With Netflix and CNN+ streaming video reaches a crossroad

Last week was a turning point in the business model of streaming video. On Tuesday, category leader Netflix who has for years adamantly refused to accept any ads, did an about face. Faced with a dismal quarterly earnings report co-CEO Reed Hastings said he would consider introducing a lower-priced, ad supported tier in the near future. On Thursday, Warner Media Discovery said they were shutting down CNN+, just weeks after the standalone streaming service was launched. The announcement came in the aftermath of Discovery finalizing its acquisition of Warner Media, CNN’s parent company.

The loss of subscribers with Netflix which they expect to continue into second quarter and the abrupt termination of CNN+ in just over one month raises financial questions about the future of streaming video. During the week of April 18, when both announcements were made, the share price of Netflix was $215.52, a decline of 36.8% from the previous week, the largest percentage drop-off of any publicly traded company. (The share price of Netflix had been $700 in November.) At the same time, the share price of the new WBD fell to $20.57, a decline of 17.3%, the fourth sharpest drop-off.

Netflix: For Netflix the decision was based on the economics of streaming video. With a number of new streaming launches in the past three years, programming costs continue to rise reaching $19 billion for the year. In 2022 Netflix announced they would release 68 movies along with hundreds of original episodes for its 222 million global subscribers.

The primary revenue of Netflix has been video subscriptions compared to the deeper pocketed and more diverse rivals, Amazon, Apple, WBD, Comcast and Disney which are also investing billions in content and have global expansion plans. With more competition, Parrot Analytics reports in first quarter the demand for shares of Netflix content fell to an all-time low of 45.2%. By comparison, in first quarter 2021 the figure stood at 50.2% and 55.7% in first quarter 2020.

To pay for content Netflix has been relying on continued subscriber growth and increasing monthly subscription rates. In its first quarter earnings report, Netflix expected to grow their subscriber base by 2.5 million, instead they announced a net loss of 200,000 subscribers, marking the first time in over ten years subscriber counts declined. In early March Netflix dropped 700,000 subscribers in Russia in the aftermath of their invasion of Ukraine. More ominously, Netflix expects to lose another 2 million subscribers in second quarter.

Earlier this year Netflix announced another monthly rate hike for subscribers reaching $15.50. It was the fifth time in seven years Netflix increased their monthly subscription fees and came at a time when the inflation rate was at its highest in 40 years. Netflix is now more costly than any other prominent SVO VO +0.1%D providers.

Mike Proulx, VP & Research Director, Forrester says, “Consumers today have many more choices when it comes to quality programming on streaming platforms. But they also have a finite amount of time and money to spend on them. Ultimately consumers will follow the content and the overall value they’re getting when choosing which streaming services make their watch list.”

The Netflix announcement of an ad supported tier was hinted at last month when CFO CFO +0.2% Spencer Neumann when asked by Reuters if they would accept ads responded, “Never say never, but it’s not something in our plan right now.” In reversal of policy and another further indication Netflix needs to grow revenue was the announcement they would begin cracking down on password sharing. Netflix noted 100 million households use someone else’s account including 30 million in the U.S. and Canada. Previously, Netflix viewed shared passwords as an opportunity to increase subscribers.

Sara Adler, Head of TV WITHIN said, “Netflix has hinted at this over the past months as they likely realized that they had to get into the AVOD game to get subs. They tried to hold out and raise prices but this year taught them that it was time to enter. And AVOD is growing and everyone is doing it. Hulu and Netflix were the biggest in the streaming game for a while but now they aren’t the only players. Insert HBO Max, Apple TV+ who beat out Netflix for best pic at the Oscars, Disney+ is coming to the game later in the year and more. I don’t see how streaming platforms would be able to survive without ads – consumers are switching and the content has gotten so good across platforms it is just too competitive.”

