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Why Would Netflix Buy a Billboard Company?

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According to Reuters Netflix has bid $300 million to buy an outdoor advertising company (L.A. based Regency Outdoor Advertising). The report makes it clear there are other bidders and a deal is far from done. Who else should buy Regency? Moviepass and Fandango would be excellent fits.

Netflix has only made one previous acquisition. In Summer 2017 it purchased a comic book publisher (Millarworld).

While outdoor advertising may be a profitable business, how does it fit into Netflix’s focused plan? Why is a 21st century company making a 20th century move? Is it green flag or a red flag?

A couple of facts and some thought make it clear that the buy would be an inspired move:

  • Regency’s billboards blanket the L.A. market including the airport, the Sunset Strip, and other key Hollywood industry relevant spots;

  • This is key real estate that is highly visible (in fact unavoidable) to key players in Hollywood including everyone in the value chain from actors and agents to writers, producers, directors and studio heads; visible when commuting to and from work, going out to dinner and meetings, and when travelling in and out of town;

  • Netflix is stepping up its marketing spend (to $2B in 2018) and has spent money with Regency;

  • Of all of the traditional advertising options, Billboards have, and should, maintain their value for clear reasons (“audience” is consistent and measurable, physical real estate is finite, and technology is/will continue to add value).

So let’s get a little business nerdier here and look at the acquisition through Porter’s Five Forces model as applied to the OTT streaming subscription industry. The Five Forces are a framework that helps us analyze industry structure by making profits/profit potential more visible, and highlighting points of vulnerability and leverage for competitors.

The Five Forces surround Rivalry within an industry. Rivalry is driven by the intensity and type of competition among rivals. Netflix has been able to skyrocket to 117M+ global subscribers in part because it had few serious direct competitors until fairly recently and has done a superior job “competing to be unique” (another Porter concept).

The forces surrounding rivalry include the “Threat of New Entrants” (high — not a ton of barriers to launch an OTT service), Threat of Substitute Products and Services (fairly low — consumer video time is consistent and shifting to OTT), Bargaining Power of Buyers (high and getting higher as OTT options grow), and the Bargaining Power of Suppliers (most relevant and interesting here). All of these forces impacting rivals affect the costs and revenues/prices within an industry and determine profit potential.

Let’s focus on Suppliers. The suppliers in the OTT industry include any firm that Netflix negotiates with and buys from. These costs broadly include the external costs of content (for licensing and original productions), marketing, and technology. Of all the forces, this is the area where Netflix has the most room to maneuver for leverage.

The Millarworld acquisition and Netflix’s willingness to invest heavily in original content are prime examples of actions that make Netflix less dependent on third party licensors, trading risk for leverage and making global expansion easier.

If Netflix can land Regency Outdoor, it will lower its marketing costs by recycling the profits on its own now internal marketing spend, and own a key asset that rivals, and current licensors (i.e. movie studios) will now have to negotiate to buy from them.

It is important to note that visible billboards around Hollywood/L.A. are a must buy for studios. They are public, but communicate within the industry as much as they do externally. On a films opening weekend, actors, agents, producers, directors and everyone in the value chain of a film is looking for visible marketing support and validation in their community.

These billboards have big impact literally and figuratively and so are culturally central to the Hollywood ecosystem. Disney can launch a rival service and balk at licensing content to Netflix, but it will keep looking to buy advertising on these billboards.

Would the buy be a one-off, or the beginning of Netflix looking to diversify revenue into advertising? Too early to tell, but, at even as a one-off, it is a relatively low-cost, low-risk way for Netflix to generate cash, stay front and center in the Hollywood creative and business community, and generate some leverage among a group of suppliers.

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