Long Read: '13 Reasons Why' Netflix Is Actually Struggling

Binge-watching a new release for the weekend, curated for the local audience, especially the ones in the Hindi heartland, and consequently exhausting the seven hours of my life I could beg for but I doubt I would get back in this lifetime, I was left wondering about everything wrong with Netflix in India.

Why would the world’s biggest and oldest streaming service take pride in releasing content so mediocre in production and so shallow in writing, and be so confident about its acceptance that it goes ahead and promises a sequel to it before even a single viewer could watch it?

Perhaps, it was time for me to curate a sequel to an analysis I had authored in July 2019. Titled ‘Stranger Things: Why Netflix Will Not Survive The Streaming Wars’, the analysis predicted a pessimistic future for the dominance of the global platform and questioned the prospects of survival in a world where studios would go for their streaming services, as Disney, NBC, Warner Bros, Comcast and Sony have already done.

The studios without a streaming service, yet, have opted for a streaming partner, like in the case of Paramount and Amazon. Beyond the contracts and partnerships and streaming atmanirbharta, there is also the big breaking world of acquisitions. For instance, Amazon has the 'license to stream' James Bond, an MGM production for over five decades.

However, between 2019 and today, there is an event that we must attribute the OTT hyperdrive to — the coronavirus pandemic. Streaming was always the future, but the pandemic ushered in what can only be described as a nuclear holocaust for the multiplexes across the globe, for the impact of it would be felt for decades to come.

The pandemic has not decimated the multiplex culture, for sure, but it has put a big question mark on its utility beyond the big-ticket franchise releases and movie events. In this post-pandemic world, Martin Scorsese’s The Irishman, even with its cinematic excellence, has far fewer takers than Disney-Sony’s Spiderman-No Way Home, best described as a ‘fan service’ and the first movie to amass a billion dollars globally after the pandemic.

For the likes of Netflix, the pandemic was great news. The share price skyrocketed, the subscriber growth exceeded expectations even when the production of new shows suffered because of the Covid-restrictions. More people at home with more time to squander and thus for many, the limitless library of Netflix was the entertainment oxygen they craved for.

The trajectory of Netflix’s share price is a tale that warrants attention. Before the pandemic hit the shores of the United States of America, Netflix stock closed at $369 while hitting the high of $392. This was February 1, 2020. On the last day of July 2020, Netflix hit a high of $549 and closed at $529. The pandemic had ushered in an early Christmas, but the Santa was not done yet.

On the last day of September 2020, Netflix closed at $475 after hitting a high of $572. On the first day of 2021, in January, Netflix hit a high of $593 and closed at $532. It ended the Q1 of 2021 at $517. However, the Delta variant pushed the prices even further as Covid restrictions increased and by the end of September 2021, Netflix was trading around $690.

At the end of 2021, it was trading at around $600. Three weeks later, it’s down by almost 35 per cent at $397. For Netflix, the pandemic Santa has been displaced by the Satan of the OTT market, while the same pandemic helped accelerate it and grow. All the pandemic gains were wiped out, but at worst, the question is now about survival.

The urge of some well-meaning observers in India to attribute the downfall of Netflix to their woke anti-Hindu content is understandable and correct to a small extent, but then, Amazon's Prime and some local OTTs have far more questionable content than Netflix, but they aren’t struggling at all. Therefore, such claims must be taken with a grain of salt, for Netflix has a lot going wrong for it beyond its travesties in the Indian market.

So, here are ‘Thirteen Reasons Why’ Netflix is in a free fall on Wall Street.

One, it is no longer the king of the jungle. Even before the pandemic, Netflix was bracing for competitors, as I documented in my analysis in 2019, but with people staying home for more than two years now and multiplexes being more or less shut with a few scattered releases, the new OTT platforms, especially that of Disney, and many in the local markets, grew at an unprecedented pace. For the new OTTs, the pandemic put the entire adoption and acceptance into a hyperdrive, driving subscriber growth and investment.

Two, unlike its competitors, Netflix does not boast of alternative revenue streams. While Netflix is often referred to as one of the ‘Big Tech’ companies, and we all have grown accustomed to the FAANG abbreviation, the platform is not competing with similar offerings, but with established conglomerates that have alternative revenue streams to endlessly fund a loss-making streaming entity. This holds true for the studios like Warner Bros and Disney, and also for tech giants like Apple and Microsoft. Netflix does not have that kind of money. Will never have.

