Sir Martin Sorrell, CEO of the world’s largest advertising agency holding group WPP, believes Netflix needs to go down one of two routes (or perhaps both) in order to be a profitable business in the long-term.
Speaking at The Financial Times’ FT Digital Media conference in London on Tuesday, Sorrell said: “Netflix is extremely powerful yet it is not yet achieved profitability — that old-fashioned thing that at the end of the day we are all interested in, in the long-run.”
Netflix reported net income of $US24 million in its first quarter of 2015, and EPS of $US0.77. But its expenses are high ($US59 million in the last quarter, according to the “other income (expense)” segment in its financial report) as it invests aggressively in international expansion, marketing, and content acquisition. Sorrell said Netflix’s chief content officer Ted Sarandos oversees a production budget of $US4 billion or more.
“In those circumstances, it will have to raise its subscription prices — and you can remember what the reaction was like to that last time around — or have an alternative revenue generation operation, one of which will be advertising,” Sorrell added.
That advertising may not take the form of the TV advertising model, but could be branded content, or sponsorships, Sorrell predicted.
Sorrell also suggested the rise and rise of platforms like Netflix will come at the expense of TV at the annual television upfronts this year, where the bulk of TV advertising is bought ahead of time.
He said: “Upfronts will be affected by the fact that viewing figures you refer to [Interviewer Matthew Garrahan from the Financial Times had mentioned that Viacom’s ratings were down significantly year on year] … show declines, not necessarily because of a decline in viewing, but a different type of viewing.”
That is the fault of traditional measurement companies not catching up with the change in consumer behaviour, Sorrell said, adding: “Nielsen [which measures TV rating in the US] will not be upset if I say — or maybe they will — that media owners are upset and advertisers are upset.”
That’s evident if you look at these recent figures from BTIG Research that suggest if Netflix were a domestic US broadcast network, it would be at least the fourth-biggest network, or maybe even number two if you compared viewing hours.
But these figures don’t also take into account the fact that viewers may be viewing content from those networks away from the TV set, such as on their mobiles.
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