Netflix Think They Don’t Have a YouTube Problem… But They Actually Do
Kids Headlines: Netflix Q2 2024 Earnings
Subs are up at Netflix and the overall tone of earnings last night was positive. Some challenges persist, of course. Advertising remains a grind and, despite talking at length last quarter about how great their user interface is at surfacing content, they’ve redesigned their homepage.
There was also some very interesting discussion about competition. Netflix themselves definitively underlined YouTube as their fellow leader and “primary competitor” in the direct-to-consumer space. Despite this, they’re not going after YouTube market share. They’d prefer to gouge other “premium content” streaming competitors (which to be fair they do masterfully), as well as pulling in a bigger share of the 80%+ TV overall. But I’m not letting Netflix get away from the YouTube question that easily, particularly given its timeliness.
Netflix and YouTube
At one stage, Netflix were allergic to YouTube. Watching how the relationship is evolving is fascinating. There was clear side eye in Netflix describing themselves as a home for:
“creators of great movies and TV shows, who need partners that can share in the risk inherent in bringing these stories to life”
They spoke about “bets,” and there’s no denying their $17 billion content budget is money they’re putting on the table each year. Any bet YouTube makes is fully hedged in revenue sharing. Amongst all that, funding models for “premium content” (read: traditional TV and movie formats) are trickier than they’ve ever been.
Netflix’s disruption of the industry has been part of that conundrum. Kids programming, which Netflix were asked about specifically and didn’t actually address, is particularly difficult. I’m currently working on a project which deeply unpacks all the content performance data Netflix are publishing (if your company is interested in seeing this, get in touch). Depressingly, this reveals that out of the top 10 kids shows on Netflix, four of them originate from YouTube, five if you include Masha and the Bear, which really found its audience there. So, if Netflix are making bets, these aren’t in the kids space, or the bets they are making for kids aren’t really paying off.
Netflix themselves talked about how YouTube can be leveraged for marketing, both platforms can “feed each other really well.” This is important. Content discoverability isn’t something that YouTube struggles with the way Netflix do. When you apply this feedback loop to content, rather than marketing, as we’re seeing here with kids, there’s a real concern that the subsequent self-ingestion might negatively impact the quality and variety of content our most precious audience is engaging with.
Animated Movies
One flip side to this quality question is animated features. These weren’t referenced at all this quarter, and that’s despite Netflix having three global Original features that launched (more on that below). In particular, nothing was addressed regarding what impact the Paramount–Skydance merger might have on Netflix’s gazumped output deal with Skydance Animation (currently under the stewardship of John Lasseter). This seems like a big question mark for me, and perhaps another bet in the kids space that looks at risk for Netflix. Paramount know the movie machine when it comes to kids. Heck, they’ve seen it at its most fertile with recent PAW Patrol films. Will they be comfortable with straight-to-streaming (or more specifically straight-to-streaming competitor) when it comes to this potentially valuable content engine?
Beyond these points, other areas relevant to the kids space were discussed. In gaming, they seem to have realized that transmedia is a thing…
From the Earnings Letter:
“We’ve also learned that games based on Netflix IP are very appealing too, especially when timed to the launch of a series or film.”
From Ted Sarandos:
“I think the idea of being able to take a show and give the super fan a place to be in between seasons, and even beyond that, to be able to use the game platform to introduce new characters, the new storylines or new plot twists”
On AI, the streamer’s thoughts were as follows:
“AI is a great -- is going to generate a great set of creator tools, a great way for creators to tell better stories. And one thing that’s sure, if you look back over a hundred years of entertainment, you can see how great technology and great entertainment work hand in hand to make, to build great big businesses. You could look no further than animation.
When animation didn’t get cheaper, it got better in the move from hand-drawn to CG animation. And more people work in animation today than ever in history. So, I’m pretty sure that there’s a better business and a bigger business in making content, 10% better than it is making it 50% cheaper. So, remember, I think that shows and movies, they win with the audience when they connect.
You know, it’s in the beauty of the writing, it’s in the chemistry of the actors, it’s in the plot -- the surprise in the plot twist, all those things. And I’m not saying that audiences don’t notice all these other things, but I think they largely care mostly about connecting with the storytelling.”
