Is Netflix Screwed?
January 23, 2019
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Netflix has locomote a darling stock over the yesteryear decade (despite a moderation inwards the euphoria of late), together with is an honourary fellow member of the FANG club. It is seen equally ane of the novel breed of incumbent online monopolies, together with trades at to a greater extent than than 100x electrical current earnings. However, to my mind, many investors seem to live on ignoring to a greater extent than or less fairly of import realities/risks, together with believe it tin give the axe live on argued that Netflix is to a greater extent than akin to a Tesla than an Amazon - i.e. a fellowship that is laid to locomote 'just to a greater extent than or less other media (auto) company' that volition presently receive got to compete amongst many seasoned competitors inwards possession of far greater fiscal resources. It's going to live on interesting to encounter what happens.
To date, Netflix has been a huge success, together with hugely pop amongst customers, for a real obvious reason: they were the outset to offering a service amongst a client value proffer akin to: you tin give the axe picket virtually whatsoever scripted TV present or moving painting yous want, anytime, for virtually $10 a month. Who wouldn't similar that? Not surprisingly, the company's subscriber base of operations grew real rapidly.
They provided this value proffer to customers yesteryear signing upward online distribution rights from traditional content companies, who made (and locomote along to make) most of their coin through the traditional pay TV bundle. The content companies saw Netflix equally an additional monetisation chance for content they had already made/were making, together with were already getting paid for, therefore those extra revenues would period of time direct to their bottom lines. Furthermore, Netflix would non interruption the traditional pay TV bundle, they reasoned, because the latter also had sports together with alive news, together with therefore would rest inwards demand. Often traditional pay TV services were bundled amongst high speed broadband access equally well.
However, piece customers loved the product, Netflix made real fiddling coin doing it, because they were doing fiddling to a greater extent than than aggregating this content onto a uncomplicated online interface available for streaming. The margins were real thin, together with the traditional content owners captured virtually all of the value. Consumers loved Netflix, but it wasn't a corking business. This made sense, because most of the value beingness provided to customers derived from the content itself. Putting it all together onto an online interface that made it convenient to access added value, but this was a uncomplicated occupation concern that wasn't all that difficult to replicate. And it had no value without a large content library.
Then, much to the surprise of many of its content suppliers, Netflix strategically pivoted, together with inwards a vogue that unveiled grave long term strategic risks to content suppliers that they had previously overlooked: Netflix started producing its ain content, together with started giving primacy to marketing its ain content on its platform ahead of those from external studios (e.g. through their 'recommendation engines').
Traditional content producers, who had previously considered Netflix exactly a content distribution partner/customer, of a abrupt realised they had made a huge strategic blunder. By providing Netflix amongst access to much of their content, they had allowed Netflix to aggregate a large audience of subscribers. And yesteryear aggregating those subscribers, Netflix was able to dictate what they watched, together with was at nowadays attempting to purpose that large audience against them. They had forgotten to insist on Netflix non self-producing its ain content equally a status of carrying their content. As Netflix's command of eyeballs continued to increase, together with it's ain library of content also grew, they would receive got to a greater extent than together with to a greater extent than powerfulness to cutting traditional supplies out of the painting entirely, or at the real to the lowest degree significantly weaken their bargaining position. Netflix would receive got the powerfulness to tell 'cut prices 50% or nosotros driblet all your content', equally nosotros already receive got plenty of our own, together with they would receive got no choice.
Traditional content producers were boring to realise what was happening, but they eventually woke upward (a dyad of years ago). They realised that Netflix was non a distribution partner at all, but a competitor, together with ane that wanted to seat them out of occupation concern long term together with monopolise the entire global media turn a profit puddle (on both content production together with distribution). And yesteryear supplying Netflix amongst content that was helping them to drive growth inwards subscriber numbers, they were 'feeding the dragon'. The bigger Netflix got, the to a greater extent than content they would live on able to produce, together with at a lower cost per subscriber, the to a greater extent than customers they would live on able to attract. This would together with therefore allow them to gain fifty-fifty to a greater extent than content, inwards a flywheel that could outcome inwards Netflix dominating the entire global scripted media industry. They had laid inwards motion events that were resulting inwards them excavation their ain graves.
Unfortunately, inwards many cases these suppliers had locked themselves into 3-5 yr content deals amongst Netflix, together with therefore in that location was non much they could similar a shot exercise virtually it. However, the occupation Netflix volition confront over the adjacent several years is that these content deals are going to start to expire. Several content companies (notably Disney) receive got stopped signing novel deals amongst Netflix, together with receive got also said they squall back to line most of their content off the platform this year, equally legacy deals expire.
