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All change at Netflix

Is it the beginning of a new age for the streaming giant?

21 Jul 2022

I heard sales agent joke ‘All the best script writers are locked up in a basement at Netflix HQs’

But it wasn’t really a joke.

He was talking about the battle amongst the big streamers to produce the best original content inhouse. This has resulted in an increase in Film and TV budgets, a merry go round of top exec jobs and the noticeable diminishing of the independent film and TV market.

I shouldn’t be too negative, it would be wrong for me to argue that the original content route as a business plan didn’t makes sense. Creating their productions inhouse these companies were able to control the rights and stop their competitors from getting their hands on them, a viable business model you’d say? The rights battle was played out when Disney removed its content from Netflix. This was a major blow for Netflix as it exposed the giant’s vulnerability for first time.

Netflix entered the game in 21st century and so lacked the legacy content of some of its competitors. Whilst it dominated the market and had no real competitors there was no urgency to create original content. But when Disney and HBO et al entered the streaming market life at Netflix took a turn.

Not so long ago Netflix was on the offensive, releasing big budget movies such as Martin Scorsese’s The Irishman, and at the same time sticking it to the film festival by boycotting them. Netflix was a pioneer of the new age of Film and TV. A few years ago, you’d be crazy to think that Netflix would be ever facing a decline.

According to its latest results Q2 2022 Netflix reported a loss of only 970,000 subscribers; in its outlook for the quarter, it had predicted a net loss of 2M. The news is better than expected, but it’s still the largest quarterly loss in the history of Netflix. Its share price has suffered a fall of a jaw dropping 70% and the business was forced to lay off 450 employees.

This is not the end for Netflix it’s the beginning of a new age for the streaming giant.

Netflix is keeping its future growth plans close to its chest there have been some teasing announcements e.g. the introduction of ads on their platform and getting tough on password sharing. Netflix plans to introduce a lower price ad-supported subscription plan in partnership with Microsoft. This is seen as a fair way to keep prices for the subscription low without jeopardising Netflix’s balance sheet. Spotify successfully operates this model and through offering a free service with ads it has converted users to its ad-free subscription service. Spotify is on track to hit 1BN global users by 2030.

We may also have seen Netflix’s first strategic chess move in Cannes with the acquisition of Emily Blunt’s ‘Pain Hustlers’. As I heard a sales agent say, ‘It’s cheaper to acquire films than develop them inhouse’.

We may see a shift away from developing content inhouse to a focus on content acquisition. This shift could be the defibrillator the independent film market needs to shock it back to life. Though I’m sure Netflix won’t stop developing projects inhouse, we may see it acquiring more than it has in the past.

There are also rumours that Netflix will ramp up its plans to release its mid to big budget films in cinemas first. Not for the box office revenue but for marketing and to access tax credits. Releasing films in cinema before they go on the platform Netflix will be able to build up an audience for the film. Those who don’t get to see films in cinemas will be encouraged to sign up for a subscription to watch the films. A type of four walling distribution that is common within the independent market.

Importantly a condition of the UK Film Tax credit is that there needs to be an intention for theatrical release. Currently, Netflix films produced in the UK are unlikely to have met this condition. This means that Netflix’s films are unlikely to have to have received tax credits from their UK productions. But as budgets tighten Netflix may need to take full advantage of tax credits for its inhouse productions.  It could make this happen by acquiring cinemas and showing their films to a paying audience; benefit from UK film tax credit and see its income increase.

It may look bleak for Netflix, with layoffs and falling subscription numbers but it’s still the largest streaming platform and the thirst for content is not going anywhere. What Netflix needs to do now which the Hollywood report put so eloquently is show discipline.

Big budget and a great cast doesn’t always equal a great film. Netflix needs to find a way to increase revenue without alienating customers with increased subscription fees. If Netflix manages to strike this balance it won’t be long until we see the streaming giant reach its pandemic level of success.

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