Kids Content Performance:
Kids Series
This quarter was also quite bountiful in terms of content performance for young people. On the series side, that’s despite much hubbub around Baby Reindeer and the latest season of Bridgerton (one week the Netflix Global Top 10 had four slots dedicated to this IP). Highlighted in my last earnings notes, Bad Dinosaurs went on to chart for five weeks in the Netflix Global Top 10, which is quite an achievement.
The second season of CoComelon Lane also landed and hit the Top 10. It had observable halo impact on Season 1, of course, but quantifying that is tricky. We pan for insight nuggets when we can, and quite often performance fragmentation across various derivatives muddies the water. On that note, the advent of CoComelon Lane and associated viewer division across series has meant that the OG CoComelon Netflix series has fallen out of the US Nielsen weekly rankings. This is something I have pinned to unpack at some stage.
Jurassic World: Chaos Theory landed from DreamWorks. This is the follow-up to Jurassic World: Camp Cretaceous, which was one of the first series DreamWorks mined from the Universal film catalogue (alongside Fast & Furious Spy Racers) after the two companies merged. Camp Cretaceous was also the most successful output from this strategy, convincingly pulling in numbers across various metrics during its run from 2020 to 2022.
Jurassic World: Chaos Theory came in strong, hitting higher than Hot Wheels Let’s Race did last quarter. The derivative fragmentation effect, mentioned above, didn’t hold it back in this case.
Keeping an eye on teen content, Geek Girl was a new British series. It’s based on a successful YA novel by author Holly Smale and follows lead character Harriet Manners as she’s thrust into the glamorous world of modeling.
We haven’t seen British teen fare break through the same way as American has. To this end, the premiere of Geek Girl bested Heartstopper but it didn’t quite hit the heights of XO, Kitty which launched at a similar time last year. The latter felt like good partner content for Geek Girl; years ago it would have been the lead in #IYKYK.
Geek Girl isn’t available in the Netflix kids section, so I thought it was interesting to find the trailer on the Netflix After School YouTube channel, which targets older kids. Another example of Netflix leveraging YouTube for marketing. They know what they’re doing when it comes to reaching this tricky shoulder audience. Congratulations Jeff Norton and team, all this looks like a season 2 to me.
Kids Movies
On the movie side there is also plenty to unpack, with Thelma the Unicorn, Ultraman: Rising and Woody Woodpecker Goes to Camp all landing on Netflix globally.
Thelma the Unicorn is an animated musical. It hit performance in the ballpark of what seems to be emerging as a second-tier level of Netflix animated movies, which also covers titles such as The Magician’s Elephant and The Monkey King. With Thelma being a musical, you’d have expected to see longer legs, but alas no.
Woody Woodpecker Goes to Camp is a live action–animation hybrid produced as a direct-to-streaming sequel of the 2017 film by Universal Animation Studios. The heritage character obviously still connects somewhat as performance for this film was above average, although not first rate.
Finally, Ultraman: Rising, based on the Ultraman franchise, has been described “as a colorful romp for all the family.” Though the story has all the action you would expect at its core (plus stunning visuals), emotions and cuteness are dialed up for the superhero franchise in the form of Emi, a cute, dragon-like hatchling who imprints on Ultraman, and ultimately broadens the appeal.
Netflix have taken multiple swings at capturing an older audience for animation. Nimona and Wendell & Wild were both hampered by being undiscoverable from the kids section, excluding any audience that would find them that way. Ultraman: Rising managed to balance the compliance needs here and was included in kids, though didn’t see a major bump from this, unfortunately.
Conclusion
Netflix rightfully identified the need to be masters of their own content pipeline over a decade ago. They saw the weakness, moved to action, and are now a major engine of the production industry globally. It’s confusing that they don’t see a need to apply this strategy to kids content, happy to drift courtesy of output deals and sure bets from YouTube. With Skydance Animation we can see the weakness in the former. God love Netflix if any such spanner entered their agreement for DreamWorks and Illumination movies. As for the latter, this is actually a joint problem for Netflix and YouTube alike. Since the (justified) 2019 FTC ruling, YouTube revenue generated for kids creators from advertising is in the toilet. That makes it less and less viable for new kids IP to build audiences and businesses on the platform; the pipeline for the next big thing is in jeopardy. To me, this seems a key crux facing the kids media industry as a whole.
Gold. Love the analysis here. I think Netflix is definitely underplaying the threat that is YouTube