As Netflix shares continue to get hammered in the wake of the company’s first reported subscriber losses since 2011, investors looking to grab a piece of the streaming giant on the cheap should be encouraged by Ted Sarandos’ disinterest in live sports. If nothing else, Netflix’s long-standing aversion to investing in top-shelf sports programming and its recent musings on introducing a cheapie ad-supported tier should be cause for celebration at the TV network sports divisions.
Speaking to investors this week during Netflix’s first-quarter earnings call, co-CEO and chief content officer Sarandos said he hasn’t changed his mind on the sports issue, noting that such an investment wouldn’t bear fruit. “We’re not quite so sure that you can add the big profit stream by adding sports,” Sarandos said. “Other folks are trying it, and … we’ve gone down this other path.”
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That “other path,” of course, is a business model that leans heavily on the development of original TV series and movies, a giddily profligate endeavor that, as of March 31, has cranked up Netflix’s total streaming content obligations to $22.4 billion. In lieu of piling up even more programming bills, Netflix has eschewed going after rights to live sporting events in favor of backing a number of documentary series. Of these, the most celebrated effort is Formula 1: Drive to Survive, which is widely credited with helping boost F1’s TV ratings—although best of luck to anyone trying to demonstrate causality here.
Sarandos name-checked the F1 show on the call, characterizing Drive to Survive as “an example of kind of sports-adjacent programming that our members really value.” Still, for all the engagement Netflix says it has wrung out of the genre—and similar behind-the-scenes productions are in the works for the PGA Tour and tennis’ Grand Slam events—Sarandos remains standoffish about getting into a big-ticket rights skirmish. “I’m not saying we never would do sports, but we would have to see a path to growing a big revenue stream and a big profit stream with it,” he said.
Last fall, Netflix co-CEO and chairman Reed Hastings told the German magazine Der Spiegel that the streamer “would think about” buying the rights to F1 if they were on the market today. In the same interview, Hasting noted that one of the reasons Netflix has steered clear of live sports is that rights deals aren’t sufficiently self-contained to make such an investment worthwhile. “We don’t own the Bundesliga, they can make deals with whoever they want,” Hastings said, by way of an example. “But that kind of control would be a prerequisite for us to be able to offer our customers a safe deal.”
Hastings this week finally said the words media agencies have been waiting to hear since original Netflix shows like House of Cards and Stranger Things first began stealing share from linear TV. “One way to increase the price spread is advertising on low-end plans and to have lower prices with advertising,” said Hastings, in what amounted to a reversal of his consistent anti-ad-tier stance.
“Allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that’s something we’re looking at now,” Hastings said. “[It’s something] we’re trying to figure out over the next year or two.”
Hastings’ rethink on advertising is a tacit acknowledgment that the Netflix model as it is currently configured seems to have maxed out. Netflix posted a loss of 200,000 subscribers in the quarter, which marked the company’s first reversal on that front in over a decade. The double-tap of the first-quarter slide and Netflix’s projection to lose another 2 million customers in the April-June quarter sent the stock plummeting 35% on Wednesday. On Thursday, as the Dow fell 368 points, Netflix shares closed at $218.22, or 69% lower than the 52-week high ($700.99).
Netflix was quick to attribute its sub losses to a number of factors beyond its control (password sharing, the emergence of rival streaming services, etc.), but Hastings’ change of heart on the advertising front should have stanched the bleeding somewhat. Regardless of how investors interpret the company’s earnings, the executives in charge of selling sports at CBS, NBC, ABC and Fox are enthusiastic about the impact an ad-supported Netflix platform is likely to have on the TV market.
A vertiginous decline in entertainment viewership has been instrumental in boosting the unit costs for ads that air during live sports and across the networks’ associated shoulder programming, and if the Netflix scheme steals even more share from broadcast primetime, those rates will increase even faster. Season-to-date, the networks’ 106 scripted shows and nightly dance-offs/competition series are averaging a meager 3.84 million viewers, of whom only 672,073 are members of the coveted 18-49 set. The latter metric marks a 66% drop compared to the nearly 2 million viewers in the demo delivered by the average Big Four entertainment series just five years ago.
To put it another way, in 2016-17 no fewer than 52 scripted series averaged a 1.0 rating in the dollar demo. Today, not a single scripted show is doing a 1.0; the three highest-rated network dramas are currently averaging 0.8. Meanwhile, the NFL’s top-rated primetime window, NBC’s Sunday Night Football, averaged a 5.1 rating this season, which works out to 6.65 million demographically-apposite viewers per game, while the national Sunday afternoon package shared by CBS and Fox scared up a 6.1 rating, good for 7.96 million adults 18-49.
Advertisers with sufficiently deep pockets who want to get out in front of a large segment of viewers are buying up every in-game spot they can get their hands on. (Aside from the massive reach afforded by sports, the advantage of buying TV breaks down to performance guarantees and a familiar currency; no brand that advertises in televised NFL/NBA/MLB/NHL broadcasts need worry about having to transact against walled-garden data.) If Netflix is successful in its bid to lure marketers from linear TV to its streaming platform, the flight from primetime entertainment will only serve to increase demand for sports TV inventory.
In the early going, the biggest winner of all will be Fox, which in 2021 generated 77% of its commercial impressions via live sports, per MoffettNathanson analysis. The NFL accounted for 50% of Fox’s ad deliveries, while college football (10%) and MLB games (8%) did their share of the heavy lifting. Fox went all-in on sports a few years ago, but NBC and CBS have begun to come around to prioritizing live broadcasts, as both networks have begun shifting some entertainment properties over to their respective in-house streaming platforms.
Sports provided NBC with 33% of its commercial impressions in 2021, up from 17% a decade ago, while CBS drew more than one-quarter (27%) of its ad views care of sports. ABC has a lighter sports handle (15%), although the contribution is expected to increase significantly now that the broadcaster is back in the Super Bowl rotation. Netflix’s disruptive gambit may hasten the inevitable migration of entertainment TV to over-the-top platforms, but the payoff on the sports side should more than make up for all the exiled police procedurals, hospital dramas and churlish-fat-guy-married-to-improbably-attractive-wife sitcoms.
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