Almost 20 years ago, in September 1999, Netflix took the DVD rental market by storm by introducing the monthly subscription concept.
While the existing DVD rental companies, the most notable of them being Blockbuster, allowed users to rent DVDs within a fixed cost per unit model, Netflix, with a subscription option, ushered a market for unlimited renting of DVDs against a fixed monthly cost.
In an era where DVD players were being sold like hotcakes, Netflix’s subscription model was a knockout blow for Blockbuster, the latter perishing a decade later. To put things in perspective, in those days Blockbuster was to DVD renting what Facebook is to social media today.
Netflix continued its staggering rise. In May 2002, the company went public, opening at $15 a share. In February 2004, as the shares traded at $71.96, the company went for a two-to-one stock split. This was when Netflix operated only as a DVD renting by mail service.
In January 2007, Netflix announced that it was going to launch its own streaming service. Even though by February 2007 Netflix had completed the delivery of one billion DVDs, they had set their sights on the streaming business.
In 2015, as the shares traded at a record high of $700, the company went for a seven-to-one stock split. The new share price hovered around the $98 mark. By this time, Blockbuster, the idea of DVD renting, and DVDs had disappeared. Netflix’s streaming success had been as brutal for Blockbuster as Thanos’ snap at the end of Infinity War.
If one had invested $990 in Netflix’s initial public offering, at $15 a share, in 2002, around April 2019, they would have generated close to $310,000, factoring in the stock splits, thus registering a gain of 31,260 per cent.
From 2002, the market cap of Netflix went from $82.5 million to $184 billion in 2018 to $151 billion today.
However, with greater share prices and market cap, came greater debts for Netflix. From a mere $38.6 million in 2001, the company’s long-term debt now stands at $12.6 billion, and this is where the problems begin for Netflix.
In the second quarter of 2019, Netflix added 2.3 million users worldwide against a Wall Street forecast of 5.1 million users and their own target of 5 million. Following an 18 per cent price rise in January, Netflix saw around 130,000 users in the United States alone leaving their service.
The numbers wiped away $15 billion from Netflix’s market cap. Last week, the market cap of Netflix was as low as $139 billion before recovering to $151 billion on Friday (July 26). Therefore, if you happen to be a subscriber of Netflix, the company lost more than $130,000 on a Wall Street gamble in your name alone.
The weak Q2 results from 2019 does not mean the end of Netflix, not even close, but they do highlight Netflix’s four big problems that its investors and stakeholders can no longer afford to ignore.
First, the pricing. Across the United States, Netflix, when compared to other streaming services falters on the pricing front. CBS All Access, where users can stream shows like The Big Bang Theory, Elementary, The Late Night With Stephen Colbert, along with 10,000 episodes from other series on-demand comes with a monthly cost of $5.99 and ad-free monthly plan of $9.99.
Hulu, with over 85,000 episodes on-demand and shows like The Handmaid’s Tale amongst others is a joint venture of Disney and NBCUniversal, and comes with a monthly cost of $5.99 and an ad-free monthly plan of $11.99. Earlier this year, Disney acquired complete operational control of Hulu.
Amazon Prime Video, if one opts for the streaming service alone, costs $8.99/ month while it costs $12.99/month bundled with Amazon’s complete range of services under the Prime membership.
Netflix, with a basic monthly plan cost of $8.99, standard plan cost of $12.99, and a premium plan cost (access to ultra HD) of $15.99 comes across as relatively expensive when compared against the above options.
To further add to Netflix’s woes, Disney is coming up with its own streaming service, priced at $7 per month with a library far greater than that of Netflix. WarnerMedia (owned by AT&T) will launch its own service HBO Max, priced at $16/month. Comcast, one of the biggest telecommunications conglomerates with a market cap of over $200 billion is coming out with an NBCUniversal streaming service next year.
It is not only the US market that is critical for the survival of Netflix but India too, for a nation with 800 million Internet users by 2025 would be on the radar of any streaming service, local or international. The market for digital subscriptions in India alone grew by 262 per cent last year to $205 million.
