Why Netflix's Recent News Shouldn't Come as a Surprise
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Chapter 1: The Downfall of Netflix
Netflix shares plummeted 26% on Tuesday (April 19), resulting in a staggering loss of $40 billion in market value. The platform experienced a decline of 200,000 subscribers, contrary to the company's earlier prediction of adding 2.5 million in Q1. This shocking turn of events also cost investor Bill Ackman $400 million.
The primary reason behind Netflix's subscriber exodus? The content, quite frankly. I personally felt this shift beginning in early 2021 when I found myself gravitating more towards Amazon Prime and HBO Max, while Netflix's offerings seemed stale. I often spent considerable time browsing Netflix, only to abandon it for more appealing options on competing platforms. This trend is reflected in HBO Max's impressive gain of a million subscribers during the same quarter that Netflix saw losses. Realizing the shift, I divested my Netflix shares in January 2021. In hindsight, I wish I had held onto them a bit longer, but now I feel relieved to have exited when I did.
The company's financial woes are compounded by a significant debt burden. Netflix is grappling with an enormous cash burn as it invests heavily in content creation. Currently, the company carries a total debt of $14.5 billion, with only $6 billion in cash reserves. Moreover, $7 billion of this debt is set to mature in 2025.
Competition is intensifying within the streaming industry. Major players like Warner Brothers (owner of HBO), Paramount (which owns CBS and Showtime), and Comcast (parent company of NBC and Universal Studios) are launching their own services. Disney has already pulled its beloved Disney and Marvel content from Netflix, opting to stream it exclusively on Disney+. As more studios create their own platforms, Netflix will likely face even greater challenges in securing licenses for quality content from external sources. Furthermore, producing high-caliber content requires substantial financial resources, and established Hollywood studios possess greater financial power and expertise compared to Netflix.
Will Advertising Solve Netflix's Issues?
Netflix is contemplating a lower-cost subscription tier that would allow viewers to access content in exchange for watching ads. While this could be a viable strategy, advertisers are drawn to platforms with a large audience. Additionally, can ad revenue truly cover the hefty expenses involved in producing captivating content? Do companies want to invest in ads on a service that is losing subscribers?
What Lies Ahead for Netflix?
I envision Netflix becoming a potential acquisition target. Companies such as Amazon, Disney, or Comcast (which owns NBC and Peacock) may find value in acquiring Netflix. This could be a strategic move since any buyer would gain access to Netflix's extensive content library and existing subscriber base. Alternatively, Netflix might follow in the footsteps of Hulu, which is jointly owned by several studios.
Nevertheless, it's crucial to acknowledge Netflix's remarkable achievements. As I write this, I'm engrossed in "Selling Sunset" (my guilty pleasure being the opulent mansions of LA—don’t judge!). The company has transformed from a fledgling operation that was mocked by the entertainment industry and doubted by Wall Street in 2011, into a powerhouse of entertainment. Iconic shows like "Tiger King," "Squid Game," and "House of Cards" (prior to the Kevin Spacey controversy) have become some of the most-watched and critically acclaimed programs around. Netflix has received numerous accolades, including Emmys and Oscars, and fundamentally reshaped the entertainment landscape, effectively rendering the traditional DVD rental model obsolete (RIP Blockbuster). For these reasons, Netflix emerged as the leading stock performer of the decade.
One of my favorite moments from Netflix is the "Cobra Kai" phenomenon. This series, a reboot of "The Karate Kid," originally premiered on YouTube Premium (formerly YouTube Red). I initially mistook it for a parody due to its minimal marketing and was unaware it was a legitimate show until Netflix acquired streaming rights in 2020. I quickly became a fan. Netflix's successful revival of a previously dormant show into a global hit demonstrates its capability to produce compelling scripted content, outshining YouTube in this regard.
Overall, we are witnessing a trend toward the protection of intellectual property and content. Major Hollywood studios recognize the critical importance of streaming services for exclusive content that attracts audiences worldwide. As a result, these studios are launching their own platforms, creating more challenges for Netflix. The company now faces a pivotal moment: adapt, be acquired, or face decline.
Please note that this article is not investment advice and is intended solely for educational purposes. Consult an investment advisor before making any investment decisions, and conduct thorough research as investing carries inherent risks.
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In this insightful video, Lorin Hochstein discusses unexpected challenges and opportunities that Netflix faces, emphasizing the need for adaptation in a competitive landscape.
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