Netflix – Risky business pt. II

Netflix faces increasing risk for a more uncertain return.

• The collapse of Netflix’s movie library is continuing apace meaning that more than ever Netflix will have to depend on the hit and miss content creation business for its future growth.
• This basically changes Netflix from being a distributor of content into a creator of content and it is on that basis that it should be judged.
• To be fair to Netflix, some of this reduction has been voluntary but its library of movies is now down to 3,849 from the 7,000 it had in 2010 and 6,494 in 2014.
• This is likely to continue as existing deals continue to expire and it’s now rivals pull their content from Netflix’s catalogue.
• The problem that Netflix faces is two-fold:
  • First, risk: Making films and television series is a very risky business.
  • The capital outlay is almost entirely upfront and the predictability of returns is increasingly poor.
  • This is why many studios are heavily reliant on churning out franchises as the financial predictability of these is much higher.
  • For Netflix to remain relevant, it will have to take more risks as it has no real big-name franchises to rely on.
  • This means more money upfront with much lower visibility of revenue going forward.
  • Second, competition: which is increasingly drastically meaning that more and more money is being spent on high-quality TV content.
  • The most troubling of the new competitors is Disney whose new streaming service already has 10m users signed up.
  • Disney now exclusively offers some of the biggest names in the back catalogue as well as very deep pockets for future investment.
  • Disney is only the latest offering to come to market and there many other very deep-pocketed players (Apple, Amazon etc) also out there who are not afraid to invest billions.
• This is just the first stage of what is an ongoing shift from traditional broadcast to streaming and at the moment the user experience is suffering.
• This is because the experience is becoming much more disjointed and fragmented with an increasing number of different and unconnected streaming services being made available.
• This makes discovery and recommendation of content much harder as content that the consumer will like will be increasingly spread across numerous unconnected services.
• Netflix is not about to recommend a show on Disney+ because its consumers happen to like House of Cards.
• The solution to this problem is either one of the content providers takes over, crushes the rest and forces them onto its platform or there is an independent indexation and cross-referencing system put in place.
• Both of these will take a long time to come to fruition meaning that greater fragmentation is likely to be the outlook for now.
• Against that backdrop, Netflix is now subject to the hit and miss nature of content creation as much as anyone else.
• The one thing it has going for it is its huge user base but it must now irrevocably hook them into its own content such that they won’t want to leave an go elsewhere and be happy to pay up.
• This brings us right back to content where it has a few hits like Stranger Things and Orange Is the New Black, but it faces competition from far larger and better-financed rivals.
• This means that they can outspend Netflix which is already very heavily indebted.
• Netflix’s future now hangs on having a string of hit shows that can match the popularity of Game of Thrones or Chernobyl in order to keep its user base happy.
• Failure will mean falling users as they move away and spend their money on other services leading to the possibility of being forcibly acquired.
• Netflix’s $134bn market capitalisation and $12.5bn debt load is too rich for me.
• I would back Disney.