In the non also distant future, the only content yous volition live on able to access on Netflix volition live on Netflix's ain content, plus maybe a bunch of indi films, etc, that don't receive got mainstream distribution access (unless Netflix is prepared to pay uneconomically high prices for traditional studio content). What this way is that their value proffer to customers of 'watch whatsoever present yous want, anytime, for $10', is going to locomote 'watch whatsoever present Netflix has produced, whatsoever time, for $12' (they exactly raised prices). In coming years, to a greater extent than together with to a greater extent than customers are going to receive got the disappointing sense of trying to expression upward to a greater extent than or less of their favourite shows to watch, together with realising they are no longer available on Netflix. It's going to give a lot, together with customers are going to live on surprised together with disappointed.
Meanwhile, all of the non-Netflix content produced yesteryear the traditional studios, equally good equally their massive content libraries, volition presently live on available (if non already) on a broad diversity of competing streaming platforms owned yesteryear the traditional media companies themselves. It seems to me that the platform that is most probable to win amongst customers is going to live on the ane that offers the widest array of shows from the widest array of studios, because that's what customers want. They desire to live on able to access whatsoever present they desire to picket from a unmarried platform, exactly similar customers exercise amongst Spotify when they hear to music. In other words, customers desire the platform that represented Netflix's value proffer 3-5 years ago, rather than the Netflix that volition probable be inwards the adjacent few years.
The frontrunner inwards this regard would seem to live on Hulu, inwards my view (which, incidentally, has lately started to add together novel U.S.A. subscribers at a faster measurement than Netflix). Hulu is 60% owned yesteryear Disney (formerly 30% Disney together with 30% 21st Century Fox, but the onetime exactly acquired most of the scripted content assets of the latter, equally good equally its stake inwards Hulu), Comcast's NBC Universal (30%), together with AT&T's WarnerMedia (10%). This platform tin give the axe depict on the combined content production budgets of all of these shareholders (as good equally other traditional media companies), equally good equally their deep libraries which reverberate the fact they receive got been producing content for 50 years, vs. less than 10 for Netflix. They could also re-jig shareholdings to jibe their respective content contributions, together with choose novel traditional media shareholders into the fold. It is also possible a novel Netflix-like platform emerges that promises to non self-produce content, that all the traditional media companies instruct behind.
This is why nosotros receive got been seeing therefore much M&A inwards the media space, equally traditional content producers rush to instruct bigger. Disney, for instance, lately bought out most of 21st Century Fox's scripted content assets, inwards ane of the biggest media deals of all time; Discovery merged amongst Scripps final year; together with Comcast bought Sky TV inwards the UK of Britain together with Northern Republic of Ireland (which self-produces 50% of its content), afterwards a bidding nation of war amongst Fox. Telcos such equally AT&T receive got also been pushing into content (acquiring Time Warner) inwards an sweat to differentiate their increasingly-commoditised services (they desire consumers to receive got a ground to stick amongst them other than exactly price). Traditional content companies receive got realised that the online platforms amongst the widest availability of content are going to win, together with therefore they ask to instruct bigger. Big plenty that they receive got larger libraries together with content production budgets than Netflix. That's why they are merging. They are non stupid, together with they at nowadays know what they ask to exercise to win.
What this way is that Netflix is presently going to receive got to compete amongst platforms together with media giants that receive got access to much bigger content libraries, together with much bigger combined annual scripted content production budgets, than Netflix does. It's going to live on interesting to encounter how consumers react, but inwards my opinion, consumers are probable to migrate to the platform that is to a greater extent than probable to receive got all the shows they desire to picket available. And they could also potentially exercise therefore quite quickly.
That beingness said, it is truthful that scripted TV is non a winner takes all business. Individual shows together with movies are truly differentiated. A lot of customers may good locomote along to encounter $12 a calendar month equally proficient value for Netflix, given its growing library together with content budget. Customer inertia volition also locomote inwards their favour. However, ultimately, these novel industry/competitive dynamics are going to plough Netflix into 'just to a greater extent than or less other media company', similar tell HBO. Would yous pay $12 exactly to subscribe to HBO? They receive got a lot of corking content. You might. But it's non the same equally subscribing to all content, everywhere, together with the target marketplace is probable to live on much smaller.
