Alarm Bells Might Start to Ring for Netflix as Competition Gets Fiercer
Long gone are the days when one would settle on the couch at a specific time and day of the week just to watch the new episode of their favorite TV series. As Netflix transformed from a DVD-by-mail Blockbuster rival to a video streaming company in 2007, streaming services have become a modern everyday staple of households. Today, Netflix is a global brand name and the leader of the market it created. The most popular platform has an enormous customer base with more than 150 million subscribers all around the world watching content from its platform. With a vast content library, global presence, and hit original series like “Orange is The New Black” and “Stranger Things”, Netflix has become a verb amongst Generation Z.
On-demand video streaming services are providing consumers the convenience to watch a variety of TV series, movies, documentaries whenever and wherever they want as long as they are connected to the Internet. As the number of households cutting the cable is increasing every year, the size of the pie is also increasing for the streaming services. Statista has reported that the global streaming services market reached $20 billion in 2018, and it is forecasted that this figure will reach $25 billion by 2021.
Netflix has enjoyed being the first entrant to this market for a long time. Netflix’s success in raising capital, customer traction, and its whopping $130 billion market capitalization have all attracted new entrants into the video streaming space. The entertainment industry has started to embrace the Direct to Consumer business model by creating their own streaming platform amid the growing cord-cutting trend. Traditional cable TV networks like HBO, CBS, and Comcast’s NBCUniversal have all created their own individual streaming apps. The two top Hollywood production giants Disney and Warner Media are also entering the streaming services sector. Disney acquired Fox Media, the parent company of production company 21st Century Fox, for a whopping $71.1 billion deal. Disney’s streaming service Disney+ will launch in November and focus more on family-friendly productions. On the other hand, AT&T has paid an extraordinary $85 Billion to acquire Hollywood production giant Warner Media. AT&T’s service HBO Max is set to launch Spring 2020 with 10,000 hours of content. In October 2018, Comcast acquired UK media giant Sky for $39 Billion, in an effort to increase its global presence Most recently, CBS, America’s most-watched Network, and Viacom, owner of MTV, Paramount and Nickelodeon, have reached an agreement to merge again after being split up at 2006. Amazon has invested in an on-demand video service and offers it as a Prime feature. Amazon is investing heavily into Amazon Prime Video to grow its Amazon Prime membership customer base. In addition, Apple has announced plans to roll out a service that will offer free original content for customers that own its hardware devices. This will give Apple the opportunity to easily tap into billions of customers it has worldwide through its pre-installed TV app. Apple’s current plan to roll out only PG-rated content could cause competitors to have a moment of relief. These power plays show the media giants can’t afford to watch industry behemoths grow their own streaming services, so they have to consolidate different offerings through mergers and acquisitions under their own streaming platform to compete with them.
As each media titan creates its own video streaming service offering, they will have to forgo their current hefty licensing revenues from competitors and traditional networks for the sake of exclusivity. They will also have to invest heavily in new original productions for their own platforms to keep offering subscribers new content and justify their value proposition. Netflix which up until recently had content from its future competitors will lose its two most popular TV shows Friends and The Office as well as Pixar, Star Wars, and Marvel productions since Disney will not renew its licensing contract. The company has spent more than $13 Billion last year on content production to lessen its reliance on licensed content. Netflix’s huge budget definitely gives it a competitive edge on original productions, but the company is still having difficulty turning that spending into revenue growth. The company remains free cash-flow negative and keeps on borrowing billions of dollars to spend on original content production.
Netflix’s business model is solely comprised of monthly subscription fees as the company has no other revenue streams. Currently Netflix offers three pricing tiers with $9, $13, and $16 plans that were hiked recently. Netflix has positioned itself as the premium service in the market. Hulu, the US-only longtime Netflix challenger, follows a different approach by offering an ad-free version at $12/month and an ad-supported plan for a low $6/month. Disney will launch Disney+ at $7/month at November and offer a bundle of Disney+, ESPN+, and ad-supported Hulu for $13/month. HBO Max that will launch at Spring 2020 is expected to cost more than HBO Now’s current $15/month plan. Currently, all services remain fairly inexpensive as they cost less than a cinema ticket.
Netflix first went public in May 23, 2002 and shares were priced at $15. Currently the stock is trading at the $300 level, down from its peak $420 level it reached June 2018. Netflix’s stock might have had tremendous gains in the past years, but investors have started to question the financial performance of the company. On April 12th, following Disney’s announcement of Disney+, Netflix lost $8 Billion in market capitalization within minutes of the news. Investors didn’t like the news that Disney, the entertainment giant, would start offering a lower priced alternative to Netflix. More recently, on July 18th, Netflix shares slipped more than 10.3% erasing $16 Billion in Market capitalization following the Q2 report stating a loss in domestic paid subscribes for the first time in eight years. It is rather unclear how Netflix will transition from its debt fueled growth and negative free cash-flow business to become profitable while competing with media giants Disney and AT&T that have a lot of cash to burn to gain market share. For the business model to work subscriber revenue growth has to be greater than the increased cost on content, currently, the exact opposite, before the market turns its back on the company.
As competition gets fiercer with new entrants and the market gets even more fragmented, consumers will have to start spending more due to the need to subscribe to more than one service in order to keep up with their favorite shows and movies. As the bills from few streaming services add up, consumers will find themselves in similar tradeoffs choosing between companies, having to sacrifice some content for cost savings – exactly what made them cancel their expensive cable TV plans in the first place. Alarm bells might start to ring for the industry pioneer as investors will start to squeeze Netflix once the rival media giants remove their content from Netflix and launch their own direct-to-consumer streaming services. The “Streaming Wars” is not a winner-takes-all situation but it is important to outline Netflix’s position in the industry it once innovated more than a decade ago.