Discover more from The Asianometry Newsletter
The Economics of Netflix's 17 Billion
And a Note on XBox Game Pass
If you want to watch the video, it is below. I wanted to do a follow up video on video game subscription plans but this Netflix video did poorly so it’s going to be a newsletter instead.
Shortly thereafter, news of the Microsoft's big $67 billion purchase of Activision-Blizzard came out. Assuming that the transaction closes, adding this company to 343 Industries, Mojang, Bethesda, and others makes Xbox Game Studios the third largest game company by revenue. Sony also bought Bungie, continuing the consolidation drive.
Microsoft themselves says that Xbox Game Pass is behind this massive studio rollup. Subscription gaming products like Xbox Game Pass and Sony's Playstation Plus are remaking the industry.
It used to be that Sony’s most profitable division was its insurance division. That has changed, as Playstation Game Services have turned into its biggest segment. The subscription revenue along with the 30% cut on the purchase of video game content has been immensely profitable. Epic Games and Fortnite is so willing to go to war against iOS because its cash cows are in the consoles like Playstation and XBox.
Services like Playstation Plus and Game Pass are not that far away from expanding into other types of media content. And I think Netflix knows that - they consider anything that captures the user’s attention as their competition. Streaming video is a way to engage a viewer’s attention. A good TV show like Squid Game is pretty engrossing, but video games are even more so. So that is why Netflix started dabbling into video games.
Today, the gaming industry - at $180 billion in revenue in 2021 - is twice as large as the movie industry. AAA video games cost as much as movies to make now, but can return a huge amount more money. GTA V and its online features have made Take-Two nearly $6 billion in cumulative revenue and it is still a top seller. Tencent’s in-house studio made $10 billion in 2020, as much as any movie studio out there (except Disney).
The economics aren’t quite the same, but I think if Netflix showed how subscriptions for movies and content were a thing then it will work all the same for AAA games. Who knows if it is, but companies are going to go there and find out.
In 2021, Netflix dropped $17 billion in cash - $13 billion accrued - for its content.
A significant portion of that was spent on making its own shows and movies. In 2021, the company spent $5 billion on originals.
People aren't going out to see movies in the theaters anymore unless it's for a Marvel movie. Yet the film and TV production businesses are busier than ever before - pandemic shutdowns notwithstanding.
All of that is thanks to the streamers. What's the strategy behind all this content spending?
Differing Content Strategies
Content is hard to value. It is not like a box of biscuits. And different companies have different ways of doing so. However, the goal of a pure-play direct-to-consumer video subscription service is pretty straightforward: You want to grow the subscriber base.
You want to release content that gets more new customers to sign up and keeps old ones from churning - either to a competitor or to something else. And you have to make or buy that content at a reasonable return.
Netflix makes money from subscriptions. The longer people subscribe, the more it makes. And while some subscribers never use it and still keep their subscription, the best situation is that they watch a lot of shows on their Netflix account. And they keep watching month after month.
This requires vastly more content. Back when there were only 3-5 networks, the TV show production machine used to only have to make some four hours of original content a night from September to May. Cable expanded on that a little, but the season system remained.
Now, Netflix and the streamers have to commission, produce, and release new shows each month year-round.
In 2019, there were 500 original scripted series made. And because of the sheer volume, these have to be produced more quickly and cheaply.
In today's TV production environment, there is 60% less time from green-lighting to release - and 65% lower budgets per original content hour.
Amazon - and I presume Apple too - add a few tweaks to the model. Yeah they care about acquisition and retention too. But they also use their video subscription products - Amazon Video Prime and Apple TV Plus - as retention tactics within their particular ecosystem.
It is content marketing. Billion dollar white papers! Ha! Thus Amazon wants to measure what shows incentivize people to sign up or extend their Amazon Prime subscription. But more on that later.
In October 2021, Netflix changed the way they reported their content viewership. They used to report just how many accounts watched a particular show for at least 2 minutes.
The new methodology would present the number of hours viewed for each show or movie. Presumably this says more about which shows or movies hold subscribers' attention for longer. Whereas you can argue that the old metric just told you how well the content’s thumbnail performed.
However, we are still missing how far an individual subscriber gets through a particular show or movie: Retention. And retention is key. Is it 500 million people watching just 4 hours, or 2 billion people watching just 1?
A recent Bloomberg news article caught my eye, and in it there was a really interesting statistic:
> In the case of “Squid Game,” Netflix estimates that 89% of people who started the show watched at least 75 minutes (more than one episode) and 66% of viewers, or 87 million people, have finished the series in the first 23 days.
90% of viewers finishing at least one episode and 66% finishing the whole show - that is kind of crazy good.
An example of this focus on retention: I have noticed that Netflix original shows don't have to hit the arbitrary 16 or 22 episode limits that a TV season requires. Thus, they tend to be tighter, without padding and random side quests. Netflix wants them to hold people’s attention longer. Not to fill up the hours.
