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Marcus Johnson (00:00):

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(00:21):

Hey gang, it's Monday, November 3rd. Ross, Danny, and listeners, welcome into Behind the Numbers, an EMARKETER video podcast made possible by Nielsen. I'm Marcus And join me for today's conversation, we have senior analysts covering digital ads and media living in the Westchester vicinity. It's Ross Benes.

Ross Benes (00:38):

Hey Marcus.

Marcus Johnson (00:39):

Hey fella. Also a little further south in Brooklyn, joining us we have the editor of the Marketing Advertising Briefing, our Marketing Advertising Briefing, is Daniel Konstantinovic.

Daniel Konstantinovic (00:51):

Hello. Yeah, actually in Queens now. So still a little bit south of Ross, but you got to get it right.

Marcus Johnson (00:58):

I know. I never listen. I also gave him the wrong title before we started. I don't you at all, Danny. His name is also Daniel. Nothing about him is true. Today's fact.

(01:15):

How much time do we actually spend watching things happen during a football game? American football. So I'll ask you guys, there was a Wall Street Journal analysis of an average game of football and it lasts three hours and 12 minutes on average. Total timeframe, starting to watch to end of watching. But if you tally up the time when the ball is actually in play, the action amounts to how many minutes?

Ross Benes (01:43):

17.

Daniel Konstantinovic (01:45):

Oof, that's pretty low. I was going to guess like 30, but I also don't watch football, so I have no reference for this.

Marcus Johnson (01:52):

11 minutes.

Daniel Konstantinovic (01:56):

Wow, that's crazy.

Marcus Johnson (01:59):

An average play in the NFL last just four seconds. And Ross, you would've been right if you'd said the average NFL broadcast spends 17 minutes on replays, watching replays, which is obviously more. You'll spend more time watching replays than the actual live game. 75 minutes are spent watching players, coaches, referees, basically loiter on the field, just shots of them walking around. And the average NFL game includes 20 commercial breaks containing over 100 ads that take up a total of one hour of viewing time.

Daniel Konstantinovic (02:38):

Wow. Well, I guess we need all those shots of the refs walking around the field, because they're all so jacked and muscly. They're all so strong. I don't know what they're preparing for, but maybe I should be too.

Ross Benes (02:51):

Well, this is why you have to go to Buffalo Wild Wings or something like that where they have a bunch of games going on simultaneously.

Marcus Johnson (02:57):

Yes, thank God for Red Zone.

Ross Benes (02:58):

You can go from game to game and maybe might see an hour's worth of football if you sit there all day and watch a hundred games. Who knows?

Marcus Johnson (03:08):

Yeah. I bring my book to the bar and people have said to me, "Why are you bringing your book to watch football?" This is the reason, because nothing is happening most of the time.

Ross Benes (03:18):

And yet, especially during the review, if they review a play, you can probably read half a chapter.

Marcus Johnson (03:24):

Yeah, you can get through quite a lot. Anyway, today's real topic, the biggest questions surrounding Netflix in Q3 and beyond.

(03:31):

All right folks, we have a new format for you. And in this episode, around this time, earnings season, we cover the big tech giants and see how they're doing, look at their financial performance, other things that are going on with the company. But we wanted to focus a bit more about on the biggest questions surrounding these companies. So we'll have the usual suspects coming up over the next few days, Google, Meta, Amazon, et cetera, but we'll be asking what are the biggest questions surrounding these folks, focusing a little bit less on the performance. We'll still talk about the earnings, but in the context of these big questions.

(04:08):

So I have a list of three, we're going to talk about those, but Ross and Danny might disagree. Maybe there are other things that they think should be top of this big three questions list. The first one though, gents, I want to reference our briefings writer, Marisa Jones, noting that Netflix said it's on track to double ad revenues this year, claiming Q3 was its strongest quarter yet for ad sales. Ross, I'll go to you first. What stands out the most at this point regarding Netflix's ad business?

Ross Benes (04:41):

That they've expanded live sports considerably. It went from just hot dog eating competitions to the occasional boxing match, but now you have like some NFL games, you have a little bit of Major League Baseball coming up. And I think when more rights come up for renewal, they will be a bidder. They've shown that it's not quite so experimental. It's something that they said they wouldn't get into years ago, but clearly they have ambitions in live sports and the reason they have those ambitions is to grow the ad business.

Daniel Konstantinovic (05:12):

And they also said they would never get into advertising years ago, and here we're talking about their ad business.

