Netflix has always fancied itself as a disruptive, innovating interloper in the entertainment media space. But the truth is that the 27 year old company, now in its 12th year as an original content provider, has very much become an incumbent power faced with the same challenges as the rest of the industry. Specifically, Netflix could never escape the reality that Hollywood is a hits-driven business. That means finding ways to monetize less stand-out content, efficiently invest in programming, and embrace advertising is a necessity of survival.
Ironically, elements of free ad-supported streaming television (FAST) — or the internet’s equivalent to pay-TV — can help the company address the compounding issues it now faces as the largest TV network in the world.
Off-Platform Licensing
Netflix's Engagement Report, in which it provided the global hours viewed for around 18,000 titles over the first six months of 2023, revealed that the top 1,000 titles (or roughly 5% of its worldwide library) accounts for nearly 60% of all viewing. Although the issue of a small number of titles driving the vast majority of viewership is industry wide, Netflix would surely have hoped to see a more even distribution of viewership across its library after spending around $17 billion on content annually in recent years. (The sheer size of its library has led to the lowest average demand per title among the major players at 2.23x as of October, according to Parrot Analytics). Given the company’s prodigious investments into programming, a better return on less-watched material would be ideal.
Netflix has thus far resisted the urge to license fully owned originals externally and for good reason. Licensing the library titles of its media compatriots helped turn it into a juggernaut. Why would the market-leading streamer want to turn around and help a rival do the same? Well, the company’s very effective password sharing crackdown efforts are expected to reach saturation later this year. That means subscriber growth will once again slow and the company will be in need of a new growth narrative to sell to Wall Street. Even as Netflix’s ad-supported tier improves, it isn’t yet large enough to make meaningful noise.
In January 2023, co-CEO Ted Sarandos admitted that Netflix is “keeping an eye” on the FAST segment. Programming that isn’t being watched by subscribers usually isn’t worth the costs associated with maintaining it on platform, as evidenced by the rash of removals the industry suffered in recent years. But lesser-watched programming is monetizable by FAST, which is a growing supplemental revenue driver. VIP+ estimates that US FAST ad revenue will grow to $6.1 billion in 2025. Other estimates peg FAST revenue already at $6.3 billion in 2023 and $12 billion by 2027.
In terms of library supply and demand, reality, drama and comedy accounted for the three largest shares across both SVOD and FAST in the US as of Q3 2023, according to Parrot Analytics data. In Q4 2023, crime dramas, Japanese animation and sitcoms were the most in demand subgenres worldwide. Many of Netflix’s concluded originals fall within these categories. The company has amassed a massive collection of concluded English language original series (including canceled shows, limited series and series no longer airing new episodes), providing ample licensing opportunities.
The vast majority of supply and demand on FAST also comes from older series, leaving a whitespace opportunity for somewhat newer programming. When asked how much revenue Warner Bros. Discovery might be generating with its Roku and Tubi licensing deals, one industry insider told me that they “suspect it’s a lot given how premium it is.”
Netflix shouldn’t license currently ongoing and returning originals; given its scale, it doesn’t need help launching new shows or raising awareness for returning ones. The first four seasons of Stranger Things don’t need to pop up anywhere else in order for Season 5 to be a hit. The company doesn’t have to license originals to direct SVOD competitors like Amazon Prime Video or Max.
But Netflix’s average revenue per user (ARPU) declined 1% year-over-year as of Q3 ’23 and RiverPark Advisors noted that some “market participants took comments from management at a recent conference to mean revenue growth may be slower in the coming years than expected.” Building against such a possibility by generating additional revenue via licensing completed series that are no longer airing new episodes (and have largely already delivered the bulk of their lifetime value to Netflix) to smaller FAST services would be in line with historical syndication strategies. Doing this at a time when subscription growth may potentially plateau once more can also help craft a worthy growth narrative for fickle investors.
On-Platform Linear Channels
In 2020, Netflix began testing linear-like channels called “Netflix Direct” in France. The service delivered Netflix Original content, including local language programming, in a pre-set schedule that recreated the linear viewing experience. Such a service removes the paradox of choice, which has been a thorn in the streaming company’s side for years as viewers hem and haw over what to watch.
Evolving this model to include talent or title-specific channels, fandom enthusiast genres such as horror and anime, and culture-specific channels would be one way to bolster the ad-supported tier with additional entry points and create habitual usage. These could be tailored to specific seasonal events as well to drive added attention. It would also help with engagement as subscribers seek out easier lean back entertainment options. Coupled with ad-supported on-demand streaming, Netflix would be able to satisfy the intentional and channel surfing needs of viewers all in one.
Going one step further, the creation of an in-house FAST, similar to what Amazon does with Freevee, is another monetization opportunity and a small but potential conversion funnel for prospective subscribers. A+E Networks, AMC Networks, NBCU and Paramount have found success with this model.
It’s unclear if Netflix could use licensed titles as part of any in-house FAST and/or linear channel expansion or if a separate contractual agreement on top of the new AVOD deals reached would be required. But an in-house FAST-like service with the ability to create temporary linear-like channels could result in selective short-term licensing. Other studios already use non-exclusive licensing to help promote the return/premiere of an original, as Paramount Global did with Netflix for iCarly ahead of the show’s Paramount+ revival. And as we’ve seen with AMC+ series airing on Max for a short time last year, rivals clearly value the brief injection of awareness greater scale can provide. FAST/linear streaming framework would provide Netflix with more flexibility in its original programming and greater external licensing opportunities overall (while also serving as a hub for Netflix to promote its burgeoning gaming library as well).
FAST may not be the digital revolution some paint it as, but there’s no doubt it is an additive source of revenue and engagement. Ultimately, if Netflix still fancies itself as an innovator, it will continue to explore any and all measures to monetize content, boost revenue and increase engagement. That includes leveraging all distribution pathways that streaming has to offer in order to maximize the value of content and offer a wholistic digital ecosystem that solves for several audience pain points.
