Netflix's Poor Business Fundamentals Finally Catch Up With It
Why investors should’ve seen this one coming…
Netflix has always had bad fundamentals.
In fact, the only things it really ever had going for it were a first mover advantage and the typical fanfare/hype that follows.
On Tuesday, the stock price dropped by as much as 26% on the news that Netflix’s subscriber count dropped for the first time in the company’s history.
This is particularly disastrous for a company like Netflix because it’s mantra has always been:
more subscribers = higher margins = more profits
In other words, the Netflix Plan™️ was for them to arrive at a point, where the revenue generated by their millions of subscribers would far dwarf the production costs of creating their original films and shows because there wouldn’t be any significant costs to acquiring new subscribers when they already have and produce their dozens of shows.
This isn’t going to happen. Here’s why.
To Grow It’s Revenue, Netflix Must Now Spend So Much More = Declining Profits
Netflix will only face increasing competition in the coming years. Largely because:
Other streaming services will begin to cannibalise its market share
Licensing agreements for much of Netflix’s back catalogue will be terminated by the copyright holders so that the shows can be returned to their original homes whether that home is Disney, Tubi (FOX) or HBO Max.
Netflix is left with no other choice but to spend significantly more on creating their own original shows, but how exactly does it plan to finance these rising production costs?
It can’t exactly raise subscription prices because it already recently did that and a further price hike will only alienate more of its customer base.
The CEO tell us he plans to crackdown on users/households who share passwords but I doubt they’ll be able to extract much value from people who aren’t willing to pay for their own subscription in the first place.
In other words, Netflix is damned if it does and it’s damned if it doesn’t. It’s really not a place any business wants to be in.
Conclusion: Subscription Streaming Services Are A Terrible Business Model
Subscription streaming services have always been a terrible business model.
The only way they work is if they function purely as a middle man and don’t get involved in producing their own content — similar to how Spotify and Apple Music license music from record labels and pay the companies/artists a set amount per 1,000 streams.
Netflix, on the other hand, spends billions every year creating its own original shows.
This doesn’t work for it because Netflix cannot provide customers with:
High Production Value Content (similar to what is produced by Hollywood film studios and US TV networks) and
Large Volumes Of Content & High Turnaround (similar to the “endless” entertainment that both TikTok and YouTube provide)…
…all while charging a subscription price that starts at $9.99/mo. You can’t possibly maintain both quantity and quality at this price point.
One will undoubtedly have to suffer.
If quality suffers (as it unfortunately has in recent years), viewers will feel they’re not getting good value for money.
If quantity suffers, viewers will feel they’re not getting enough for their buck.
In other words, (once again) Netflix is damned if it does and it’s damned if it doesn’t.
For reference, $9.99/mo is less than what YouTube charges for YouTube Premium ($11.99/mo), which allows viewers to watch videos both offline and ad-free from their favourite content creators as well as granting them access to some exclusive YouTube Originals.
Am I Saying Netflix Is Too CHEAP?!
I guess in a way, yes… because for Netflix to succeed and overcome the competition (the big Hollywood Studios and TV networks) it will need to deliver “High Quality Content In Large Volumes.”
To do that, however, it needs to start charging its subscribers much more than it currently does. Probably closer to the $40/mo mark.
But will anyone pay that? I don’t think so.