Marcus Johnson (05:19):

They say they're not going to do it, then they're going to do it soon. On the sports piece, I didn't realize fighting happens partly because I'm not a boxing fan, but Netflix had Canelo versus Crawford boxing match September 13th. That drew an estimated 41.4 million total viewers worldwide making it the most viewed men's championship boxing match this century. It also had live attendance of over 70,000 people, which broke the records for Vegas's Allegiant Stadium.

Ross Benes (05:49):

It's to... boxing has been a pay-per-view model. So when Floyd Mayweather had his big bouts, even with Canelo who was one of the fighters in this particular fight, people were paying $70 just to access it. So the fact that a match of that magnitude is on Netflix, it was bound to break it. Because premier boxing matches aren't on, they're not even on cable TV. They're on a pay-per-view model. So the number of people was always kind of low. This gives it a much bigger platform. And Crawford, I mean he'd be an American icon if this was the '70s, but boxing's popularity has declined quite a bit. Most people don't even know who he is.

Daniel Konstantinovic (06:31):

Yeah, I was not familiar with him. I have to admit.

Marcus Johnson (06:34):

Yeah, no, I've heard the name but never watched [inaudible 00:06:36].

Ross Benes (06:36):

Undefeated. He's gone up and down weight classes, can't be beat.

Marcus Johnson (06:41):

I mean this is high profile match anyway, so that would've poured in some viewers.

Ross Benes (06:44):

Oh yeah, it would've been a big pay-per-view if Netflix wouldn't have had it.

Marcus Johnson (06:47):

It's a good point though. Do you think that when some of these sports rights come up for renewal, that Netflix might get preferential treatment because it can reach this many people all at once? I mean it's one of the biggest platforms video-wise outside of YouTube, so do you think that there's a high likelihood if you had to bet money that they'll get one of the top four major sports, NFL, NHL, NBA, MLB, when the next rights come up?

Ross Benes (07:11):

Well, I think a lot of it's on what the prices that they bid on. Formula 1 for instance, went with Apple TV because Apple TV paid the most, but they're not delivering the biggest audience whatsoever. If you look at their MLS games, MLS on Apple TV has gotten far fewer viewers than it had on ESPN and on Fox Sports previously. So I think it depends on the league. If they just want revenue now, a lot of them probably won't care that much. But you do make a point, if you're looking to gain viewers and expand your sports reach, Netflix and Amazon are very attractive for that reason. So I could see it happen, but they'd still have to come in with a pretty sizable bid even if they have that platform.

Daniel Konstantinovic (07:57):

Yeah. And I think what Ross is mentioning is part of why the WWE saw Netflix as such an attractive partner. It's a bid to increase the popularity of the sport with Netflix viewers, which is the largest streaming service in the U.S., in a way, to Ross's point again that a service like Apple TV probably couldn't provide. So I think that will make Netflix an attractive option.

(08:24):

But I think that the sports rights picture has gotten a lot more complicated. I think that these leagues have really shown a desire to split up the rights among several services, because you're getting more money coming in from those various services and you have things like ESPN and the NFL partnering to some degree that could influence where rights for the top, top ticket sporting events go.

Marcus Johnson (08:54):

Well, two things really quick. The first thing is, I wondered if for the viewing experience that might change, that they might prefer one rights holder, one platform over another, because viewers are going to get frustrated. But I saw that, I think it's the NBA, now if you go to NBA.com, you can click on the game and it will show you, kind of like just watch, but it'll show you which platform that game is going to be on. And then if you're signed in, it'll take you straight there or maybe it will ask you to sign up for a subscription.

Ross Benes (09:22):

That's a helpful feature, but it's crazy that you need that feature.

Marcus Johnson (09:28):

It is, yeah. So it seems like this is going to be the future, because to your point, you can have them bid against each other and it makes more money for the sports franchise to do it that way.

(09:39):

But we mentioned we're talking about Netflix viewers, the ad supported viewer base for Netflix come out of nowhere, projected to reach 48 million this year in the U.S. It's up from 40 million last year, and just 8 million in 2023. So our forecasting team expecting it to be 20% of Americans in four years time are going to be ad supportive viewers on Netflix. So it's a big audience even for the ad supported folks.

(10:10):

Danny, what about for you? What jumps out to you the most regarding Netflix's ad business?

Daniel Konstantinovic (10:14):

For me, I think programmatic ad buying has been a really interesting development for Netflix. This year, we've seen them make a big push into expanding programmatic ad buying access across the world in I believe 12 major markets. And it seems like this has done fairly well for them. I mean, it's opened up an easy channel to buy ad inventory on Netflix. It's bringing new advertisers into the fold. I think that there will always be an interest in advertising on Netflix as long as it remains this leader of streaming and this household brand name. So I think it helps it keep churn relatively low. It is synonymous with streaming in a way that Disney Plus or HBO Max are just not.

