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Netflix 'will have to raise its subscription prices'
(Flickr/IAB UK) Sir Martin Sorrell.
Sir Martin Sorrell, CEO of WPP, the world's largest advertising agency holding group, believes Netflix needs to go down one of two routes (or perhaps both) to be a profitable business in the long-term.
Speaking at The Financial Times' FT Digital Media conference in London on Tuesday, Sorrell said: "Netflix is extremely powerful yet it has not yet achieved profitability — that old-fashioned thing that, at the end of the day, we are all interested in, in the long run."
Netflix reported net income of $24 million in its first quarter of 2015 and EPS of $0.77 (adjusted for foreign-exchange rate changes since last year).
But its expenses are high ($59 million in the most recent quarter, according to the "other income (expense)" segment in the consolidated section in its financial report) as it invests aggressively in international expansion (international losses widened to $65 million in the quarter, from $35 million in the year-ago quarter,) marketing, and content acquisition.
Sorrell said Ted Sarandos, Netflix's chief content officer, oversees a production budget of at least $4 billion.
"In those circumstances, it will have to raise its subscription prices — and you can remember what the reaction was like to that last time around — or have an alternative revenue generation operation, one of which will be advertising," Sorrell added.
That advertising may not take the form of the TV advertising model but could include branded content or sponsorships, Sorrell predicted.
Sorrell also suggested the rise and rise of platforms like Netflix would come at the expense of TV at the annual television upfronts this year, where the bulk of TV advertising is bought ahead of time.
After interviewer Matthew Garrahan from the Financial Times mentioned that Viacom's ratings were down significantly year-over-year, Sorrell said: "Upfronts will be affected by the fact that viewing figures you refer to ... show declines, not necessarily because of a decline in viewing, but a different type of viewing."
That is the fault of traditional measurement companies not catching up with the change in consumer behavior, Sorrell said, adding that Nielsen, which measures TV ratings in the US, "will not be upset if I say — or maybe they will — that media owners are upset and advertisers are upset."
That's evident if you look at these recent figures from BTIG Research that suggest if Netflix were a domestic US broadcast network, it would be at least the fourth-biggest network, or maybe even No. 2 if you compared viewing hours.
(BTIG)
But these figures don't also take into account the fact that viewers may be viewing content from those networks away from the TV set, such as on their mobile devices.
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