Balancing Netflix’s Commitment to the Outdoor Advertising Business
OOH ...Here’s One Thing by Jim Johnsen
OOH …Here’s One Thing
My friend Bill Board, was kind enough to invite me to write a periodic #OOH column. Since I am a man of few words, I promise to keep my riffs short and focused on one thing.
Netflix is in the Outdoor Advertising Business!
Before you scratch you head and say NSS, as in “No Shinola Sherlock”…no, I am not referring to their purchase of 30 plus billboard faces on Sunset Strip from Regency Outdoor last July (which by the way is one of the coolest things to happen in the Outdoor business in a while)*.
What I really mean, is their mainline streaming business seems quite analogous to the outdoor advertising business. I reached this conclusion after reading an article about the Company in Thursday’s Wall Street Journal. What does Netflix streaming have to do with the OOH business, right?
Well consider this (per Wall Street Journal April 25, 2019):
- Non-original “library programming” made up 72% of the minutes people spent watching Netflix as of October. Translation: Netflix does not develop but rather purchases the vast majority of the content that it serves up to its audience. The way it purchases this content is by entering into fixed multiyear contracts with its suppliers. Similar to the way we don’t own the ground underneath our boards (except in select cases), Netflix doesn’t own its primary means of production, i.e. its content. Similarly, we, in most cases, lease the ground (or wall) for as long as we can in exchange for fixed payments to our supplier-ground owners. As an interesting factoid, Netflix pays AT&T’s WarnerMedia, $100MM per year for the exclusive right to allow its subscribers to stream “Friends”. Now that’s an expensive lease!
- Roughly speaking (since it is moving so fast) Netflix has 149MM customers, $18B in run rate revenue and about 7.5B on content costs, in essence its lease cost as a percent of revenue is in the low 40s. (Note this is using GAAP accounting. Their actual programming spend is much higher…like $12B. Talk about pre-paying rent!)
- In an earnings call last week, Chief Executive Reed Hastings, said the Company has long-expected to lose some of its library content and “is ready for it, anticipating it, and in fact we are eager to have more and more of our money to be able to do spectacular new titles.” Translation: Lets try to buttress our portfolio by rolling our own. In the outdoor business, when a permanent easement becomes available under one of our signs, as long as the price is right, we buy it every time right? The quote above also echos of the Outfront Prime strategy to me. Let’s move up the food chain.
- The biggest media companies are betting their futures on the online subscriptions business just like Netflix…but multi year contracts with Netflix to provide them content mean they can’t cancel overnight. Not sure about you, but it certainly feels like the landlord(s) have figured out that streaming is a pretty damn good business and want in. In the outdoor business, particularly in bigger markets, we see that from time to time, no? Talk about something that could keep us awake at night!
- Netflix might have to relax its insistence on acquiring exclusive streaming rights for classic shows, says industry executives. Ouch. This certainly doesn’t feel like the outdoor business, right? Let’s hope not anyway. But can anyone say “Interstate/JCDecaux” in Chicago? Or “JCDecaux/Outfront” in LA? Or how about a “programmatic” future where everyone is just mailing it in?
Long short, Netflix may not look exactly the same as Lamar and some of our other brethren, especially since it’s still burning cash like its fire starter, but I do think there are more similarities than meet the eye. And if they were to lose “The Office” in 2021, that would have been like Outfront losing the MTA (which didn’t happen by the way).
* Lastly, just as an aside for all you readers who were still in diapers at the time, this is not the first time an entertainment company has entered the outdoor advertising business. Shortly after Karl Eller sold Combined Communications to Gannett, he formed a venture with Columbia Pictures, which was then acquired by Coca Cola. Interesting…Karl always did have a tremendous relationship with Coke.