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TikTokers & YouTubers aren’t playing by Netflix’s rules

Total global investment in TV series and movies will exceed $230 billion this year, according to a projection from research firm Ampere Analysis, up from the single-digit billions as recently as 2014. Netflix is contributing $17 billion to that figure.

However, as of recently, Netflix has stemmed the bleeding of its subscribers, and its third-quarter earnings once again tell a story of marginal growth, yet its stock is still down more than 50% for the year. It long ago acknowledged the likes of YouTube and TikTok as competitors, but now management is saying little about how that competition has evolved.

YouTube captured 8% of TV viewing in September compared to Netflix’s 7.3%, after having tied at 7.6% in August. Now both YouTube and TikTok are moving to distribute their short-form video content on connected TV, just as Netflix prepares to launch a new ad-supported tier (we covered this last week) which will need to reach scale quickly to capture much-needed premium advertising dollars.

In a world where individual creators can increasingly deliver the premium quality of Hollywood-style productions funded by billions of dollars in budgets, but can do so faster, cheaper and sometimes better,  can the subscription streaming model’s feedback loop survive? As the definition of premium content evolves and the base of content creators expands, any head-to-head fight with YouTube and/or TikTok no longer seems fair.

The ubiquity of YouTube and TikTok in part reflects a generational shift. As many as 95% of American teens use YouTube and two-thirds use TikTok, per Pew Research. TikTok has overtaken Netflix as the second-most-popular video app among Americans under the age of 35, according to research firm Omdia. YouTube is No. 1 across the board, no matter what the age group.

Those figures underscore a shift toward fast, free short-form content generated by independent creators, which is almost always of lower production quality but scales much, much better on the internet. Both companies’ models primarily rely on advertising—YouTube generated $28.8 billion and TikTok $4 billion in 2021—and moving into the connected TV space will further boost advertiser demand (and perhaps help offset YouTube’s recent decline in revenue).

This means Netflix—which is soon to launch its Basic with Ads tier—and legacy media streamers with ad-supported services now must compete with two market heavyweights for the same audiences and the same advertisers across all screens.

The reality is that even the most powerful recommendation algorithm may not be enough to keep legacy streamers dominant. Back in August, “Office” writer and actor B.J. Novak appeared on the Recode Media podcast, where host Peter Kafka asked him whether the show felt “less popular” since it left Netflix. Novak answered: “I thought it would feel less popular, but the weird thing is, when I ask teenagers who say ‘We love “The Office!”’—I say, ‘Do you watch it on Peacock?’ And more often I hear, ‘No, we watch it on YouTube.’ People will watch highlight reels of it and consider that the show.” He said a teenager at a children’s hospital recognized him not from the show but from the “you rolling your eyes” meme.

Instead, audiences increasingly seem to prefer content that is relevant to them. Personalised recommendations are format agnostic, which bodes ill for the streaming TV episode and feature-length movie. But the trend also implies a deeper change. A personalization algorithm is built to maximise engagement, which is one key goal of any streaming platform. It is not, however, built to maximise the return on billions of dollars of investment in premium content.

All in all, Netflix may still have a world-class recommendation algorithm and $17 billion annual production budget, but it still doesn’t know which content will “work” with audiences. Content that fails to engage leaves Netflix stuck with an expensive tab. Meanwhile, audiences are learning en masse that they don’t always need expensive productions to be entertained, and both YouTube and TikTok only share revenue on the content that succeeds.

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