Is Netflix now an accident waiting to happen?

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In the latest issue of Euromedia we look at the dawning of the era of D2C. It is, I suppose, the natural evolution of the stunning success of the era of SVoD as exemplified by the ‘world domination’ of Netflix.

Netflix has achieved much: it has disintermediated traditional gatekeepers, it has changed viewing habits and it has even made some epoch-defining content. What it hasn’t done is make any money. And to that degree it seems an odd bandwagon for a bunch of profitable traditional content producers to jump on. Particularly as others already on the bus have such obvious alternative (by which I mean not profit-driven), motives for being there: Prime is the OTT version of the $1 DVD basket in Walmart, while Apple TV is just one part of the corporation’s tectonic shift from device provider to service provider.

None of the above already had major skin in the game – skin that could end up badly scorched if this all goes wrong. Netflix main attribute is as a disrupter; it first came to prominence by using the mail to disintermediate Blockbuster stores, and when it went online, its pricing reflected that heritage of providing a handy service priced to undercut the establishment. Uber has done a similar thing for (to?) the cab business, and it isn’t making any money either.

The route to profit was clearer when Netflix could maintain a ‘pile it high sell it cheap’ philosophy on content. But as its suppliers noticed its success and began to think about the D2C route, it had to home grow more and more – a notoriously expensive and (literally) hit and miss business.

Now many of the brands that used to supply Netflix with their old shows while selling their fresh content to pay-TV platforms, are going all in on D2C. Or sort of all in. Many will attempt the notoriously hard trick of ‘dancing at two weddings at the same time’; they want glass-to-glass control but don’t want to trash the revenue stream from other networks or platforms. For each piece of content produced they will have to pick a side, or at least think of a new way to spin the whole meaning of ‘exclusivity’.

Of course, all the players will have gamed many outcomes. But this is a web of known unknowns: can D2Cs ever be more than ‘good value’ (cheap), how many services will households take, how bad will churn be if you don’t deliver all the time, will consumers get choice and search fatigue, will platform providers cut you off as they call your bluff and just concentrate on providing the networks you’re clogging up, will consumers migrate to aggregators – new or old – who will put you right back where you were?

Content is King – but only if you get it to the consumer in a way, and at a price, that doesn’t turn them off. Will all the new or existing D2C plays succeed? Not a chance. Will they mean that in a few years the media landscape will look dramatically different to now? Less likely than it currently seems.

And Netflix? How can such a market share monster be vulnerable? Because it is locked in a business model where creating its product has a very high fixed cost but its retail price is constrained and its cost of sale, now it has to market against competition, is only going to go up. That equals cash burn, and we are talking a veritable furnace. The share price – which still has the business valued over $150 billion – has shown itself sensitive to tiny down ticks in new sub acquisition. But it is the debt market that will determine Netflix fate; its bonds are already close to 7 per cent and some give it a near junk rating; if the market stops believing that free cash will continue to flow fast enough to keep up, the tightening will be quick and, possibly, fatal.

Of course, the alternative has always been that Netflix will become too attractive for one of the other leviathans to resist. But why would they buy? Google could have been in the game, but gathering regulatory threats are now a disincentive. The others either have very different motivations (Amazon) or their own brand names to protect and promote.

One very experienced investor told me buyers could now wait until it’s in big trouble before picking up the assets – basically content, worth, he guessed, somewhere between $60 and $80 billion – roughly half the current market value of the business.


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