Three, Netflix, unlike some of its competitors, cannot offer bundled services. For instance, Amazon Prime comes with a delivery service, sales and other product offerings, and even a music streaming service. Apple+ comes as a free service for a trimester with any new product, and can be bundled with Apple News, iTunes, Apple Arcade, Apple Fitness, and Apple News for a cheaper subscription of Apple One. Disney comes with the option of live sports that has enabled a sustained audience willing to pay for the entire service, especially in India.

Four, Netflix may have some fascinating originals but it lacks the big-ticket franchises that audiences, across generations, have admired. For instance, Disney has the Marvel Cinematic Universe, which is now going big with streaming series apart from the billion-dollar blockbusters it releases in multiplexes — Star Wars, Chronicles of Narnia, Disney Princesses, Grey’s Anatomy, and even everything under the 21st Century Fox.

Warner Bros has the DC Universe and Harry Potter franchise. Prime now has MGM’s James Bond and is coming up with an extension of the ‘Lord of the Rings’ franchise. While Netflix’s originals have found an audience of their own, like ‘Squid Game’ and ‘The Crown’, they are nowhere as famous as the franchises listed above.

Five, for reasons best known to Netflix, there is absolutely no streaming of live sports. One of the best sports documentaries in the recent years, ‘Drive to Survive’, that follows the Formula One season across the globe, has come from Netflix.

While the docu-series has been a cash-cow for the platform, it has enabled a new audience for the motorsport. Yet, Netflix, for some oddity, has not forayed into the business of live sports streaming. This is where Disney has gained an advantage, and its not only about one live match or sporting event, but a library with events across each sport for years to come. How could Netflix miss that?

Six, Netflix has a debt problem. While debt is not uncommon for Big Tech giants, Netflix’s debt problem is a bit unusual, for the simple fact that it has no alternative revenue source and therefore, a few rocky quarters could create holes significant enough to sink the ship.

As of September 2021, Netflix’s liabilities outweighed the sum of its cash and (near-term) receivables by $19.1billion. While analysts say this debt is manageable, the problem is that Netflix will have to take up more debt only to compete with the new players in the market. The platform is set to spend more than $17bn on content in 2022 — 25 per cent more from 2021 and 57 per cent from 2020, while Disney will spend $33 billion for the same period. For Netflix, debt is not an issue, but for how long and how much debt it can accumulate is the question.

Seven, Netflix has a pricing conundrum that has origins in two other challenges — competitors and debt. To keep up with the debt, it must not go too low on pricing, but by keeping the price high, as it has done since its inception, it risks losing to the competition that is priced lower.

Now, Netflix’s lowest plan starts at $9.99 and goes as high as $19.99 for 4K in the US market. In comparison, Amazon is $8.99, Apple is $4.99, CBS all-access is $5.99, Disney Plus is $6.99, HBO Max is $14.99, Hulu is $5.99, Peacock is $9.99, and Disney Plus bundle that includes Disney, Hulu, and ESPN Plus is $12.99 in the US Market.

The challenges of the conundrum were visible in the Indian market for Netflix where it had to go for a Rs. 199 mobile-only package, then later reduce it to Rs. 149 while introducing a Rs. 199 basic package, and also cutting prices for all their plans. Going forward, the challenge will be to find that pricing sweet spot which takes care of the competition, subscriber growth, and helps managing the debt.

Eight, the movie business Netflix continues to be in. Netflix, each year, spends millions of dollars acquiring movies. For instance, it paid $469 million in April 2021 for the two sequels of ‘Knives Out’, compared to $150 million it paid for ‘The Irishman’, and $200 million for ‘Red Notice’ that streamed last Christmas.

On the surface, these deals (Netflix does not disclose most deals publicly), come across as subscriber engagement exercises, but while the new competitors have huge movie libraries and licenses, perhaps Netflix has its priorities misplaced.

For instance, looking at the future where competitors will outshine the platform when it comes to movie libraries, licenses, and even franchises (HBO Max, Disney, Prime), why would Netflix spend $200 million on creating two-hours worth of a movie when it can produce 20-hours worth of content, given a single episode of ‘The Crown’ costs $10 million. In the business where user retention is everything, why is Netflix not factoring the importance of having quantity and quality both to up its ammunition for the future?

