Where is Netflix headed in 2023 under the direction of co-CEOs Ted Sarandos and Greg Peters? On January 19, Reed Hastings, arguably the most important and influential person in the rise of New Hollywood, , having shared the position with Sarandos since 2020. Hastings, who remains executive chairman, made an impact on the entertainment industry that will be felt for years to come. Now Sarandos and Peters, who had been Netflix’s chief operating officer, are calling the shots. stepped down from his role of CEO They’re taking over at a time when Netflix is storming into 2023 with guns blazing. In its , Netflix said it added 7.7 million paid subscribers for the quarter. This figure easily surpassed the 4.57 million Wall Street expected. Revenue also slightly exceeded Wall Street’s expectations. fourth-quarter 2022 earnings announcement This is the second consecutive big quarter for Netflix. Its stock price is gradually rebounding from a freefall in 2022 following a harsh year that rocked the streaming industry. With the wind at their backs, Team Sarandos/Peters will likely not rock the boat and instead will stay the course – for the most part. Even so, many questions and hot button issues loom. Here are three big questions the company faces in 2023: How Soon Will Netflix Expand into Cloud-Based Gaming? -- which is too big for Netflix to ignore. So, in November 2021, the company games for mobile devices, available to Netflix subscribers in an ad-free format. (Mobile accounts for 86 percent of the global video gaming market, .) Gaming is a $300 billion market launched according to Statistica Since then, the company has built a portfolio of 50 games and acquired four game studios. The company will expand its offerings in 2023. According to Vice President of Gaming Mike Verdu, Netflix is “ ” beyond mobile. very seriously exploring a cloud-gaming offering so that we can reach members on TVs and on PCs A potential move into cloud gaming is important because the global cloud gaming market size is expected to reach $20.94 billion by the year 2030, according to market research store . Research and Markets What are Netflix’s chances of growing profitably in gaming overall? On the one hand, Netflix can offer well-known entertainment titles that lend themselves to games and an audience that is receptive to gaming. According to Karol Severin, lead gaming analyst for MIDiA Research, 46 percent of Netflix’s weekly active users play games on mobile devices and 33 percent play on consoles, “ .” which over-indexes significantly compared to the consumer average Indeed, Netflix’s most recent letter to shareholders noted, “In the fourth quarter of 2022, the company launched season four of the unscripted series Too Hot to Handle, which was a top 10 title for us globally for three consecutive weeks. Simultaneously, we debuted our Too Hot to Handle game, which has been our biggest game launch to date and is another encouraging sign in the long-term opportunity to entertain members with Netflix intellectual property (IP) across different mediums.” Gaming creates the potential for revenue through features such as in-app purchases, a model that Fortnite has mastered – should Netflix choose to go down that path (which it currently is not). But the company has a long road ahead. In 2022, only 1.7 million Netflix subscribers out of 220 million were playing one of its games on any given day, – although it must be said that even if daily active usage is low. according to Apptopia downloads of Netflix games have been improving It’s too early to say yet how much value gaming will deliver to Netflix from the standpoint of growing and keeping subscribers and generating revenue. That said, the potential value cannot be denied. Kevin Westcott, who leads the U.S. technology, media and telecommunications practice of Deloitte, The Los Angeles Times, “The more entertainment services that are on a platform, I believe it will make it much more sticky and reduce churn.” told Reducing churn, or subscriber loss, is important at a time when analysts are concerned that the streaming industry is over-statured. The Los Angeles Times noted that many consumers prefer not to pay for mobile games and instead play free ones that are supported by ads, or that charge for additional gameplay or bonus items. This suggests that gaming will be more valuable as a customer retention strategy, not an acquisition strategy. In 2021, Netflix Epic Games, TikTok, and YouTube as rivals for customers’ screen time. Keeping people engaged is important to Netflix. The company , which is all about viewer retention. cited counts total streaming minutes of any program as a key performance indicator for successful content Adam Levy of The Motley Fool , “The way I view Netflix's foray into games is as a moonshot. The biggest mobile games seemingly come out of nowhere and go viral (think Wordle). The same thing happens with some of Netflix's biggest shows (think Squid Game). The