(11:00):

And when consumers who, especially in the U.S. are staring down some tough economic conditions in the next foreseeable future I should say, if they start making some tough decisions about what entertainment costs do we cut, they're likely to hang on to one to two streaming services, just based on how consumer behavior has kind of shifted around streaming in the past, during concerns about inflation and other economic pressures. So Netflix is less likely to be hurt by viewers cutting costs, cutting streaming costs rather.

Marcus Johnson (11:38):

I mean they also just have so many hit shows or TV shows and movies. It's not like they're resting on their laurels and just hoping that that brand recognition will continue to propel them forwards. They've got multiple seasons, they've got final season of Stranger Things, they've got Squid Games season two, they've got NFL games. Ross, I think alludes to earlier coming out Christmas. They're still pushing the envelope when it comes to content. KPop Demon Hunters, which I kind of just, not dismissed, but didn't really think much of. And then I come to find out that it's their most watched film in Netflix's history, 325 million views. That would be basically everyone in America, if it was all unique. If it was unique, 300 million people watching that. And also hit the top of the box office its release weekend as well.

(12:33):

So do we agree with this one being one of the biggest three questions for Netflix at the moment, this question around their ad business? Does that stay up there in the top three, do you think?

Daniel Konstantinovic (12:44):

Yeah, I think so.

Marcus Johnson (12:45):

Okay. Ross, agree? Top three?

Ross Benes (12:48):

Yeah, it's aiming to be their second big revenue stream. It's mostly still coming from subscription fees. So if they're trying to diversify, advertising's the best shot and that's where they've put the most effort and gotten the most attention. So I think it'll be a top three question for the next several quarters repetitively.

Marcus Johnson (13:13):

I'll just keep this script then, we'll just-

Ross Benes (13:15):

There you go. Call me up in three months, we'll say the same thing.

Marcus Johnson (13:20):

And this year, we forecast that it's going to be about, they don't break this out, but we think it's going to be about a $2 billion, over $2 billion business this year. In a year or two, a $3 billion business. That would be about 5% of its revenue. So it's not nothing, and to what Ross is saying, they're trying to make it more significant line item. Okay, that's one for one then.

(13:40):

My second big question I think is around Netflix House, is their video streaming giant's new physical location, or locations I should say, where folks can engage with popular Netflix shows and movies through immersive experiences, including VR, themed food and drinks and exclusive merch. Jennifer Maas of Variety explaining that the permanent entertainment and shopping venue, venues will be free to enter, but the majority of the virtual experiences and hands-on activities will be ticketed offerings. The first one opens in Philly at the King of Prussia Mall November 12th this year, and then the second one opens in Dallas at the Galleria of Dallas December 11th.

(14:19):

Danny, how big of a deal do you expect these new Netflix house locations to be out of 10?

Daniel Konstantinovic (14:24):

I would rank it fairly low, maybe like a four to five. I'm not so bullish on this development. I think that it's certainly not a bad move for Netflix to make. I mean, there is a large amount of spacious cheap mall real estate available for them to launch locations like this. And I think that it helps strengthen the Netflix brand as this kind of all encompassing entertainment brand, a family friendly entertainment company. You can bring your kids to the Netflix House. It reminds me sort of like a Disney theme park-esque experience, but with obviously much lower operation costs presumably and returns as well most likely.

Marcus Johnson (15:15):

It's kind of like Disney Store meets Disney theme park.

Daniel Konstantinovic (15:18):

Yeah, I think that's a great way to describe it.

Marcus Johnson (15:20):

Ross, higher than four to five out of 10?

Ross Benes (15:23):

No, I'd give it lower than that. I'd give it more like a two to three, because I think it's a nice marketing ploy. This is a nice way to push their brand. It's kind of like the tie-ins they've had with Dunkin Donuts and various other things when Stranger Things was a newer show. I just don't see this being a gigantic revenue generator that it's something that analysts or investors are going to be focusing on every quarter. It looks like it's just like a nice to have little feature to promote your product.

Marcus Johnson (15:59):

Okay.

Daniel Konstantinovic (16:00):

And at the moment, it's also just a small handful of locations. So it's not like this is a massive nationwide rollout of Netflix retail locations.

Marcus Johnson (16:09):

Nope.

Ross Benes (16:12):

They got a long ways to go before this would be a segment like the way parks is for Universal or for Disney. This is just such a smaller scale.