Here, Netflix is struggling against the local service providers. While it has an estimated user count between 4 to 6 million users in India, Hotstar owned by Disney (after the Fox-Disney merger) boasts of 300 million users. In theory, every household in India has access to Hotstar.
What is hurting Netflix in India is the pricing. While a monthly plan for Hotstar costs between $0.40-$4.30, for Amazon Prime $1.80, for Zee5 between $0.70 and $2.90, irrespective of the device, the Netflix plan starts at over $7 (Rs. 499) with the upper limit being $11.60 (Rs. 799).
To counter this challenge, Netflix has come up with a monthly mobile-only plan for Rs.199. However, this one has its own set of limitations. One, users cannot stream the data on any other device, and two, it allows streaming only in Standard Definition (SD). With China out of the question, the Rs. 199 plan reflects Netflix’s desperate need to make inroads in India.
Second, the content. Even if (and that’s a big if) Netflix manages a competitive pricing model against its rivals, it is no match to many in terms of content.
Netflix had the streaming world monopoly in the absence of the likes of Disney and NBC for almost a decade. Thus, it hosted popular shows from other networks. However, with the streaming giants waking up, Netflix finds itself losing such content.
To begin with, Netflix will lose Friends to WarnerMedia and The Office to NBCUniversal. For long, Netflix had been paying $100 million each year to have Friends on its platform and was one of its most-watched shows. However, Netflix will now be left with that $100 million for investment elsewhere, probably, in its own originals.
Also, Disney and other networks will gradually withdraw their own content from Netflix. Already, Disney has cancelled shows like Daredevil, Jessica Jones, Luke Cage, The Punisher, Iron Fist, and The Defenders.
However, the challenge for Netflix is not in what it shall lose but in its ability to create content as quickly as other networks are doing. Disney has already announced shows for its service.
To add to Netflix worries, President of Marvel Studios (owned by Disney) and the brain behind the Marvel Cinematic Universe (MCU) (Iron Man, Captain America, Thor, Doctor Strange, Ant-Man, Avengers) has stated that the shows announced, namely Loke, Wanda Vision, The Falcon and the Winter Soldier, and Hawkeye, amongst others, will be an integral part of the MCU, thereby adding to the excitement of Disney+.
Interestingly, none of the shows cancelled on Netflix ever found a mention in the MCU. Apart from Marvel, Disney own’s library is now the biggest, especially after its acquisition of 21st Century Fox.
Disney is not alone, for WarnerMedia too has a lot to offer. Their library will encompass the movies produced under the Warner Bros banner including the DC Universe movies (Batman, Wonder Woman, Superman, Aquaman), the shared monster-verse of Godzilla and King Kong, the Lord of the Rings franchise, to name a very few.
In India too, Netflix is struggling to churn out content as quickly as other networks. While its show Sacred Games is all set for a second season release on August 15, other networks are garnering better numbers.
Hotstar, due to cricket coverage, was able to capture over 300 million viewers during IPL 2019 and registered a record high of 25 million concurrent viewers during the India-New Zealand World Cup semi-final in July this year. Now, the network is starting to invest in its own originals and is hosting content from some of India’s most-watched YouTube channels.
Amazon Prime has already garnered some loyalty for its critically acclaimed shows like Made in Heaven, Inside Edge, and Mirzapur. Meanwhile, other streaming networks backed by production houses and TC channels like ALTBalaji, Zee5, and SonyLIV and regional and local ones like Hoichi make the going tougher for Netflix.
House of Cards and Debts
Third, the spending. The obvious solution to Netflix’s second big problem lies in spending more. However, this happens to be Netflix’s third big problem. It just cannot burn cash like Amazon, Disney, and Apple can and will in the future.