more shots the company takes, the more likely it's going to find a hit. And it has the resources and experience to capitalize if and when it finds that hit. That could result in stronger subscriber retention and monetization down the road. concluded So, while games have been disappointing so far, there's no need for Netflix to give up on them anytime soon.” An expansion into cloud-based gaming makes sense for Netflix, and I predict that’s exactly what Netflix will do in 2023. Cloud gaming involves streaming games off the internet instead of outright downloading them. It’s a more natural experience for Netflix subscribers and keeps Netflix’s audience locked into its own platform more easily. In 2022, the appearance of multiple Netflix for cloud-based gaming positions fueled speculation that the company would go in this direction -- as did Mike Verdu’s about cloud-based gaming at TechCrunch Disrupt in October 2022. job postings bullish comments In doing so, Netflix enters a crowded field that includes the likes of Microsoft’s Game Pass, Sony’s PlayStation Plus, and NVIDIA’s GeForce Now. Google made a run at cloud-based gaming . Before the advent of cloud-based gaming, Disney tried to launch video gaming and also before instead of trying to do all the heavy lifting of creating games in-house. and failed gave up licensing its properties to gaming companies Neil Barbour, an analyst at Kagan, , “While Netflix does have the infrastructure set up to stream video as well as an existing consumer base, there is a pretty deep chasm between video streaming and game streaming. Microsoft and Nvidia have been working for years at this and are just now approaching usable experiences for the average consumer.” said Netflix has a major advantage: the ability to develop games based on its marquee shows. After you’re done watching , with cloud-based gaming, you can play the game without having to fuss with downloading. This depends on Netflix quickly developing games that capitalize on the popularity of its content – and, of course, games that appeal to gamers. Gaming is a different experience than passively watching television. (At TechCrunch Disrupt, Verdu did not say whether  Netflix would build its own game controllers like Google did for the unsuccessful Stadia service; he did say that the titles wouldn't rely on TV remotes for input.) Stranger Things Stranger Things This is why Netflix has been fast tracking its growth by acquiring gaming studios. Even still, Netflix has its work cut out for it. How Successful Will Content Monetization Be? Reed Hastings must be relieved he is stepping back from his CEO role now that Netflix has launched its own ad-supported tier. During Netflix’s glory years when seemingly no one could touch the company, he was a content purist – insisting on building a business by creating great content that drives subscriber growth. But he eventually changed his thinking as his competitors grew their ad-supported offerings and Netflix’s subscriber growth showed signs of slowing before 2022. By 2022, he was , “Every major streaming company excluding Apple has or has announced an ad-supported service. For good reason, people want lower-priced options.” admitting to shareholders And so, under his watch, Netflix launched its own ad-supported tier in November 2022 – just as Disney+ unveiled its own. Netflix has not released any performance numbers on its ad-supported offering, but it looks like Netflix is delivering promising results. , daily subscription signups rose by more than 50 percent during the first few days the ad-supported tier was available. Ampere Analysis said that almost 10 percent of new customer signups are now for the ad-supported tier. According to Ampere Analysis Peters and Sarandos say they are going to push the ad model forward full throttle. They believe the model is succeeding already. Peters , “We have knocked this thing outta the park. We literally went from zero to get this thing launched in six months. And then we were within this much of what our predictions were. We’ve got a crap load of work, there’s no doubt. We're gonna be busy building this out for years to come.” He predicted its growth trajectory as follows: “Think about it as zero two months ago [when the service was launched in November 2021] and then about mid-single digit billions of dollars in three years” by catering to price-sensitive consumers. assured Bloomberg recently In its letter to shareholders discussing Q42022 growth, Netflix was equally sanguine about its prospects: While it’s still early days for ads and we have lots to do (in particular better targeting and measurement), we are pleased with our progress to date across every dimension: member experience, value to advertisers, and incremental contribution to our business. Engagement, which is consistent with members on comparable ad-free plans, is better than what we had expected and we believe the lower price point is driving incremental