Marcus Johnson (16:25):

Yeah, the rollout is slow as well. I think they're going to have a location in Las Vegas next, but that's 2027 and that's going to be the third one. But I wonder if they're probably looking at this as a loss-leader, like kind of flagship store on Michigan Avenue or-

Ross Benes (16:38):

Madison Avenue?

Marcus Johnson (16:41):

Or Madison Avenue.

Ross Benes (16:45):

Or Fifth Avenue in New York.

Marcus Johnson (16:46):

I was thinking Chicago and then Fifth Avenue for New York. This is something where you're probably going to lose money, but for brand recognition it's absolutely worth it to keep people engaged with the brands and come out of the online world and have a physical presence.

(17:01):

Do we think it's top three questions at the moment, because they're opening, I guess technically they're opening in November, which is Q4? But I did say and beyond.

Ross Benes (17:08):

Nice.

Marcus Johnson (17:09):

Do you think this makes it or do we want to replace it with something else?

Ross Benes (17:13):

I would swap it out. I would ask about video games, which I also don't think are doing that much for them at the moment, but they've put a lot more money into that and more emphasis. So my question would be how much revenue are you making on video games, if anything? What justifies the continued push and what do you see as the long-term strategy? Because that's a different market than the streaming video one, but yet one that they are kind of dabbling in.

Daniel Konstantinovic (17:43):

I would love to talk about this a little bit, you just said my activation phrase, because I had a brief obsession with Netflix's video game business. And yeah, I don't think it seems to be going very well. And I think mobile games maybe make more sense for Netflix than some of the other games produced by studios it is acquired that have a much longer and more unpredictable production time. These seemed like very costly investments for Netflix to make to get into this space. And I think the economic model for a big video game production just doesn't sync up with the quarterly revenue focus and advertising focus that Netflix seems to be taking now.

Marcus Johnson (18:26):

All right, we're swapping out Netflix House for its gaming business. How much is Netflix making from its gaming business? How's that going? All right, I've got one more for you guys, talking about their new partnership with Spotify. So our briefing's analyst again, Marissa Jones, writing that Netflix is making its first big move into the podcast business in a deal with Spotify that will see the popular streaming platform showcase a selection of Spotify video podcasts in 2026. Ross, how much will Netflix's new Spotify deal move the needle for Netflix in particular out of 10?

Ross Benes (19:00):

Three out of 10 at best. This is a bigger deal for Spotify in particular, for The Ringer portion of Spotify, but I don't think it's that big of a deal for Netflix. This isn't exclusive content to Netflix. You can already watch or listen to all of The Ringer podcasts elsewhere for free if you want to. And shortly after they made this announcement, there's a free channel of these podcasts from Spotify being made available on Samsung TV+. So video podcasts to begin with are very hit and miss. I don't know how many people want to watch other people talk. If you're watching me on YouTube right now, God bless you, you're one of 75 people.

Marcus Johnson (19:50):

It's closer to 80, but that's [inaudible 00:19:53].

Ross Benes (19:53):

Okay. But I just don't see this being a main type of content that Netflix viewers gravitate to. I think it's awesome deal for, like I said, The Ringer, because they can get an audience extension out of this. They're on Netflix now, they're on Samsung TV+.

(20:13):

I'd say that bigger deal for Netflix is partnering with creators or other types of content producers that aren't traditional studios. They're getting content for cheap here. If you're just taking a podcast that already exists and put it on your platform, that doesn't cost you a whole lot of money. If you're taking YouTubers' videos that already exist and repurposing them, that's not going to have the licensing fee that a giant Warner Brothers or Disney movie has. And they have been doing more of that. So they have been changing the types of content and this is indicative of that.

(20:45):

So it's part of a bigger trend I think matters, but this particular deal I don't think matters. Spotify has done a bunch of video announcements in the last decade and very few of them have lasted.

Marcus Johnson (20:56):

Real quick, are you surprised that Spotify would be interested in helping Netflix get ahead or get into the podcast space?

Ross Benes (21:02):

No, I'm not surprised because like I said, I think this helps them expand the reach of those podcasts that they own. I don't think it's going to drive time spent on Netflix by several percentage points or something like that. If you're looking at the change in audience, I think it's going to change the audience of the Spotify podcast more than it's going to change the audience of total Netflix viewing.

Marcus Johnson (21:30):

Okay.

Daniel Konstantinovic (21:30):

Yeah, I sort of agree. I think I would give it a similar score, maybe around four to five. This definitely has more of an impact for Spotify than for Netflix. Spotify is under a lot of competition from YouTube right now in video podcasts. I think it's feeling a lot of investor pressure about slow ad growth. And this, the Samsung TV deal, are a way for Spotify to show that we are tapping into video, which is some of the best ad inventory. And we're trying to compete with YouTube, like we're the audio company, but this video platform is gobbling up viewership for video podcasts. So I think yes, it has a bigger impact for Spotify.