In addition, real importantly, Netflix does non receive got the cost of its content creation subsidised yesteryear affiliate fees together with advertising revenues from the bloated costs of the traditional pay TV bundle, where although subscribers are declining, they are withal large. Netflix has only ane content monetisation channel - depression cost monthly subscriptions. But this begs the question, exactly how profitable is this going to live on for Netflix? We don't know. And if an online cost nation of war for consumer eyeballs were to emerge, it seems probable that Netflix volition lose, because they are already barely profitable together with are FCF negative, piece the media giants are monstrously profitable together with generate tonnes of FCF. That way the latter receive got significantly greater capacity to cutting prices than Netflix does.
Furthermore, investors receive got forgotten that Netflix's customers tin give the axe cancel anytime without notice, or strategically sign upward together with cancel multiple times, inwards monastic enjoin to 'game the system'. You tin give the axe sign upward for ane calendar month for $12, for instance, binge picket entire seasons of all your favourite shows, together with and therefore cancel your subscription. You tin give the axe together with therefore come upward dorsum for a calendar month adjacent yr together with picket the novel seasons. Customers haven't gamed it similar this inwards the yesteryear because Netflix was their go-to for all content. But if Netflix is exactly a house they locomote to picket ane or 2 shows they like, it becomes a existent risk. And Netflix's occupation concern model won't locomote if a lot of customers exercise this. It's also a especially pronounced run a endangerment because Netflix has massive content-production fiscal commitments. If their client count drops, the fixed costs of producing shows volition increment on a per-subscriber basis, squeezing margins.
It's going to live on interesting to encounter what happens. I've been a happy Netflix client inwards the past, but am waiting for the hateful solar daytime Hulu extends its services globally (it is withal constrained yesteryear legacy rights deals amongst traditional pay TV operators inwards many markets), together with makes its services available inwards places similar Singapore, where I currently reside. If together with when they do, I'm in all likelihood going to switch to Hulu. Netflix only has a dyad of shows they gain that I desire to picket every yr (although to live on fair, I exercise non picket a lot of TV), together with they no longer ship most of my favourite shows. It remains to live on seen if other customers deport similarly.
Time volition tell. I wouldn't brusk Netflix, because in that location is withal a plausible bull representative that they come upward to alone dominate the global scripted media manufacture long term, if they line off their strategic ambitions. This is a huge economies-of-scale business, together with they receive got been an early on mover. The flywheel consequence is significant. As their subscriber count grows, their cost of content production per subscriber falls, which allows them to gain to a greater extent than content to attract to a greater extent than subscribers, etc. This is the same flywheel that worked therefore good for the traditional pay TV ecosystem inwards prior decades. If they succeed, in that location is withal pregnant upside. However, this flywheel cuts both ways, together with if subscriber growth undershoots expectations together with goes into reverse, Netflix could good blow up.
So I wouldn't brusk it. Buying deep out of the coin long term puts mightiness live on worth considering. However, I don't concur whatsoever of the inwards a higher house views amongst a corking grapple of conviction. Indeed, they somewhat defy my intuitions. I exactly similar to probe consensus views to encounter how they mightiness live on wrong, because that's how yous observe opportunities inwards markets. I'm to a greater extent than oftentimes than non exactly interested to picket from the sidelines to encounter what happens.
LT3000
To date, Netflix has been a huge success, together with hugely pop amongst customers, for a real obvious reason: they were the outset to offering a service amongst a client value proffer akin to: you tin give the axe picket virtually whatsoever scripted TV present or moving painting yous want, anytime, for virtually $10 a month. Who wouldn't similar that? Not surprisingly, the company's subscriber base of operations grew real rapidly.
They provided this value proffer to customers yesteryear signing upward online distribution rights from traditional content companies, who made (and locomote along to make) most of their coin through the traditional pay TV bundle. The content companies saw Netflix equally an additional monetisation chance for content they had already made/were making, together with were already getting paid for, therefore those extra revenues would period of time direct to their bottom lines. Furthermore, Netflix would non interruption the traditional pay TV bundle, they reasoned, because the latter also had sports together with alive news, together with therefore would rest inwards demand. Often traditional pay TV services were bundled amongst high speed broadband access equally well.
However, piece customers loved the product, Netflix made real fiddling coin doing it, because they were doing fiddling to a greater extent than than aggregating this content onto a uncomplicated online interface available for streaming. The margins were real thin, together with the traditional content owners captured virtually all of the value. Consumers loved Netflix, but it wasn't a corking business. This made sense, because most of the value beingness provided to customers derived from the content itself. Putting it all together onto an online interface that made it convenient to access added value, but this was a uncomplicated occupation concern that wasn't all that difficult to replicate. And it had no value without a large content library.
