Netflix’s Untapped Weapons for Survival

Netflix responded to Disney’s news that will end its $300 million annual film deal while creating two streaming services with a warm, stinking slice of revenge! 

Just five days after Disney set the stage for war, Netflix shot back by luring Shonda Rhimes, ABC’s most important creator to the streaming giant with a massive multi-year deal and Netflix’s first overall deal with a content producer to multiple projects. According to AdAge, Rhimes and her Shondaland production company’s four shows (Grey's Anatomy, Scandal, How to Get Away with Murder and the axed The Catch) last season accounted for nearly half of ABC’s primetime drama ratings.

Refusing to stop there, Netflix sent a message to the industry at large – especially any other entertainment company contemplating following Disney out the door – that they’re not backing down. In the last ten days, Netflix brilliantly orchestrated a string of newsworthy deals, acquiring some of the biggest names in Hollywood and putting every TV network on notice. The deals include:

• TV legend David Letterman will make his return to TV in a six-episode series sometime next year where he goes out in the wild interviewing people he finds the most interesting;
• Netflix’s first ever content acquisition, for comic book legend, Mark Millar’s Millarworld, which has inspired movies that grossed over $4B, including the first Avengers, Captain America: Civil War, Logan, The Kingsman, Kick-Ass and Wanted;
• Critically acclaimed and 4-time Oscar-winning filmmakers, Joel and Ethan Coen will make an anthology series about the American West;
• The Simpsons creator, Matt Groening, is working on a new fantasy cartoon series;
• A new comedy from Two and a Half Man and The Big Bang Theory creator, Chuck Lorre, called The Kominsky Method, with Michael Douglas and Alan Arkin attached to star, while Lorre’s straight-to-series pot comedy Disjointed, starring Kathy Bates premieres on August 25.

These announcements highlight the heart of Netflix’s overall content strategy: look for top name talent whose past work or genres they specialize in and do well on their platform, and offer them rich deals and creative freedom. So, while Netflix has been aggressive in bringing in on A-list showrunners like Jenji Kohan (Weeds and now Orange is the New Black), Marta Kauffman (Friends and Grace and Frankie), Chuck Lorre and most recently, Shonda Rhimes, TheWrap’s Ryan Gajewski smartly points out that many of its buzziest shows have come from up-and-comers creating their first hits, like the Duffer brothers’ Stranger Things and Making a Murderer writers Laura Ricciardi and Moira Demos.

With Netflix set to spend $6 billion on content this year and preparing to spend $7 billion in 2018, it’s getting very expensive to keep their content engine firing on all cylinders. Poaching top talent and creating their visions comes at a cost, which according to Netflix’s latest filing, has been funded by $13.32 billion in debt. There must be a better way to boost revenue growth without the selling of its stocks or bonds or raising prices. The answer may be sitting right underneath all their most recent announcements. 

Having the largest batch of storytellers housed under Netflix’s roof presents a billion dollar untapped opportunity to fund new content through the introduction of branded content and product placement.   

Consumers quickly grew accustomed to two promises from Netflix: making all episodes of a season available at once and no advertising. But keeping those promises to their audience leaves Netflix standing on the sideline of the more than $70 billion ad business. CBS for example, home to Chuck Lorre’s blockbuster shows, just locked in $2.5 billion in advertising commitments for the upcoming TV season.

While traditional 30-second spots are off limits, imagine if Netflix got their stable of creators to start telling stories on behalf of consumer brands. This type of branded content isn't very different from what most brands are trying to do today on Facebook and YouTube. It could also be considered a follow-up to the first and most famous branded content series, BMW Film's The Hire from 2001, which increased sales by 12.5% and drove 11 million views before YouTube was invented (and has over 100 million views today).

How much would P&G, Ford, Coke or any blue chip company pay to have Shonda Rhimes create a short film that plays with her new Netflix drama series? How interested would Kellogg’s be in partnering with the Duffer Brothers to fund additional stories about the kids from Stranger Things with a special guest-starring role from Eggo waffles (a brand prominently featured in Season one)? For reference, a :30 spot on NBC’s Sunday Night Football went for $650,000 last season, AMC’s The Walking Dead cost $470,000 and Fox’s Empire wasn’t too far behind. In these scenarios, even $1 million would be a steal! If they do that with all new content, they're looking at a major windfall.

Product Placement has been around since the invention of filmed content, but when Netflix launched their first original series in 2013 with House of Cards, they let the show’s producers handle and profit all product placement deals rather than brokering it themselves. More recently, Netflix has gone so far as forbidding producers to accept cash to feature brands in their projects. PQ Media projects that product placement revenue will reach $11.44 billion in 2019, yet doesn’t understand that in most product placement deals, cash isn’t exchanged. Product placement deals are traditionally done as a barter, lending or giving away products to decrease the cost of production. But if even 10% of PQ’s estimates represent cash deals, there’s over $1 billion out there for the taking.

A 2015 attitudinal study by Israel D. Nebenzahl and Eugene Secunda revealed that most consumers prefer product placement over traditional ads. If you’re one of Netflix’s 52 million U.S. subscribers, would you tolerate Marvel’s Defenders communicating with Samsung devices over a $2 increase in your monthly subscription?

We know Netflix isn’t backing down in their fight against Disney or anyone else, but they will need to find new ways to raise funds to fuel the epic content battle ahead. While an eventual subscription price hike is inevitable, giving in to branded content and product placement are Reed Hasting and Ted Sarandos' secret weapon for filling the Netflix war chest.