With no ad sales infrastructure and no relationship with Madison Avenue an ad supported tier will be challenging. Hastings said developing an ad sales strategy for Netflix could take several months. At present, Hulu, Discovery+, HBO Max, Paramount+ and Peacock all have an ad supported tier and Disney+ announced plans to launch an ad supported tier later this year. All of them are owned by legacy media companies with an in-house ad sales team in place.

TiVo’s “Video Trends Report” in fourth quarter found 65% of respondents were inclined to watch ads for free content on video sources. John Hamilton, CEO & Founder, TVDataNow notes, “Netflix is stuck in an outdated mode of thinking that says that consumers hate ads so much they are willing to pay to not see them. While that is true for a subset of consumers it isn’t true for the broader population who happily accept ads as a trade-off for free or reduced cost content. As streaming advertising becomes more data driven, effective, and relevant, consumers will shift even more of their attention to advertising supported publishers like Tubi, Pluto, and more.”

According to Nielsen, in March, Netflix had a 6.6% share of total video viewing, more than any streaming provider. eMarketer projects the ad spend for Connected TV to reach $19.1 billion this year led by Roku, YouTube and Hulu. DoubleVerify CEO Mark Zagorski believes Netflix could see 40 million ad-supported subscribers right out of the gate and that Netflix’s shift into ads could “accelerate the growth of CTV advertising in a way we haven’t seen before, with 30-50% growth just from Netflix alone.”

Anjali Midha, the CEO & Co-founder at Diesel Labs, notes, “While Netflix has signaled openness toward incorporating advertising within the platform, it’s important to recall that this is the same company that pioneered the modern streaming experience just a few short years ago. It’s very likely that we’ll see a similar, innovative approach toward advertising as well. I’d expect an emphasis on rethinking ad formats and models – one which has the potential to dramatically influence both audience expectations as well as how the industry overall matures around incorporating new revenue streams.”

To gauge their thoughts on ad support Netflix tier, we reached out to several ad agency executives.

Brad Dixon, Co-Founder, Executive Creative Director, Special Operations Studios says. “It’ll be exciting. It gives consumers more options. Also, what will be the ad unit options, native ads, program placement? How much access advertisers will have with the content? It will be interesting to see whether they will have traditional ads; :15 units, :30 units, :60 units, bumper ads, mid-roll ads, or their own spin.”

Brad Stockton, SVP, US National Video Innovation, Dentsu International adds, “These are exciting times and a good opportunity for consumers who are okay with ad supported streaming. Netflix has great premium content that reaches cord cutters and light TV viewers. The algorithms used in program recommendations can be used in ad targeting. At this time though, it’s very early and we don’t know what we don’t know.”

Andy Rhode, Director of Media, Fallon, says, “It seemed like only a matter of time before Netflix decided to turn on some kind of advertising-based model. There’s too much revenue potential. But there’s also so much copycatting. Netflix is now just another brand with an AVOD service. As a consumer, it’s nice that I have a free option, but otherwise that doesn’t excite me. On some level it’s sad for the brand that this move so clearly feels like a reaction to a problem. As an advertiser, they already have so much scale on the subscription side, who are they going to reach with the ad-supported model? I’m not sure the rush to cancel subs for a free, ad-supported subscription is going to create an interesting scale for advertisers. I’d love to see Netflix introduce an ad model that feels innovative and different, something that finds a new way to connect with consumers without just copy-catting.”

Ben Gogley, Senior Vice President, Media Planning, INNOCEAN USA adds, “Marketers will always chase quality audiences if they are there and if it’s efficient. As advertisers we’ve always wanted to reach the relatively desirable audience that subscribes to Netflix, but have been limited to either product placement (working with the production companies creating the content for Netflix) or adjacent placements through partners like Roku or enabled TVs. However, as streaming competition has grown, Netflix’s dominant position has eroded and there are multiple options now to create a diversified portfolio of advertising-based video on demand (AVOD) partners.”