Then, much to the surprise of many of its content suppliers, Netflix strategically pivoted, together with inwards a vogue that unveiled grave long term strategic risks to content suppliers that they had previously overlooked: Netflix started producing its ain content, together with started giving primacy to marketing its ain content on its platform ahead of those from external studios (e.g. through their 'recommendation engines').
Traditional content producers, who had previously considered Netflix exactly a content distribution partner/customer, of a abrupt realised they had made a huge strategic blunder. By providing Netflix amongst access to much of their content, they had allowed Netflix to aggregate a large audience of subscribers. And yesteryear aggregating those subscribers, Netflix was able to dictate what they watched, together with was at nowadays attempting to purpose that large audience against them. They had forgotten to insist on Netflix non self-producing its ain content equally a status of carrying their content. As Netflix's command of eyeballs continued to increase, together with it's ain library of content also grew, they would receive got to a greater extent than together with to a greater extent than powerfulness to cutting traditional supplies out of the painting entirely, or at the real to the lowest degree significantly weaken their bargaining position. Netflix would receive got the powerfulness to tell 'cut prices 50% or nosotros driblet all your content', equally nosotros already receive got plenty of our own, together with they would receive got no choice.
Traditional content producers were boring to realise what was happening, but they eventually woke upward (a dyad of years ago). They realised that Netflix was non a distribution partner at all, but a competitor, together with ane that wanted to seat them out of occupation concern long term together with monopolise the entire global media turn a profit puddle (on both content production together with distribution). And yesteryear supplying Netflix amongst content that was helping them to drive growth inwards subscriber numbers, they were 'feeding the dragon'. The bigger Netflix got, the to a greater extent than content they would live on able to produce, together with at a lower cost per subscriber, the to a greater extent than customers they would live on able to attract. This would together with therefore allow them to gain fifty-fifty to a greater extent than content, inwards a flywheel that could outcome inwards Netflix dominating the entire global scripted media industry. They had laid inwards motion events that were resulting inwards them excavation their ain graves.
Unfortunately, inwards many cases these suppliers had locked themselves into 3-5 yr content deals amongst Netflix, together with therefore in that location was non much they could similar a shot exercise virtually it. However, the occupation Netflix volition confront over the adjacent several years is that these content deals are going to start to expire. Several content companies (notably Disney) receive got stopped signing novel deals amongst Netflix, together with receive got also said they squall back to line most of their content off the platform this year, equally legacy deals expire.
In the non also distant future, the only content yous volition live on able to access on Netflix volition live on Netflix's ain content, plus maybe a bunch of indi films, etc, that don't receive got mainstream distribution access (unless Netflix is prepared to pay uneconomically high prices for traditional studio content). What this way is that their value proffer to customers of 'watch whatsoever present yous want, anytime, for $10', is going to locomote 'watch whatsoever present Netflix has produced, whatsoever time, for $12' (they exactly raised prices). In coming years, to a greater extent than together with to a greater extent than customers are going to receive got the disappointing sense of trying to expression upward to a greater extent than or less of their favourite shows to watch, together with realising they are no longer available on Netflix. It's going to give a lot, together with customers are going to live on surprised together with disappointed.
Meanwhile, all of the non-Netflix content produced yesteryear the traditional studios, equally good equally their massive content libraries, volition presently live on available (if non already) on a broad diversity of competing streaming platforms owned yesteryear the traditional media companies themselves. It seems to me that the platform that is most probable to win amongst customers is going to live on the ane that offers the widest array of shows from the widest array of studios, because that's what customers want. They desire to live on able to access whatsoever present they desire to picket from a unmarried platform, exactly similar customers exercise amongst Spotify when they hear to music. In other words, customers desire the platform that represented Netflix's value proffer 3-5 years ago, rather than the Netflix that volition probable be inwards the adjacent few years.
The frontrunner inwards this regard would seem to live on Hulu, inwards my view (which, incidentally, has lately started to add together novel U.S.A. subscribers at a faster measurement than Netflix). Hulu is 60% owned yesteryear Disney (formerly 30% Disney together with 30% 21st Century Fox, but the onetime exactly acquired most of the scripted content assets of the latter, equally good equally its stake inwards Hulu), Comcast's NBC Universal (30%), together with AT&T's WarnerMedia (10%). This platform tin give the axe depict on the combined content production budgets of all of these shareholders (as good equally other traditional media companies), equally good equally their deep libraries which reverberate the fact they receive got been producing content for 50 years, vs. less than 10 for Netflix. They could also re-jig shareholdings to jibe their respective content contributions, together with choose novel traditional media shareholders into the fold. It is also possible a novel Netflix-like platform emerges that promises to non self-produce content, that all the traditional media companies instruct behind.
