB has identified strong growth in) and of course the pay-tv Youview platforms, but the point being that even the current deal squeezes Sky’s margins. If they were to increase their bid significantly, then this would have to be passed on to the customer ultimately, which in the current market, might just be a tipping point.

And what about BT? Well, the Champions League bidding has shown that they do still have appetite to be competitive, but likewise, they have also publicly stated that the rate of inflation in rights need to stop. Additionally, since that time, BT and Sky have come to agreements on content sharing of channels and there is general talk of a truce ahead of the auction. 

So, what might this all mean for overall rights prices? Well, there are new packages available, which, on any merit, will drive new revenue to the Premier League. But that said, the nature of many of the new packages are not necessarily conducive to the viewer. The mid-week and Bank Holiday packages in which all matches will be across a few days mean it is unlikely that a viewer will even be able to watch all the matches available to televise, as many of them will have to kick-off at the same time, a point made clearly by media commentator Adam Bowie last month.  Even with some potential new entrants (and to date, other than Ampere’s contact, remember that there has been no confirmed public interest), I can’t see, and I certainly wouldn’t recommend either Sky or BT upping their current bids by any significant margin. 

And lastly, a point that hasn’t really been discussed at all, do viewers actually want this? Nearly all top category games are already televised, so what do the viewers get in their extra 32 games? A Burnley away trip to Huddersfield perhaps? Ratings per game do change significantly by club, so the idea that a 20% increase in televised games will warrant a 20% increase in viewing (and therefore cost at least 20% more) is folly .  As Mitchell & Webb parodied, perhaps there is already too much football on TV?