For Netflix, a Tougher Road Ahead
When you say “subscription video-on-demand,” Netflix is no doubt the first company that comes to mind. While dozens of SVOD providers have arrived on the scene in the past few years, most are still struggling to find their way in an increasingly cut-throat market dominated by Reed Hastings and company.
Though investors are quick to celebrate the company’s subscriber growth last quarter, it’s important to look beyond that single (admittedly important) figure.
The road that brought Netflix to its current spot atop the online TV heap looks vastly different from the road ahead for the company.
Is it Getting Crowded in Here?
As one of the first online VOD libraries, Netflix became a household name in the absence of much serious competition, getting a head start on its current main rivals: Hulu and Amazon Prime Video.
Netflix undoubtedly maintains an advantage, but there’s no shortage of competition, with new SVOD libraries coming online every few months. With streaming startups, TV networks, niche content providers, and even cable/satellite operators fielding their own rivals, Netflix suddenly has company.
This flood of new services, spreading the same familiar content across more and more different sites and apps, is already starting to wear on customers who are getting frustrated with the lack of a coherent TV experience.
A space that Netflix once owned is now one of the most cut-throat and competitive, while consumers’ attention spans are growing shorter all the time.
Frenemies
The TV networks also previously had a different relationship with the company, gladly accepting the company’s cash in exchange for giving their older content new life.
Now, that couldn’t be farther from the truth. TV executives want nothing more than to “put the Netflix genie back in the bottle” as Recode’s Peter Kafka put it. Starving OTT rivals like Netflix of content and building their own VOD apps instead has been an oft-discussed solution among the networks.
Netflix has grown thanks largely to a catalog of content from the networks. But those networks now see undermining Netflix’s success as critical to their own. Going forward, the company can expect far less reasonable terms for licensing content, if the networks are willing to deal at all.
Many will instead go it alone, with HBO Now serving as the best example of a network choosing to do battle with Netflix head-on.
Original Content: Risky Business
As the networks give Netflix the cold shoulder, the company must move from betting on tried and true content to creating hits of its own; a far more challenging task.
Deutsche Bank analyst Bryan Kraft noted that Netflix’s investment in original content will outpace previous forecasts, a direct result of the company’s newly fraught relationship with the TV networks.
Netflix has long been able to license the most popular shows and movies of the past few decades. But with networks fielding their own VOD rivals, they’ll be keeping the best content for themselves, forcing Netflix to look in-house for an increasing portion of its content.
Though Netflix described its original content as more “efficient” than its licensed shows and movies, the company is now shouldering much greater risk by producing its originals. If a show or movie is a flop, Netflix eats a huge loss.
Deregulatory Headwinds
Netflix was one of the most vocal advocates for the new net neutrality rules that were passed last year. But with Donald Trump taking the oval office, appointing outspoken net neutrality foe Ajit Pai to head the FCC, those rules’ days are numbered.
For a voracious bandwidth user like Netflix, this opens the door for ISPs of all sizes to stick the company with a new bill, or degrade the experience for their customers.
And with more ISPs under the same roof as rival content producers, there are more opportunities and incentives than ever for the owners of NBC Universal and Time Warner (ie Comcast and AT&T) to try and give their own cable and OTT offerings an advantage.
Against the Odds
With an overcrowded landscape, a deteriorating relationship with the networks, an ever-increasing need for original content, and an unfavorable regulatory environment, there’s no end in sight to the cash drain which has plagued Netflix over the past few years.
In its most recent unaudited financial statement, Netflix had non-GAAP free cash flow of negative $1.7 billion and unrealized content assets on the balance sheet worth $11 billion.
Will their investment in original content ever pay off?