Nine, Netflix’s surprising incapacity to understand the local market. Choosing not to take lessons from the success of ‘Squid Game’ and ‘Narcos’, the platform, at least in the biggest free market of the world, has gone for content that is either too urban, catering to a very insignificant viewer base, or too mediocre, only aping what’s being done by other streaming services in the region.

While there have been some scattered success stories like ‘Decoupled’, ‘Jamtara’, and ‘Delhi Crime’, the investment in regional content, especially Tamil and Telugu, has been too low. At the same time, Amazon’s Prime and Disney Plus have successfully captured that segment.

Ten, Netflix will lose a lot of content in the future unless it does not pay a fortune to retain it. For instance, the globally acclaimed series ‘Friends’ will go off Netflix in specific regions each year, for there is no incentive for Warner Bros to renew the contract as their streaming service, HBO Max, enters more markets.

Starting January 2022, the series was made unavailable in Japan and South Korea after it was already taken off from the US and Canadian markets in 2020. Similar fate will follow many movies and series, as other competitors grow in regional markets, and that is more the reason for Netflix to invest in series and not movies. Another example is Tom Cruise’s ‘Mission Impossible’ franchise that may find its way, eventually, to Viacom CBS’ streaming service, Paramount+.

Take the example of Disney that immediately cancelled its entire entourage of Marvel shows on Netflix, even when they were very well received. ‘Daredevil’, played by Charlie Cox, had three successful seasons on Netflix, last released in 2018, and yet, three years later, when the same actor, in the same character, showed up in ‘Spider-Man: No Way Home’ for less than a minute in a cameo, the audiences erupted. That recall value, the potential of the story and the character, and what it could have done with it is what Netflix has lost, and will lose with other IPs in the future. The library of content not produced by Netflix will only shrink going forward.

Eleven, Netflix’s gaming ambitions have not taken off. Netflix, capitalising on the IP it had created in shows like ‘The Squid Game’, launched its gaming service in the final quarter of 2021. However, the future of gaming is in the metaverse, as Microsoft’s recent $75 billion acquisition of Activision shows.

The future of gaming is immersive and by virtue of technology, companies like Apple and Facebook will have a headstart, and by virtue of content, the likes of Disney and HBO Max will find themselves well suited to adapt to the future of the internet. One doubts if Netflix will be able to keep up.

Twelve, while Netflix is struggling to find its feet in India, it is beginning to saturate in its home markets of America and Canada. In 2022, when Netflix expects to have a positive cash flow, it is instead looking at the prospects of substantially slowing growth.

Compared to the 4 million subscribers it added in Q1 of 2021, it will only add 2.5 million this quarter (Q1 2022). In the final quarter of 2021, Netflix missed the market expectations when it came to new subscriber count.

While the platform does boast of more than 220 million paying subscribers today, how far can it go, and what if the growth slows down to 2 million new subscribers every quarter? What happens to the cash flow versus-debt-versus-pricing-versus-keeping up with the competitor conundrum.

Lastly, some blame must be attributed to the tsunami of market correction that is impacting all stocks on Wall Street, in apprehension of the interest rate hikes planned for later this year as announced by the Federal Reserve.

Just that the bad news for Netflix could not have come at a worst time. Last week, the NASDAQ index fell 7.6 per cent, S&P Index dell 5.7 per cent, and within the S&P index, more than two-thirds of the companies are down at least 10 per cent from their record highs, as reported by The Financial Times.

So, what is the endgame for Netflix? This is where the sequel of my analysis does not differ from what I wrote in 2019.

One, it gets acquired by a conglomerate like Apple or a new entrant in the business, possibly Facebook, given their push in the metaverse. Two, it introduces advertising on its platform as it would help create a revenue stream. However, with already faltering numbers and new networks on the horizon, the presence of ads on Netflix may backfire, leading to a greater user exodus.

Three, it invests in low-budget content for international and regional markets with a greater frequency, thus lowering its production costs. This poses a challenge on the quality front and comes with no assurance of debt being serviced. This is a gamble Netflix will have to take, or rather should have taken years ago.

Ideally, if I am Tim Cook, I’d be waiting for the Netflix share price to drop to $240 by the end of 2023, only to acquire it at $180 per share by 2024, and combine it with Apple+, but who knows what twists and turns await this odyssey of streaming wars except that the music is slowing down for Netflix.