The Crown Slipping Away?
Updated: Apr 6, 2022
Netflix changed the way we viewed content and it revolutionized the concept of online media streaming. In its wake came Hulu, then Amazon Prime Video and this year we are going to see 3 more conglomerates enter into this fray. Netflix is seeing new entries in the likes of upcoming Apple TV+, Disney+ and HBO Max being pitted against it in an aggressive fight to win in this growing market.
In 2019, Netflix for the first time saw its consumer base in its core overseas markets decline, signalling deep trouble for the beleaguered king. At the same time, US subscribers dropped by 226,000 and it grew its consumer base by half of the projected growth rate. The company is seeing its content portfolio slowly dwindle because of rivals like Disney pulling out their original productions from it to strong-arm their upcoming rival services.
Still a torrent of Netflix produced content – 700 original TV shows and 80 films this year alone – has kept fans rolling in and maintain the consumer interest. Despite all these efforts to maintain growth and retain existing consumers, when it revealed its Q2 earnings($4.92 billion vs. $4.93 billion expected) and reported widening losses along with a decrease in US subscriber investors did not respond well as soon after the company saw it’s stock price drop by more than 10%. The poor Q2 earnings and widening losses brought out to the limelight the adding woes of the streaming giant.
The influx of these rivals saw Netflix lose the rights to various franchises, shows and movies-majority of which will be removed by next year-end. Disney’s removal of all Marvel, Star Wars and other films along with HBO’s removal of Friends among others from the beleaguered giant’s content portfolio makes it difficult for the company to promote and market a desirable content portfolio. Plus with a field being slowly concentrated with more rivals and competition Netflix has seen the cost of obtaining rights to movies, franchises and shows rise steeply. This has caused its balance sheet to turn out in deep hues of red.
Netflix’s net liability rose to a huge $30-33 billion over the past few years, its debt has shot up by 58% to a huge $10.3 billion over the past few years. Its increasingly spending more and more money on original content to fill the gaping hole left behind by a lot of content being pulled out. The situations so bad for the company that from now on it will be either make or break for the company.
The company in the past few years had floored the pedal on the production of original content and in doing so had gained a huge mountain of debt. This cost the company to give up positive free cash flow, increase net liabilities and huge production and exclusive content right costs. With stiff upcoming competition, the company is facing the test of time with rivals sprouting out from wildly successful traditional media giants and other conglomerates. What this means for the company is an increasing pressure to maintain a growth trajectory in terms of both subscribers and the company as a whole and to calm agitated investors.
All isn’t that bad for the beleaguered giant as the company will find it easier to retain and maintain its original subscriber base, unlike upcoming rivals who will find an uphill task in the form of growing a customer base. Also, its robust production house will give it an upper hand in front of the other rivals when it comes to the original content. Plus the company reported a profit of $1 billion last year despite all the reds on the balance sheet as their net liabilities and debts are spread over years and years in terms of maturity of these debts.
What the company needs to do to survive is that needs to keep growing its subscriber base so that its revenues grow. Also with a growing subscriber base, the company will be able to leverage its original content, the growing consumer base will increase the likelihood for the company reaching a profitable business model.