The Streaming Wars--Part II

The topic for this post is Netflix. It is always a bit difficult  for those of us who analyze media to write or talk about Netflix. The reason to me is that so many people really like or even love the service. Those of us who are considered old or stodgy or both do not get much traction when we discuss the debt that Netflix has piled up or the huge money they spend each year to develop new programming (reported to be $12 billion + in 2019). People push back with the truly magnificent stock market performance of recent years and the burgeoning global subscription base which sits somewhere north of 160 million as we write. And, Netflix shares trade at a lusty 100 times earnings.

Candidly, as is true of many of you reading this post, I really like Netflix as a consumer. Many of their made for Netflix series have significant appeal fto me and I have been an avid user of the service for several years. Things are changing a bit and a dogged look at the facts surrounding the company raise some medium and long term issues.

Over the last five years or so, Netflix has done, as best as I can count, a total of eight debt issuances. That would be fine if growth and earnings were very large and competition was muted. Yet, the situation is changing and fast. Disney launched their new Disney + service last month (November). They reportedly signed up 10 million subscribers on day one. Many other days one million more climbed aboard with particular strength in Australia. They also have upwards of 4,000 hours of content and are offering package deals with ESPN, a property which has great appeal to many males. The Disney franchises such as Star Wars and Marvel have great fan bases plus their film library goes back to the 1930’s. Their balance sheet is strong (though not as strong as Apple’s which we will discuss in a future post) and they now control HULU which many considered a meaningful threat to Netflix recently along with Amazon Prime Video.

Some financial analysts agree that Netflix is burning cash (some borrowed) and will not really turn cash flow positive until 2022. That does not sound bad but keep in mind that studios are pulling content from Netflix. So, they will be borrowing money to produce their own series and films (much of it first rate) for the next few years for sure. Others see caution on Netflix to be alarmist. To many, streaming has a clear runway ahead as Korea, China and India are underdeveloped and can help Netflix which likely will be getting hurt in Western nations. Maybe so, but keep in mind that in India many of the new subs that Netflix is picking up are only paying $3 per month for mobile service only. Revenue growth is the key not necessarily subscriber count going forward.

What might happen? Netflix is still the global leader in streaming. They are not going to dry up and blow away soon. Yet, they will face formidable competition with VERY deep pockets. The best case might be if they sold 15-20% of the company to Apple/Amazon or Alphabet(Google)/Facebook. One of those financial behemoths could backstop them financially and they could do what they do best. Remember, their database of customer preferences is unparalleled ( see Media Realism—“Disney’s Big Challenge, April 29, 2019).

Netflix has been a resourceful player for a few decades. Now, they face the fiercest competition imaginable. Who will win? No forecast yet except to say that the consumer, particularly American, will be in the best spot possible. As the price war continues of Netflix vs. HBO vs. Amazon vs. Apple vs. Disney  plus others, the millions of American couch potatoes will get extraordinary value for their subscriptions for whatever mix of streaming services that they choose.

Next up—Disney +

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