Goodbye Cable
Streaming media has been an evident trend that has picked up steam, from pandemic subscriber growth to “streaming” and “direct to consumer” becoming buzz words. AT&T abandoned DirectTV, and media entities are scrambling, from merging a la Discovery and Time Warner, or Comcast bulking up its content endeavors. All of this activity occurs under the shadow of Netflix, the original entity in this space. Netflix has a clear incumbency advantage, but its competitive positioning raises questions.
Capital Intensity
Creating content is expensive. Blockbuster films that attact massive audiences cost a lot. Retaining recognizable actors to jump start a platform costs money. Herein lies a main question of Netflix: how to ensure that it can be competitive with capital. Disney has a suite of other business entities outside of streaming that allows for that capital expenditure. Time Warner under AT&T could not due to 5G capital requirements, revealing the strenuous nature of content creation. Netflix has said that it will be cash flow positive soon, and will no longer need to raise debt. However, the business model as it stands is to incrementally increase subscription prices with the idea that Netflix is inelastic to consumers due to the value proposition, ie the content within.
However, content is leaving Netflix, most notably the established IP that create proven attractiveness, such as the Office. Therefore, Netflix needs to create its own content which it has spent billions yearly on doing. However, in a more competitive space than ever, the inelasticity of Netflix is going to be challenged, and therefore challenging the entire ability of Netflix to reinvest in its moat. Netflix has no amusement park or mobile phone plan to provide cash flow to deploy into content. A Shopify store arguably isn’t going to be enough to provide that foundation.
A Netflix that can go through that transition into a self sufficient content library will arguably be a much stronger company than it is today, without having to worry about renewing licensing deals. However, to get there it will require cash, whose flow is going to be challenged. Ideas like entering gaming require capital and are not parachutes from the core challenge, of having to spend to stay alive at a time when consumer’s have more attractive options than ever before. US subscriber growth has grinded to a halt. International monetization is a tricky endeavor, and there’s no guarantee that international monetizes at the same rate that domestic subscribers do. Netfix is positioned to make this transition, but the other players in the space recognize this transient window.