CNN+: In July 2021, CNN’s parent company AT&T announced the launch of a standalone streaming service CNN+. The announcement came after AT&T said they were going to merge WarnerMedia (including CNN) to Discovery in a $43 billion deal. The announcement of CNN+ met the approval of then CNN President Jeff Zucker, it was an opportunity to reach cord-cutters and target younger viewers. The launch of CNN+ also met the approval of Jason Kilar, the CEO of WarnerMedia and a strong supporter of streaming video. AT&T earmarked $1 billion for the launch of CNN+ over the first four years.

A startup date of March 29 for CNN+ was set. CNN had signed up several high-profile personalities including Chris Wallace from Fox News, Kasie Hunt from MSNBC and Audie Cornish from NPR as well as such on-air CNN personalities as Brian Stelter, Jake Tapper and Anderson Cooper. Besides live news, content would include several featured genres such as travel, food and interviews which can be watched on-demand. CNN announced a monthly fee of $5.99 (same cost as rival streaming provider Fox Nation launched in 2018), but early sign-ups would get a 50% discount.

Fox Nation aside, CNN+ was entering an already crowded landscape with ABC, NBC and CBS all offering a free ad supported streaming news service as well as numerous local broadcasters. In addition, the New York Times, Wall Street Journal and Washington Post all have millions of digital subscribers. Axios reported that CNN+ projected two million subscribers in its first year and 15-18 million by 2026 when they projected to become profitable.

The month before launch date Jeff Zucker had departed unexpectedly. Jason Kilar announced he would be leaving when the new Warner Media-Discovery merger was finalized which happened on April 8. With two of CNN+ prominent supporters gone, on April 11, CNN’s new parent company, which had no direct involvement in the launch but had been dubious of their prospects, analyzed the business model of CNN+.

At that time CNN+ had 150,000 subscribers and said they were on track to reach their first-year subscription forecast. Nonetheless, on April 11 the external marketing budget of CNN+ was halted. A financial restructuring happened on April 19 when CNN CFO Brad Ferrer was replaced by Neil Chugani, Discovery’s CFO for streaming and international. Two days later, incoming CNN President Chris Licht announced, to the surprise of many, CNN+ would be shutting down on April 30, just 33 days after its launch.

In the aftermath of the merger, the new WBD was saddled with a debt load of $55 billion. CEO David Zaslav was expected to reduce the debt by $3 billion and CNN+ became a casualty with more cutbacks anticipated. Also, with consumers wanting bundling and simplicity, Discovery had hinted post-merger that HBO Max and Discovery+ would be consolidated into one direct-to-consumer app. CNN content is expected to be streamed on HBO Max as well as on other digital platforms. It is expected such high-profile CNN+ talent as Chris Wallace and Kasie Hunt will stay on at CNN in some capacity.

Tal Chalozin, co-founder & CTO, Innovid says, “This was always dead-on arrival, in my opinion. No one needs a news-only package for $6 per month when Discovery+ is priced at $6.99”. The failure here is a testament to what I’ve called ‘the second act of streaming,’ where we can expect more bundling to occur as standalone SVOD channels struggle for market share on their own.”

Sean Odlum, CEO of Bliss Point Media notes, “CNN+’s failure demonstrates the value of bundling. People liked having CNN in their cable bundles so they could flip on the news, but it was never must-have in the way ESPN is (which is reflected in the respective level of affiliate fees for the networks). As part of a bundle news has value to consumers; pull it out of the bundle and it’s just not something people feel a need to pay for. CNN+ makes much more sense as part of an HBO Max/Discovery+ bundle than as a standalone service.”

Jesse Math VP, Advanced TV & Video Solutions at Tinuiti adds, “I would add one key factor here is that CNN+ was never available on CTVs! People watch TV on TVs. It may have thrived once distributed on CTVs and Rokus. I think this is a distribution strategy story more than a news content story. CNN’s mistake was launching this as a mobile app. And, while I think the folding of CNN+ is a function of the merger it may reemerge as a bundle.” Forbes