Tuesday, May 1, 2012

Is It Time For Netflix To Incorporate Advertising?

It’s not easy to be Netflix. Increased competition, rising costs of licensing fees and a stock that’s lost 66% of its value since the summer have the company’s once golden reputation reeling. 

To incorporate advertising at this point seems like an invitation to disaster. Netflix’s ad free streaming environment is as much as part of the company’s identity as the iconic red envelopes. With a lot less of those red envelopes going out in the mail, to jeopardize the streaming experience is to risk the future of the business.

Yet, Netflix has another user experience problem to address – its spotty library of content. The only way to bolster the library is to pay up, and that’s increasingly expensive. For example, in 2008 Netflix paid Starz $30 million to stream titles from Sony Pictures and Disney. That same deal in 2012 came with a price tag rumored to be around $300 million. Netflix simply could not afford that 1,000% price increase and let the deal expire. As a result, dozens of premium titles like The Social Network and Spiderman are no longer in its library. 

The company has made some tough decisions this year to raise cash in order to bolster its library. In the summer, it infuriated customers with a sharp rate increase. In the fall, it “taxed” shareholders by issuing more stock. Will the low hanging fruit of advertising be the next untapped revenue stream? 

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