Netflix

Summary

Netflix is a media services provider, headquartered in California. Its business model is focused around its subscription streaming service, through which consumers access its vast library of TV series, documentaries and films. These include a number of shows produced by Netflix.

  • Netflix was founded on August 29th 1997 by Reed Hastings and Marc Randolph as a DVD sale and rental business.
  • Marc Randolph’s great-granduncle was Sigmund Freud.
  • Netflix revealed it accounts for 10% of all TV viewing in the US.
  • The first show to be part-funded by Netflix was Lilyhammer, which launched in February 2012. The first Netflix original was House of Cards.
  • Netflix users collectively watched 1 billion hours a week in 2017
  • In 2018 the company posted its highest revenue to date of $15.794 billion

Online Streaming:  In 2007, 10 years after the company launched a streaming service was introduced. At no additional fee subscribers were able to watch movies on their computers and by 2010 it became a streaming company.

IPO: In 2002, five years after Netflix launched it went public for $15 a share. By September the same year, it was mailing about 190,000 DVDs per day and had over 600,000 subscribers. As of January 2019 it is trading at over $300 a share.

Failed Price Hike: In spring of 2011, Reed Hastings announced that Netflix would be splitting its DVD rental and streaming service and increasing its price for both. The company lost 800,000 subscribers, its stock price dropped 77 percent in four months.

First Academy Award: Netflix won its first Oscar for their documentary “The White Helmets”. It was based on volunteer rescue workers and their work trying to save civilians in Syria and Turkey.

Competition:  As with all entertainment providers, Netflix is in constant competition for our attention. Players in this highly lucrative game aren’t just other streaming services like Amazon Prime Video. Every company which benefits from consumers looking at its content on a screen seeks to take views away from Netflix. Indeed, in a recent letter to shareholders, Netflix identified Fortnite, a video game, as one of its greatest threats. Furthermore, the barriers to entry are extremely low - anyone with a YouTube or Instagram account can compete for consumer views. Up to now, Netflix’s formula for success in this highly-fragmented market has involved huge capital expenditure. In 2018 they spent $13 billion on new content, 85% of which was on original shows.  Whether this strategy will continue to work in the face of expanding competition from the likes of Disney’s new streaming service and wider innovations in the entertainment market will have to be seen.

Debt: Netflix’s growth has been meteoric. In the years since 2007, when it began its streaming service, it has expanded its customer base to 158 million subscribers. As with most hyper-growth companies this has largely been financed by debt. As of November 2018, Netflix’s long-term liabilities were around $30 billion. While this isn’t an issue of itself, some investors are beginning to question the sustainability of this growth strategy moving forward. Their argument can be summarised by considering two factors inherent to Netflix’s market. Firstly, the high levels of competition, as discussed above, and secondly the low “shelf-life” of Netflix’s products. Demand for shows and films tends to peak for around 6-12 months before they need to be replaced. The combination of these factors mean that Netflix has to maintain its content output otherwise it will lose consumers to its competitors. How to do this other than more borrowing? Price hikes are a potential solution, but may also result in customers moving towards the competition.

Rising Content Costs: The costs of Netflix’s content is rising. The starkest example of this came at the end of 2018, when Netflix paid $100 million to Warner Media for the rights to Friends for one more year. They were paying $30 million a year up to this point. Along with the cost of producing and licensing content, there is also the cost of making sure that content is seen. Each new show has to be launched into the market and advertised to consumers. Netflix’s planned increase in content will increase their marketing and promotion costs, especially as it expands into international territories. With competition from the likes of Amazon and Apple, the only companies ever to reach a total stock value of $1 trillion, the battle for content will be fierce and only time will tell whether Netflix has the warchest to see it through.

The years ahead will bring new challenges for Netflix. New streaming services from Disney, Apple, Comcast, WarnerMedia and Sinclair Broadcasting (the largest TV operator in the US) are expected to reach the market in 2019. Netflix has emphasised that it doesn’t see itself in a war for subscribers, rather in competition to provide the best content. However, content requires money, either to produce shows or buy licenses to them. Netflix’s management have confirmed that the current trend of using debt finance will continue. As discussed in the challenges section, this could cause problems ahead, especially as the firms seeking to dethrone Netflix are some of the largest and wealthiest in the world.

However, it is likely that Netflix’s future growth isn’t going to come from the US and UK markets which these competitors will be entering. Rather, it will be international. Netflix currently operates in 190 countries, offering most of them a tailored subscription service. The percentage of internet-connected households using Netflix in the vast majority of these countries is nowhere near the 60% mark it is in the US. Further, Netflix has thus far failed to break into China. Netflix’s continued international expansion gives many investors confidence in the company’s continuing ability to maintain its growth.

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