Why a Wall St. analyst says Netflix will probably end having to spend more on marketing than a traditional TV network - not less
- Netflix will raise the amount it spends on marketing from $1.28 billion in 2017 to $2 billion in 2018.
- CEO Reed Hastings, however, has said the "Holy Grail dream" is to be so good at promoting new content that Netflix wouldn't have to spend externally.
- Barclays said Netflix will likely end up having to spend more on marketing than a traditional TV network because of its non-linear nature.
Netflix doesn't like to spend money marketing its shows, but it may end up having to spend more on it than traditional TV networks, according to Barclays.
The streaming giant has historically been averse to ponying up cash to promote its original TV shows and movies.
"Our sort of Holy Grail dream is that the service was so good at promoting the new content in such relevant ways that we wouldn't have to spend externally," CEO Reed Hastings said on an earnings call in January. That sentiment echoes Netflix's Silicon Valley roots, where costs like advertising can be done away if you just build a good enough system.
But despite Hastings' "Holy Grail dream," Netflix is going to spend a ton of money on marketing in 2018 anyway. In fact, on the same day Hastings made that statement, Netflix announced it would increase its marketing spending from $1.28 billion in 2017 to $2 billion in 2018.
Why? "Because our testing results indicate this is wise," Netflix wrote in its letter to shareholders.
It will likely be "wise" for some time. In a report distributed Tuesday, Barclays analysts led by Kannan Venkateshwar contended that Netflix will probably have to spend more moving forward than the traditional TV networks it's replacing.
Part of this has to do with the value of huge hits.
"While some base volume levels are important to keep some level of inertia consumption going, a small subset of flagship shows can drive meaningful shifts in subscriber trends," Barclays wrote.
Hits like "Stranger Things" or "The Crown" are going to be necessary for Netflix, and only some of them can be created by word-of-mouth.
"This is not unique to Netflix and has been evident in traditional media for a long time," Barclays wrote. "One of the most prominent examples of this is Fox broadcasting, which gained its scale and prominence largely on account of its NFL deal in the mid 1990s. NBC became a powerhouse of comedy in the 1980s and 1990s largely on the back of 'Cheers' and its spin off 'Frasier,' which were used to launch other shows such as 'Seinfeld' and 'Friends.'"
A network needs hits. But for Netflix, part of the problem will be that it can't use those established "flagship shows" to boost the next one to the same extent as NBC could.
"What is different about Netflix is the fact that its non linearity limits the ability to chain/cross market shows the same way that NBC was able to do with Seinfeld and Frasier but putting shows one after another," Barclays wrote.
Netflix can suggest the next show you might want to watch after "Stranger Things," but that won't have quite the same power as a lead-in on linear TV. That means that while hits are important to Netflix, they don't provide the same added value in promoting other shows.
"This in turn implies that over time, the cost of marketing for Netflix is likely to be higher than traditional linear networks," Barclays said.