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Thursday, January 28, 2016

Netflix Concerns

In recent years, Netflix has been a star of the media world and of the stock exchange. The company is widely credited with putting Blockbuster under (along with Blockbuster mistakes), is definitely the player that made binge viewing mainstream, and is also said to be harming cable television a great deal. Recently, when discussing Netflix with a few friends, we began to see that there may be some problems on the horizon.

Netflix is certainly a phenomenon. Speaking personally, I confess to loving the service. As an old film buff, I am able to find some hard to get titles and often stream them without waiting for a DVD to be delivered in the mail. Or, I can re-watch a film that I saw 30+ years ago. With more people becoming “cord-cutters” each month, it appears that Netflix along with Hulu or Hulu+ is an important component in video delivery for people who no longer have cable or satellite TV.

Why the concerns? It is really pretty simple. Over the years, I have observed that Netflix had an almost bullet proof business model. The viewer could watch thousands of films or episodes of TV shows on demand. If a subscriber were busy or traveling, Netflix still received their subscription fee regardless of usage.

A few years ago, Netfllix began to produce their own original programming. "Lilyhammer" was the first effort followed shortly thereafter with the wildly successful and award winning “House of Cards” and then “Orange is the New Black”. Some critics praised it as an example of vertical integration. They produced the show, put in on their system, and the service model had all users being payers. Sounds great--not unlike an Exxon/Mobil or a Royal Dutch Petroleum which finds the oil, refines it, ships it, and sells it to you at the pump. They control the whole process.

What can be wrong with that? My friends and I have a theory. The movie picture and TV businesses are rough.  One old colleague said, “It is a glamorous but really crappy business. Notice how many executive producers films have now? Some are Wall Street or Silicon Valley types who have made a bundle and have “gone Hollywood.” They may lose a few million, love being on the set, going to parties and THINKING that they matter.” Most films do not make money and over 70% of new TV series historically die in the first season. The original business model was elegant in its simplicity. Netflix paid a rights fee for their programming and consumers paid a monthly subscription fee to Netflix. Now, they are a TV network and motion picture studio. The company has announced plans for $5 billion in 2016 to be used for production of original programming. What if most of the new entries bomb? Can they raise subscription rates several dollars overnight to made up for artistic failures?

Netflix has announced a good bit of international expansion. On the drawing board is entry in to South Korea, Hong Kong, Taiwan and Singapore. Great. They may need it as growth in the United States appears stalled the last few quarters.

Look, we media graybeards love Netflix as a product and still see it as a major disruptor to the advertiser supported video world. Yet, their model has changed rapidly. If the expensively produced new series do not bring in substantial incremental subscribers or if a possible global recession slows growth overseas, their status as a bulletproof player in the media world could end very quickly.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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