membership growth. Also, as expected, we’ve seen very little switching from other plans. Overall the reaction to this launch from both consumers and advertisers has confirmed our belief that our ad-supported plan has strong unit economics (at minimum, in-line with or better than the comparable ad-free plan) and will generate incremental revenue and profit, though the impact on 2023 will be modest given that this will build slowly over time. Advertising doesn’t tell the whole story about Netflix’s aspirations for monetizing content. The company for years. has been quietly building a merchandising operation as well For example, in 2019, Netflix and bike maker Mongoose agreed to offer a limited edition Mongoose based on a fictional bicycle used in , which was followed by the licensing of more -inspired bikes. Netflix also launched , including those with , , , and Stranger Things Stranger Things 75 co-brands Burger King Coca-Cola H&M Nike. These relationships — hybrid in-show product placements plus real-world merchandising — offered a glimpse of how Netflix would monetize its titles more broadly. Notably, the tie-in capitalized on the growing popularity of , which was a turning point for Netflix’s commitment to monetizing the value of its titles. Stranger Things Selling licensed products is a massive revenue opportunity. Global sales revenue generated by licensed merchandise and services grew to $315.5 billion in 2021, a 7.75 percent increase over the $292.8 billion generated in 2019, according to the by Licensing International, a trade group. In 2020, Netflix hired Nike and Disney veteran Josh Simon to lead its Consumer Products division. Since, then, the company has merchandized its content in a number of ways, including: most recent study of the industry A to distribute Netflix-inspired clothes, toys, beauty supplies and housewares on the . Initially this was an online operation, but the two companies recently said they’re . (It’s not clear what the Hubs actually look like – a row of merchandise? A kiosk? A store within a store?) In addition, Walmart is making available a Netflix Streaming Gift Card, exclusively at Walmart. The low-priced Netflix Streaming Gift Card gives customers a chance to use the streaming service without having a credit or debit card. Walmart will also offer Concession Kits to help fans create a movie theater-style couch-watching experience with themed items like popcorn, confections and collectible cups. partnership with Walmart Netflix Hub expanding the Netflix Hubs across  2,400 Walmart stores Distribution deals beyond Walmart. For instance, and sell Netflix-inspired merchandise. Target Amazon The launch of the , an online store built with Shopify to nimbly create merchandise based on the popularity of series like Squid Games. Netflix Shop Pop-up stores in major markets such as and . Los Angeles New York A for a live experience for Pat McGrath Labs’ collection. partnership with YouTube shopping Bridgerton makeup The Walmart relationship is intriguing because Walmart has a deal in place to offer a competing streaming service, Paramount+, to members of the Walmart+ premium service. Nevertheless, I predict Netflix and Walmart will double down on the Netflix Hub by rolling out more Netflix Hubs across all 10,500 stores globally -- especially because global markets are essential to Netflix’s growth. Walmart offers Netflix: An in-store, web-based, and mobile distribution channel to millions of Walmart customers. . . Its website is the . The company is the world’s largest retailer Walmart’s app is the most popular shopping app in the United States most visited eCommerce and retail site in the world Insight about how its shoppers behave – what they buy, when, and where. Walmart has mastered the science of collecting and analyzing first-party data, or the information people share with Walmart about themselves when they shop in store and online. First-party data has helped Walmart launch its successful Walmart Connect ad network, one of  many such retail-based networks emerging in recent years. Brand strength. Netflix is a newcomer to merchandising. Walmart gives the company visibility and legitimacy. As with gaming, merchandising is an early-days effort for Netflix. The company has not disclosed how much money it actually makes from merchandising, and based on earning reports, the mount must be immaterial for now. Disney sets the gold standard in this area, but streaming levels the playing field. Even Disney is still just figuring out how to develop synergies between Disney+ and Disney brands such as its theme parks and stores. Walmart is Netflix’s ace in the hole. Will Netflix Rethink Movie Distribution? For years, Netflix has locked horns with the major theater chains because Netflix has refused to give its movies a wide theatrical release before taking its films to streaming. AMC and Regal have flat-out boycotted Netflix’s films. The conflict eased up in 2022 when, for