Value and Return on Investment
In addition to a show's retention, Netflix assigns values to the people who are watching it.
Shows watched by new signups or who have been previously inactive are said to be more valuable. The idea is that the show got to be impactful enough to get them to reactivate their use of the service.
According to the Bloomberg article, the two are summarized into a single internal metric called "impact value". This metric makes the various shows inside the Netflix portfolio comparable with each other. Divide the impact value by the cost it took to make a show, and you get a return on investment metric.
Netflix reviews a show's impact value ratio 7 and 28 days after release. It reminds me of something that I have read somewhere with regards to YouTube. You are in the best position to judge a video's performance 7 days after upload rather than after 30 minutes when YouTube starts showing you stats.
A YouTube Comparison
Speaking of YouTube, it is interesting to me how these metrics overlap with what YouTube content creators work with and experience on a daily basis. And in this I can use some of my personal experiences for background.
The metrics that YouTube makes available to its content creators tell you a lot about how to think about making and valuing pieces of content.
Leaving aside the revenues from sponsorships and what not, one way your average YouTuber might value one piece of content over another would be to look at how much ad revenue it brings in. That is calculated based on two metrics: How long they watch, the retention, and who is watching, the audience.
Retention: The longer a person watches a video, the more ads they watch and the more the creator makes. The YouTuber MrBeast has repeatedly made clear that he wants people to watch 80% of his videos.
Not only because it racks up the ad impressions, but also because the YouTube algorithm seeks to reward good retention. A good retaining video is more likely to get pushed out to more users.
At the same time, YouTube assigns different values to who’s watching the videos - a metric it refers to in its dashboard as Revenue per Mille or RPM. The ways it is calculated, I have not really looked into and have had a hard time predicting.
What I have found most reliable - but not always, so - is by country. Viewers in Australia, the United Kingdom, and the United States deliver a much higher RPM than those in Taiwan for instance. That being said, I can't say that it much affects how I in particular pick and choose my topic ideas.
Amazon's First Streams
As I mentioned earlier, Amazon's strategy for Prime Video is slightly different from that of Netflix's. Retention is undoubtedly important to them, but they seem to be really focused on driving new signups. This makes sense since Prime Video is supposed to be a suitable acquisition channel for the rest of the Amazon ecosystem.
For Amazon, Reuters in 2018 mentioned a metric called "First Stream", and it is frequently referenced in the documents Reuters got to see. Note that these are older documents dated December 2016 so keep that in mind. But I don't see a reason why the overall strategy might be significantly different.
If someone streams the motoring series "Grand Tour" right after they sign up for Prime, then that show gets credited for the win - something they call a first stream. In that show's first season, Reuters reported that the Grand Tour had over 1.5 million first streams to Prime worldwide.
Once you have established these metrics as your ground truth, you are able to then calculate your returns by dividing by the amount of money you paid to acquire or create the piece of content.
The Grand Tour in this case cost $49 per Prime signup - the best of its cohort. Which is not bad if you recall that Prime cost $99 back then ($119 now), which means you’ve immediately made back your cost on revenues - not profit. But add to that the strategic benefit to Amazon for someone to have Prime - Prime members are far more locked into the ecosystem, buying more stuff and all - and the show was a huge win for them.
In 2020, Amazon spent $11 billion on content, up 41% from the previous year. The fact this budget has kept on growing means that the strategy is working. The biggest and most dressed-up content marketing budget in the world.
Originally, the company invested in niche TV that garnered critical acclaim and won big at the award shows. Bezos himself mentioned it in 2016: "When we win a Golden Globe, it helps us sell more shoes."
By 2017, however, the data conclusively showed that high-end prestige dramas and their awards were not delivering better cost per acquisition numbers than four-quadrant blockbusters.
In other words, more shows like Game of Thrones rather than "Transparent".
The company promptly changed tactics with a variety of franchises like the Wheel of Time and Tom Clancy's Jack Ryan. And of course, the $500 million mega-deal for the Lord of the Rings prequel TV series.
I recently watched on Netflix an episode of the TV show Voir, made by the YouTubers who made "Every Frame a Painting".
This episode is called Film Versus Television. And it notes how the two mediums developed their own distinct, straightforward style. Film, with its limited time budget but richer canvas. Television, with an emphasis on character but shot to be watched on smaller screens.
It has made me think more about the style of a piece of content made for a streaming platform. I think that content - even if Netflix labels it a “movie” - falls more on the TV spectrum.
They apparently encourage their filmmakers to accommodate second screen consumption. In other words, on the phone while something else is going on up on the television. Which means less budget for the art department with bland props, bare walls, and big closeups of actors saying their lines.
The analytics are apparently bearing out the experiment. Everyone seems to hate Red Notice, but it's been the number one streamed movie for a while.
It's interesting to consider how the streaming business model will affect the viewing experiences of its content. Redditors say they want all of their movies on streaming and never have to go to the theaters ever again. Maybe they should consider what that might mean for the content they’ll end up watching.