To: Reed Hastings, CEO and Co-Founder of Netflix

Dear Reed,

Like many people, I spend a lot of time watching shows and movies on Netflix. It’s my default streaming service by a long shot. But as you continue to produce show after show and movie after movie, with hundreds more in the pipeline, you have an emerging opportunity that will not only grow Netflix revenue, but also deepen the relationship between your service and its subscribers: show-specific merchandising that highlights products available for purchase right from Netflix.

In 2017, Disney earned just under $5 billion on retail sales of over $55 billion from licensing its IP for consumer products. This is impressive, but most of Disney’s business model here is built on the traditional licensing and retail infrastructure. While Netflix has already started to experiment with licensing “Stranger Things” to Target for apparel, action figures and board games, you already have the built-in infrastructure to sell products direct-to-consumer—just like you do for content. Though going down this path takes you away from the pure variable cost structure that Netflix is built on, it would significantly increase revenue, longevity and affinity for everything you are doing.

Here’s one idea about how to do it.

Launch The Gift Shop, which sells show-specific products and appears at the end of every viewing session.

If the future of shopping is about personalization—putting the right products in front of the right people at the right time—then Netflix is in an envious position. I would guess that people’s viewing habits are quite similar to their shopping habits. If I watch “Ugly Delicious” of “Chef’s Table,” there’s a pretty good chance I like cooking, good food and maybe traveling—preferences that guide both what I watch and what I purchase. The same goes for “Narcos,” “Stranger Things” or “My Next Guest Needs No Introduction.”

Netflix has an amazing intent signal on your hands, one that might be more advanced than Amazon’s own recommendation algorithms. Additionally, your thumbnail artwork algorithms are able to generate a wildly diverse set of cover art for individual shows, curated for each viewer. These two advantages set Netflix up for what could be a powerhouse merchandising business, whether it’s as obvious as licensing, as you have done with “Stranger Things” and Target, or something much deeper, such as A/B testing exclusive merchandising via your existing algorithms to your hundred million-plus users.

The Gift Shop would be a new module that appears over the credits of each show and showcases merchandise available from Netflix and its partners, such as other producers and collaborators. Viewers would see the module after completing episodes, movies and seasons, or they could access it right from the Netflix homepage or on an Apple TV. You could offer limited-edition products, ones available for pre-order before new seasons come out, or long-lasting SKUs that will be available to users all around the world at any time. You already built an engaging and pleasing browsing experience for content, which would translate perfectly to products.

Selling products through your own channel would allow you to capture a greater percentage of the transaction, since you have already spent all of the energy building up an audience of at least 118 million subscribers. Ideally, this merchandise would be exclusive to Netflix, further driving signups, engagement and product sales. This also creates a new type of offline virality to Netflix itself, as there is currently no way to wear Netflix and show it off to friends and family.

As Amazon continues to spin the flywheel between Prime Video and overall retail sales (which, as was recently reported, is significantly lowering the company’s acquisition costs), Netflix has the opportunity to create its own flywheel that will impact its own acquisition costs while laying down the foundation for a consumer product empire. And, in doing so, Netflix can maintain more control—and earn more revenue—than Disney has been able to.

This is one idea among many that would put Netflix in a league of its own when it comes to the marriage of entertainment and consumer products. Let me know if you’d like to hear more.

Richie Siegel
Founder and Lead Analyst
Loose Threads