What this way is that Netflix is presently going to receive got to compete amongst platforms together with media giants that receive got access to much bigger content libraries, together with much bigger combined annual scripted content production budgets, than Netflix does. It's going to live on interesting to encounter how consumers react, but inwards my opinion, consumers are probable to migrate to the platform that is to a greater extent than probable to receive got all the shows they desire to picket available. And they could also potentially exercise therefore quite quickly.
That beingness said, it is truthful that scripted TV is non a winner takes all business. Individual shows together with movies are truly differentiated. A lot of customers may good locomote along to encounter $12 a calendar month equally proficient value for Netflix, given its growing library together with content budget. Customer inertia volition also locomote inwards their favour. However, ultimately, these novel industry/competitive dynamics are going to plough Netflix into 'just to a greater extent than or less other media company', similar tell HBO. Would yous pay $12 exactly to subscribe to HBO? They receive got a lot of corking content. You might. But it's non the same equally subscribing to all content, everywhere, together with the target marketplace is probable to live on much smaller.
In addition, real importantly, Netflix does non receive got the cost of its content creation subsidised yesteryear affiliate fees together with advertising revenues from the bloated costs of the traditional pay TV bundle, where although subscribers are declining, they are withal large. Netflix has only ane content monetisation channel - depression cost monthly subscriptions. But this begs the question, exactly how profitable is this going to live on for Netflix? We don't know. And if an online cost nation of war for consumer eyeballs were to emerge, it seems probable that Netflix volition lose, because they are already barely profitable together with are FCF negative, piece the media giants are monstrously profitable together with generate tonnes of FCF. That way the latter receive got significantly greater capacity to cutting prices than Netflix does.
Furthermore, investors receive got forgotten that Netflix's customers tin give the axe cancel anytime without notice, or strategically sign upward together with cancel multiple times, inwards monastic enjoin to 'game the system'. You tin give the axe sign upward for ane calendar month for $12, for instance, binge picket entire seasons of all your favourite shows, together with and therefore cancel your subscription. You tin give the axe together with therefore come upward dorsum for a calendar month adjacent yr together with picket the novel seasons. Customers haven't gamed it similar this inwards the yesteryear because Netflix was their go-to for all content. But if Netflix is exactly a house they locomote to picket ane or 2 shows they like, it becomes a existent risk. And Netflix's occupation concern model won't locomote if a lot of customers exercise this. It's also a especially pronounced run a endangerment because Netflix has massive content-production fiscal commitments. If their client count drops, the fixed costs of producing shows volition increment on a per-subscriber basis, squeezing margins.
It's going to live on interesting to encounter what happens. I've been a happy Netflix client inwards the past, but am waiting for the hateful solar daytime Hulu extends its services globally (it is withal constrained yesteryear legacy rights deals amongst traditional pay TV operators inwards many markets), together with makes its services available inwards places similar Singapore, where I currently reside. If together with when they do, I'm in all likelihood going to switch to Hulu. Netflix only has a dyad of shows they gain that I desire to picket every yr (although to live on fair, I exercise non picket a lot of TV), together with they no longer ship most of my favourite shows. It remains to live on seen if other customers deport similarly.
Time volition tell. I wouldn't brusk Netflix, because in that location is withal a plausible bull representative that they come upward to alone dominate the global scripted media manufacture long term, if they line off their strategic ambitions. This is a huge economies-of-scale business, together with they receive got been an early on mover. The flywheel consequence is significant. As their subscriber count grows, their cost of content production per subscriber falls, which allows them to gain to a greater extent than content to attract to a greater extent than subscribers, etc. This is the same flywheel that worked therefore good for the traditional pay TV ecosystem inwards prior decades. If they succeed, in that location is withal pregnant upside. However, this flywheel cuts both ways, together with if subscriber growth undershoots expectations together with goes into reverse, Netflix could good blow up.
So I wouldn't brusk it. Buying deep out of the coin long term puts mightiness live on worth considering. However, I don't concur whatsoever of the inwards a higher house views amongst a corking grapple of conviction. Indeed, they somewhat defy my intuitions. I exactly similar to probe consensus views to encounter how they mightiness live on wrong, because that's how yous observe opportunities inwards markets. I'm to a greater extent than oftentimes than non exactly interested to picket from the sidelines to encounter what happens.
LT3000