THB #717: Netflix Goes Linéaire Before Linéaire Goes Netflix

I’ve been pushing off a piece on the future of television in light of the spinning off of pieces of the linear television pie by most of the Legacy broadcasting organizations. But Netflix is forcing my hand this morning.

The deal between Netflix and French broadcast and streaming leader TF1 was announced in recent hours and it confirms a lot of what I have been arguing, against the tide. Netflix has been looking for ways to add to its revenues for a few years now and the much-media-assaulted platform that is Linear television is likely to be its best opportunity to grow beyond the imaginary notion that there are hundreds of millions of good-revenue-producing addressable households left to conquer (aside from impenetrable China). Every other effort to expand the revenue future of the entertainment company that Netflix is (gaming/merchandising/live experiences), aside from its move into being primarily an ad-based platform, has pretty much failed or been shown to have a minimal predictable impact moving forward.

The deal with TF1 is much more important to the future of Netflix - which has a current market cap, $519.48B based on annual gross revenues of under $40 billion and annual profit of under $11 billion - than it is for TF1.

Netflix has approximately 13 million subscribers in France. TFI, as a broadcaster, reaches 85% of the French population of about 68 million every year. Their free streaming service reaches about 5 million people a day. So this deal is good for both sides. TF1 wants a stronger position in streaming and Netflix needs daily ad sales content that it has not had so far.

Of course, US media is mostly incapable of seeing this through any lens other than “Netflix wins again!” This is silly and simplistic. And however you see the deal, none of us has any idea what the details are. I don’t really know how television advertising works in France. In America, commercial breaks include national and local commercial time. Anyone who has YouTubeTV knows that you watch minutes of kittens playing or lakes flowing during the local TV breaks that by contract, they are not allowed to fill with Google ads. What will TF1 on Netflix look like in terms of ads?

There is a legal limit on ad time on French TV of 12 minutes an hour. American television averages 18 minutes of ads per hour. But TF1 has stayed well under the legal limit in France, around 5 minutes per hour. Will that change under the Netflix relationship? Unknown. will this be more of ad-share deal for the amount of views through the Netflix portal? Unknown.

Putting the details aside, with this deal, Netflix is experimenting with the model that Disney seems to be moving towards with more and more downhill speed… delivering a full-service, live and on-demand at once, platform that cannot replace the entire footprint of what cable has been, but can own a significant percentage of that footprint for years and decades to come. And unlike the other Legacy companies, Disney is spinning off only one currently-Linear asset, a cash cow in ESPN.

What many analysts don’t seem to get about ESPN - as they miss about theatrical exhibition - is that no sane person expects it to appeal to everyone. But for those who do connect, the connection is profound and a necessity. For movies, it’s about 10% in America. For ESPN, it’s about 20%.

ESPN has been the biggest retransmission cash suck in cable for many years… but it’s never been a channel that consistently reached more than 25% of cable subscribers. (Monday Night Football being the exception... but that was still less than 50%.) But the guarantee that ESPN represented to cable providers for, basically, 20% of their subscribers, made it the most unavoidable deliverable on cable TV.

But I digress…

Disney is slowly, but surely, merging all of its assets - Linear & Streaming - into a package that will fill a wide range of content-experience needs and delivery tools, including ESPN, into a monthly spend that will eat 25% - 30% of the monthly domestic consumer spend on in-home screen entertainment. $30 x 70m domestic households x 12 months a year is $25 billion a year (combining subs and ads), plus $20 x 20m ESPN households (a price combining standalone DTC subs and discounted subs in bundles with 95% ad-based access) x 12 months a year is $4.8 billion, plus $6 billion or so from international DTC (current numbers), plus another $9.2 billion or so from the movie and merchandising side and you’re at $45 billion, which is better than Disney is now on the Entertainment side. And that doesn’t include hangover cable/satellite/broadcast, international growth, or potential upticks in advertising rates.

Of course, for this to work, Disney has to fulfill those promises to consumers and advertisers. They need to unlock the experience that makes having a Disney bundle feel close to unavoidable. But it’s far from out of reach.

There are only 2 other full-service Legacy players, NBCUniversal and Paramount. Warners and Sony don’t have the full set of platforms. Fox has marginalized itself aggressively and is a wild card.