Netflix – What is the truth behind their metrics?

By March 12, 2019Media, Technology
The Hutch Report

In a conventional world, if somebody walked into your cafe, sat down, then got up and left, would you count them as one of your customers for the day? If a customer purchased a jacket but then brought it back the next day, would you still consider that as a sale in your marketing statistics? The answer is, it depends. If your café’s success was determined solely by how many actually sales you made at the end of the month then the person who got up and left would have been considered a lost potential sale. However, if just having people in your café without everyone purchasing, gave the impression that it was a popular place, it might entice people to come in and make a purchase when they may have just otherwise walked by if they saw it empty. 

Enter the digital age. If your company’s business model is advertising based then you want to inflate the metrics as much as you can (putting aside the question of fraud for the moment). Advertisers are looking for reach, and a company with millions of hits to their website can provide a lot of reach for advertisers. More advertisers generate greater revenues. Simple. 

The big issue is transparency. There seems to be less and less of it. This begs the question, “Are all of these digital powerhouses as really successful as they appear? 

Last year, Aram Zucker-Scharff, ad engineering director for Washington Post’s research, experimentation and development team, created a ruckus on Twitter when he basically called out just about every way that digital marketers measure and report performance as “fake.”

He called out a few of them by name such as IAB, which he has highlighted many times going back a few years.  

His tweet storm stemmed from a New York Magazine article which essentially made a similar accusation. 

“How much of the internet is fake? Studies generally suggest that, year after year, less than 60 percent of web traffic is human; some years, according to some researchers, a healthy majority of it is bot. For a period of time in 2013, the Times reported this year, a full half of YouTube traffic was “bots masquerading as people,” a portion so high that employees feared an inflection point after which YouTube’s systems for detecting fraudulent traffic would begin to regard bot traffic as real and human traffic as fake. They called this hypothetical event “the Inversion.”

If that wasn’t enough to get everyone’s attention, former Reddit (the third most popular destination on the internet) CEO Ellen K. Pao chimed in on the conversation and said, “Everything is fake. Also, mobile user counts are fake. No one has figured out how to count logged-out mobile users, as I learned at reddit. Every time someone switches cell towers, it looks like another user and inflates company user metrics. And, if an unlogged-in user uses the site on multiple devices, each device counts as a unique user.”

More recently the focus has been on Netflix. Traditionally, a broadcaster’s success has been judged by way of ratings. More importantly, a third party’s ratings. Nielsen ratings is the audience measurement system operated by Nielsen Media Research that has been used to determine the audience size and composition of television programming in the United States since the 50s. The advantage has been that competeing TV broadcasting companies have been able to judge themselves against each other using these 3rd party ratings in order to attract more ad revenue. 

The traditional broadcaster’s have been slow to make the transition to the digital model, which has allowed companies like Netflix to steal away a large chunk of market share and viewership. Netflix, with a current market cap of roughly $159 billion, spent a whopping $12.04 billion in cash on content last year, up 35% from $8.9 billion in 2017, according to its fourth-quarter 2018 earnings report. They have clearly become a force to be reckoned with.

So, they are adding content, increasing their subscriber base but how do they judge the success of their shows? Well, they have their “own” rating system that only Netflix is privy to. That rating system is beginning to be called into question. According to Cheat Sheet, Netflix counts views once a show is started, which could be as short as “five to ten-seconds.”

The real focus moved to Netflix ratings when they reported that Bird Box was watched by over 45 million accounts within the first month and a half of its release. This prompted John Landgraf, FX CEO, as The Hollywood Reporter, to state that the numbers were “not a remotely accurate representation of a longform program performance.” “An average audience of 8 million viewers is good, but it’s not as good as 40 million,” he said, “which would make you the number one show on television.” 

The transparency and accuracy issues around Netflix metrics prompted Nielsen to develop their own method of estimating Netflix numbers, which then in turn sell to their client base such as Warner and Disney, which Netflix is not too happy about. However, there is still an issue. 

What does Netflix have to gain by inflating their numbers or divulging their numbers at all? Their business model is subscription based, not advertising based. According to a study by 7Park Data, 80% of Netflix U.S. viewing is of licensed content, with 20% going to original shows.  Netflix faces rising costs associated with content licensed from other studios, and disclosing ratings on popular shows would likely lead to even higher licensing fees. One producer on a Netflix original prestige period drama, said he had “never had a conversation about ratings with Netflix. I’ve got no idea how many people watch the show, as I’m paid a premium based on a percentage of the original budget.” 

This highlights that the dissatisfaction with Netflix metrics are more a problem with others wanting to understand what is under the hood as opposed to the numbers helping to generate a greater revenue stream for Netflix, aside from the buzz factor. Netflix doesn’t want to play by the old rules and is not obligated to provide ratings. (Although the company should recognize that it forfeited the right to complain about Nielsen’s data the moment it chose to keep the true numbers internal).

Netflix is in a unique and original position as they are changing the way the TV and film business operates. So we go back to our original question on what data and how should a company choose to present that data as the best indication of the company’s business success. It depends!

Netflix (NFLX) is currently tightly correlated to the Nasdaq (QQQ)