the first time, Netflix distributed one of its titles through three major Old Hollywood theater chains, AMC, Cinemark, and Regal. , the sequel to the hit Knives Out, was distributed to 600 theaters on November 23. The movie ran for one week, followed by a blackout period, and then a streaming premiere on Netflix on December 23. Glass Onion: A Knives Out Mystery Netflix didn’t release financial results for , . By contrast, Disney’s Thanksgiving release was on track to make about $24 million during Thanksgiving Week – but the movie was distributed across 4,174 theaters. Glass Onion but it’s estimated to have raked in $14.5 million during its one-week showing in only 638 theaters Strange World It’s been widely discussed that Netflix should have exhibited longer in theaters and cashed in on an opportunity to make much more money – especially because Netflix paid a reported $450 million for two sequels to . Box office analysts it could have earned four times as much if it had been released in more theaters and perhaps hundreds of millions if it had stayed in theaters longer than a week. Glass Onion Knives Out said Jeff Bock, a senior media analyst at Exhibitor Relations, , “This is probably one of the biggest gaffes in modern film release history in terms of bungling what could have been made at the box office with ‘Glass Onion.’ In my mind, they left hundreds of millions of dollars at the table. If they can afford that, that’s great, Netflix — but any other studio in town is just shaking their head at this decision because any other studio in town would have loved to have this film in the marketplace right now.” told The Los Angeles Times Sarandos countered, “There’s all kinds of debates all the time back and forth, but there is no question internally that we make our movies for our members, and we really want them to watch them on Netflix. Indeed, a short theatrical run for did exactly what Netflix had hoped for: build buzz for its streaming release. turned out to be the fourth most popular movie in Netflix’s history. As the company reported in its Q4 letter to shareholders, “We believe people typically sign up for a streaming service because they’ve heard about a title ‘you simply must watch’ from a friend, seen the excitement on social media or read about it in the press.” Glass Onion Glass Onion That was then. This is now: Sarandos and Peters are operating in a wary-to-hostile investing climate. The movies were expensive to acquire. And movies are enormously risky: unlike TV shows, which build buzz over multiple episodes, movies have only one shot at generating fan love. Knives Out And surely Sarandos and Peters are watching what their competitors are doing. A number of films enjoyed huge, extended, box office runs followed by successful streaming premiers in 2022: earned $750 million globally before Warner Brothers premiered the film the HBO Max streaming service. then enjoyed a first-week viewership of an estimated 4.1 million households (per Samba TV) – the second best first-week for a theatrical release on HBO Max. The Batman The Batman One of the biggest movie success stories of 2022 (or any year), , took to arrive on its studio’s streamer (Paramount+), which didn’t stop it from immediately becoming the service’s . Top Gun: Maverick seven months No. 1 offering banked $842 million globally during an 82-day run in theaters – and then . Black Panther: Wakanda Forever became the most-watched Marvel premiere on Disney+ based on hours streamed within the first five days I predict that Netflix will loosen up even more and allow a longer theatrical run for its titles (which it should do for the upcoming , starring Adam Sandler and Jennifer Aniston). Murder Mystery 2 The company can still cater to subscribers by releasing movies in theaters and then versions exclusively for streamers, as Peacock did following the movie’s successful box office run. And Disney+ often includes the standard and the IMAX versions for Marvel movies, plus often commentary tracks and a ton of extras, like you’d get on a DVD release. has a 90-minute making-of documentary. by streaming two versions of Jurassic World Dominion West Side Story New Hollywood is learning it can have its cake and eat it, too, by exhibiting movies in theaters as a way to maximize revenue and also build excitement for their streaming releases. What does Netflix have to lose, besides money on the table? Big Shoes to Fill Netflix is looking at a much brighter year than it did in this time last year. Reed Hastings’s legacy is secure, and Netflix has re-asserted its role as the leader of New Hollywood. Ted Sarandos and Greg Peters have big shoes to fill. Gaming, monetizing content, and rethinking Netflix’s movie distribution strategy are three ways to do that.

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Three Questions for Netflix’s New Co-CEOs

Three Questions for Netflix’s New Co-CEOs

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