(22:14):

But I do think that video podcasts are not like say a movie or even a TV show. I think that it can be more akin to a comfort watch, like a Netflix viewer putting on, I know this is no longer on Netflix, but Seinfeld or something while they do the dishes or fold laundry or whatever. I think a video podcast fills that same function where you can listen but when something that signals visual interest happens, you tune back in on your screen.

Ross Benes (22:46):

I'd say a podcast, podcast does the same too.

Daniel Konstantinovic (22:49):

Well, without the video component?

Ross Benes (22:51):

Yeah. If you're just going in and out, not looking at the screen, what do you even need the video for?

Daniel Konstantinovic (22:57):

That's true. I suppose what you need video for?

Ross Benes (22:59):

You can just go on Spotify and have the screensaver background if you want.

Daniel Konstantinovic (23:03):

If you're a platform, I guess the video just helps you sell that space for a little more money.

Marcus Johnson (23:09):

Folks do prefer, there is some research, 42% of U.S. adults prefer podcasts with video elements, up from 31% a few years ago. There's still not the majority, but there is an interest, especially from younger folks, in that video component. But whether it fits with the Netflix audience is another story entirely.

(23:29):

All right, so top three questions for Netflix in Q3, I Have down a lot of questions around the ad business, so I think that's one. We swapped out Netflix House for the gaming piece, so how is Netflix's gaming initiative going? And then finally it seems less about the Spotify piece and more to Ross, to what you were saying, more a focus on bringing creators into the fold and helping them create, come up with shows and garner a broad reach on a more, maybe brand safe premium platform.

Ross Benes (24:06):

I wouldn't say it's necessarily brand safe, it's just cheaper to do that than to...

Daniel Konstantinovic (24:10):

I think that's something that Amazon has also had great success with. I mean look at the Mr. Beast Show, that's obviously a more expensive production than getting your average YouTuber over. But that's a personality that was born and raised, so to speak on YouTube, and aimed to deal with one of its competitors. So there's an opportunity for Netflix to slide in there.

(24:32):

If I could propose a replacement question for number three. Yeah, sorry Marcus.

Marcus Johnson (24:39):

No, go ahead.

Daniel Konstantinovic (24:40):

And I'm going to propose that we replace you right after this-

Ross Benes (24:43):

There's a lot of proposals.

Marcus Johnson (24:44):

Already in the works.

Daniel Konstantinovic (24:45):

... is the potential for Netflix to be involved in a carving up of Warner Brothers Discovery. There's been some reporting that there is, there are kind of competing ideas among the two co-CEOs of Netflix about whether or not Netflix should get involved in this. WBD is obviously interested in a potential sale. And if you're Netflix, all of those really big tentpole franchises that Warner Brothers Discovery owns the rights to have to be of interest. And not just for future productions, but also for the backlog of existing, let's say DC superhero movies, just to name one example of a prime property that it owns. So if Netflix can get in on that and expand its content library even more, I think that would be a really significant addition to its portfolio and it's something that I'm very curious about and watching.

Marcus Johnson (25:39):

Some huge franchises, yeah, Harry Potter, Game of Thrones. Ross, I wasn't sure how seriously to take Netflix's interest in the company?

Ross Benes (25:48):

Netflix doesn't want the whole company. If they can get the part that they like without having to take the TV networks, that would be so much more attractive.

Marcus Johnson (25:56):

I think it makes the list. So ads, gaming and WBD, all the biggest three questions we think for Netflix at the moment.

Daniel Konstantinovic (26:05):

And I will be the new host of Behind the Numbers going on.

Marcus Johnson (26:06):

That's also true, which I'm just now finding-

Daniel Konstantinovic (26:11):

[inaudible 00:26:11] you three questions.

Marcus Johnson (26:12):

.. now about. Tune into Danny and the show next time to talk about all the other tech giants and what the biggest questions at the moment are for those guys. But this is all we've got time for this episode, thank you so much to my guests. Thank you to Danny, my replacement.

Daniel Konstantinovic (26:26):

Thank you. Always a good time.

Marcus Johnson (26:27):

And to Ross.

Ross Benes (26:29):

Thanks Marcus.

Marcus Johnson (26:30):

And to the whole editing crew and to everyone for listening to Behind the Numbers, and EMARKETER Video Podcast, made possible by Nielsen. Suzy will be here on Wednesday hosting the Reimagining Retail Show.