Reed Hastings, co-CEO of Netflix, participates in the Milken Institute Global Conference on October 18, 2021 in Beverly Hills, California.
Patrick T. Fallon | AFP | fake images
We must be living in the Upside Down. Legacy Media Has Disrupted Netflix
Netflix announced on Tuesday is exploring adding a lower-priced ad-based tier to its service. The decision has put the world’s largest video streaming service in a peculiar place: following the lead of legacy media.
Comcast Y DisneyHulu, owned by Hulu, is the founding father of ad-supported streaming. In recent years, Discovery of Warner Bros.Major streaming services (HBO Max and Discovery+), NBCUniversal’s Peacock and world paramount‘s Paramount+ launched with ad-based levels for a lower price than its commercial-free products. Disney said last month Disney+ offer a product with advertising.
The legacy media industry has spent the last four years overhauling its businesses to compete with Netflix. Legacy outlets all decided that Netflix’s streaming-only model was the future of entertainment consumption. The companies saw Netflix trade at sky-high multiples, leading to a skyrocketing share price no matter how much it spent on content.
The result was a pack of huge companies shift focus to compete directly against Netflix instead of protecting the pay TV package, long the jewel of the industry.
In the world of streaming, Netflix seems like the headline: battling saturation and an outdated core service. That may not be good news for entertainment companies struggling to gain market share.
The optimistic goal for legacy media companies has been to achieve the same kind of trading multiples as Netflix: a “win-win” scenario. But, for now at least, it appears that entertainment rivals have brought down Netflix, which it acknowledged during its first quarter earnings update that increasing competition has led to its slow growth.
Netflix shares fell more than 35% on Wednesday, dragging its market capitalization to $100 billion for the first time since 2018.
When a company trades in subscriber revenue, like Netflix, it’s inevitable that the music will eventually stop. No company can sustain subscriber growth forever. Saturation is activated.
That seems to have happened with Netflix, which lost subscribers for the first time in more than 10 years during the first quarter and projects an additional loss of 2 million subscribers during the second quarter.
The situation is so dire, on the surface, that Netflix CFO Spencer Neumann weighed in just before the end of the company’s earnings conference call on Tuesday to assure investors that Netflix will continue to grow in terms of subscribers during all year. — a telling consolation when you consider that most analysts expected Netflix to add nearly 20 million net subscribers in 2022.
“There will be a growth of the paid net addition,” Neumann said. “I just want to make sure that is understood.”
A shrinking Netflix is not good for Hollywood, which has benefited not only from the streamer’s willingness to spend, but also from the subsequent arms race of competitors.
A version of Netflix that needs to cut spending because it no longer has a growing market value forces the entire industry to figure out what’s next. If Netflix is embracing the ads after years of resisting them, will that be the next time the company gets into live sports?
Co-CEO Ted Sarandos said he didn’t see a profitable path to esports on Tuesday’s conference call, but it appears Netflix is getting used to changing long-held beliefs. Netflix ignored password sharing for many years, and that too is changing now.
If Netflix looks and acts like every other entertainment company, prepare to be disrupted too. It’s not clear that video games, which the company has repeatedly touted as an area of innovation, are enough to separate Netflix from the pack.
The industry now looks much shakier than it did a year ago, when “trading like Netflix” was actually a goal. There is rampant speculation streaming wars will lead to further consolidationbut it is not clear that regulators will allow such deals to take place.
Media companies could have moved to protect the pay-TV package, but they risked ceding the future to Netflix and other tech giants. Whether that decision was correct or not, that ship has sailed.
And following Netflix into streaming hasn’t led to the multiple expansion that legacy companies hoped for. As Netflix falls, its newly defined peers fall too. Paramount Global fell more than 8% on Wednesday. Warner Bros. Discovery fell more than 6%. Disney fell 5.6%.
Legacy media may have brought Netflix down to some degree. But in doing so, he created an existential crisis for the entire entertainment industry. What do we do now?
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Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC.