While social media users are busy imitating Sandra Bullock’s performance in the “Bird Box”, Netflix Inc is facing serious financial trouble. The popular US-based online streaming service has not been performing well in the stock market.

With a constantly increasing user base around the world, Netflix has established itself as the leader of the entertainment sector when it comes to streaming services. In the US, the most popular subscription plan costs $11 per month, whereas, in other international markets, it is much cheaper. However, its growing library of movies, TV shows, and expensive original content has been produced by burning cash at a phenomenal rate with the company posting a negative cash flow for 5 straight years. Analysts expect the company to burn at least $6 billion in cash between 2018 and 2019.

Some of the most expensive shows produced by Netflix are:

  • House of Cards
  • Orange is the New Black
  • The Crown
  • Sense8
  • Marco Polo

DSC04279.CR2

Taking stock of the situation

Netflix belongs to the ‘FAANG’ group of stocks, an acronym representing the market’s five most popular technology companies, namely Facebook, Amazon, Apple, Netflix and Alphabet’s Google. These are enlisted on NASDAQ (National Association of Securities Dealers Automated Quotations), a computerized trading system for buying or selling stocks. The NASDAQ index is observed by people to understand how the stock market is performing.

Rewinding back to October 2018, the tech giant’s shares soared for a brief period. As it released the Q4 subscriber guidance, it surpassed its own Q3 growth estimates by roughly 2 million subscribers. This was a relief for the company as it relies on subscription revenues for generating profits. But a broader market sell-off, as well as high content investment, led to a downfall of the NASDAQ index. In fact, the other ‘FAANG’ stocks rolled downhill as well.

Fast forward to 3rd January 2019, Netflix’s shares went down 36% from a July (2018) peak of $423.21, 22% below where it was prior to the positive Q3 report of October.

Earlier this month, Netflix appointed a new Chief Financial Officer (CFO) – Spencer Neumann, former CFO of Activision Blizzard Inc. A Wall Street Journal headline read: “New Netflix CFO to Tackle Cash Flow Conundrum.”

Growing competition

Another potential obstacle to Netflix’s popularity is the launch of streaming services by Disney and WarnerMedia in 2019.  Even individual channels like Fox, ESPN and CBS are planning to tread a similar path. Every major TV network will be launching its own direct-to-consumer streaming service in the next five years, according to research group TDG.

This will make the competition even tougher. These rival media companies are seeking popularity and profitability commonly associated with online streaming. But the launch of more such services will fragment the market and reduce the content available on each platform. It might become confusing for consumers to choose between paying more and losing out on streaming their favorite shows.

Interestingly, it seems like subscription revenue is not the only motivating factor for media companies to shift their resources to designing and operating streaming platforms.

Online streaming services also allow networks and studios to obtain data about their users. This data about customer habits and behaviors helps production houses in crafting their offerings as per customer preferences. Additionally, high-traffic platforms can obtain high levels of advertising revenue to generate income in the long term. At an analyst conference earlier this month, AT&T CEO Randall Stephenson said: “I think all media companies are coming to grips with the reality that you better establish a relationship directly with your audiences”.

A need for new strategies

Netflix can tackle its losses and potential difficulties in different ways:

  • By increasing the number of subscribers.
  • By increasing the average price of a subscription, particularly in the international markets that Netflix has strengthened itself.
  • Using differential pricing strategies to charge customers as per their consumption patterns and obtaining higher revenue from those users who are relatively more active. Merchandise, in-app purchases, and elite packages can lead to profits.
  • Spending lesser money in production and taking a step back from its view of being a once-in-a-generation global media company.

The silver lining

Analysts are of the opinion that there is still hope for Netflix. Although the ‘FAANG’ stocks have taken a hit in general, Netflix has an upper hand compared to the other four giants. In a phone interview to Bloomberg, Tim Nollen, a media and entertainment analyst, said, “Whereas the other FAANG companies have been on a steep international growth curve for several years, Netflix is only getting started with international growth. That’s where the real bull story is.” He also talked of how Netflix “doesn’t have growth issues like Apple, and it doesn’t have self-inflicted issues like Facebook.”

The recent success of Bird Box serves to be reassuring. Netflix reported that nearly 45 million subscribers worldwide watched the Sandra Bullock thriller during the first seven days of its release on the service in December.

What’s next?

The increasing choices in streaming services, however, remain a worry.

According to Michael Greeson, president of research group TDG: ‘We’re in a time of dramatic change for the TV and video business. There’ll be great benefits, and question marks and consequences’. Netflix, as well as its consumers, need to brace themselves for the journey henceforth.

Sources: Bloomberg, CNBC, realmoney.thestreet.com

Image credits: Variety, CNBC

Leave a Reply