The only certainty in the business of streaming networks is that not all will have a rope as long as Netflix, especially in India. For Netflix, the biggest threat comes from the likes of Disney+, Hotstar (also owned by Disney), Apple’s streaming network, Amazon Prime, HBO Max, and Comcast’s NBCUniversal.
As per a report in Bloomberg, Netflix, going forward, has to pay of $28 billion for the money it has borrowed, for creating new content, and for its office and other human resources. Most of these payments are not on its annual statements, and hence, do not reflect in the overall debt. Netflix, like Uber and other on-demand startups, aims to scale its revenue high enough to overcome its debt, and in that process, it risks creating more debt.
Meanwhile, Disney already has a loyal market for its Marvel content, and with Avengers: Endgame becoming the highest-grossing movie in the history of cinema, Disney would be optimistic in going forward with its investments in Disney+ and Hotstar, and perhaps, may merge the latter with the former for the Indian market.
What works for Disney, Amazon, Apple, WarnerMedia, and Comcast is that unlike Netflix, they are not into streaming services alone. Disney makes a couple of billion dollars each year from its Marvel movies alone, literally. Amazon has a constant revenue stream from its e-commerce business and web services.
Apple sits on enough cash today that could fund the US government’s 2008 TARP (the plan to inject capital into the banks on Wall Street after the Lehman Brothers fell) plan twice and has a brand value second to none. WarnerMedia has a revenue stream from its movie and TV channel business. Comcast generates a strong revenue stream from its cable business and NBCUniversal amongst other subsidiaries.
Even though Netflix’s market cap stands close to $150 billion, many experts feel it’s inflated, and rightfully so. Disney, with all its businesses, has a market cap of $260 billion, Comcast’s is $201 billion, and Apple’s is $965 billion, as on July 30, 2019.
Thus, not only does the market valuation feel inflated but it also warrants urgent correction that may upset investors going forward. Moreover, the ability of other giants to rope in big Hollywood and regional celebrities will make it tough for Netflix to sustain audience attention. Eventually, it all boils down to money, and Netflix does not have enough of it.
Fourth, the resonance. Netflix, unlike Disney, has not been able to find resonance amongst the audience of all age-groups and cultures. Undoubtedly, they have produced some spectacular shows like Narcos, Stranger Things, Orange is the New Black, and 13 Reasons Why, but Netflix has had far more misses than hits.
As content from other networks departs their platform in the coming years, the only option with Netflix is to create more originals with a far better hit probability than it has now, or else, it risks losing investor interest.
Also, Netflix, in regional markets like India, is pushing the wrong buttons. For a nation passionate about its religion, creating a series like Leila is like rejecting fire insurance on one’s house that sits on sticks of dynamite.
Even in the US, it has found some of its content labelled as anti-white for a show named Dear White People and anti-christian for Insatiable. Given how it is alienating people in crucial markets with shows like Leila, it appears that Netflix has a death wish.
Master of None
So, what lies ahead for Netflix?
One, it gets acquired by a streaming giant like Disney, Amazon, or WarnerMedia or a new entrant in the business, possibly Facebook given it has a taste for everything that can be bought. However, even this would require more money to be pumped into the company as it struggles in the new age of streaming networks.
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. However, this is a gamble Netflix will have to take.
Four, and somewhat likely, it perishes around 2025.
Netflix is not invincible and it must realise that — for the company itself replaced Blockbuster, which seemed invincible in the early 2000s. Netflix changed how the world viewed peripheral entertainment but maybe that was all it was meant to do.
The company may see a rise in the number of users in the next two quarters as the seasons for their popular shows are released. However, these shall be small battle victories in a war that Netflix will be fighting for a very long time.
Orkut and MySpace changed the definition of online communication and pushed us into the age of social media. However, a decade later, both are forgotten entities. Netflix, as the current trends depict, will end up as the Orkut of the streaming business.
Netflix has survived for long but its age of dominance is over and an imminent end now approaches.
Tushar is a senior-sub-editor at Swarajya. He tweets at @Tushar15_
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