Google may be a tech company, but the word “Google” has long since come to mean something else.
It’s the verb meaning “to look something up online.” After all, if someone doesn’t know something, we tell them to “Google it.”
A few other brands have reached this status too.
For most people, “Kleenex” is the name for tissues. Similarly, “Taser” has come to mean any non-lethal electric stun weapon. Even some completely unassuming words started off as brand names: Dumpster, Bubble Wrap, Escalator, even Kerosene.
This can be both a blessing and a curse.
On the one hand, it keeps the name at the top of the customers mind. For example, few people can think of a search engine other than Google.
On the other hand, few now remember the original creators of the Dumpster or of Kerosene. The brand may have become a household name, but the original product and their manufacturer are long gone.
Another brand that’s becoming a household name is Netflix Inc. (NFLX). And this November, we’re going to see whether that’s a blessing or a curse.
Because on November 1, the “Content Wars” will begin the next era of streaming entertainment.
And Netflix is in for the fight of its life…
The Evolution of Streaming Media
Netflix first began offering movies and TV shows streaming online in 2010, and have been the largely undisputed leaders in the field since. Younger readers may not even even remember that the company started as a DVD rental service that shipped movies by mail.
That business has since been moved to a smaller, separate website (DVD.com).
That’s not to say that Netflix hasn’t had competitors. Hulu Plus also launched in 2010, but it focused on TV shows shown days after airing. With ads or an add-free option, an underwhelming movie library, and relatively few original shows, it is more of niche player.
It didn’t help that three of Hulu’s original owners were competitors – the parent companies of Disney, NBC, and Fox.
Over the years, more and more competitors joined the fight. Google began dabbling with their own, original programming on YouTube. More successfully, in 2012 Amazon moved away from strictly offering online movie rentals, to also offering streaming video for free to Amazon Prime members. And in recent years, Amazon has had a very successful run of TV series and movies, winning multiple Oscar and Emmy awards over the last three years.
But Netflix has been the undisputed leader in the video streaming space, thanks to its early emphasis on exclusive original content. Popular and highly reviewed TV shows like House of Cards, Orange is the New Black, Black Mirror, Stranger Things, and many others were available exclusively through Netflix, and often produced by the company as well.
This meant that Netflix was not only the most convenient place to find the TV shows and movies you wanted, but also the only place to see the new shows everyone was talking about.
For years, having a Netflix subscription was a must if you wanted to stay in the loop of popular culture, here and internationally.
And so Netflix grew to have about 150 million subscribers, and a revenue of $5.25 billion this past quarter.
But all of that content is expensive, and is becoming even more so. In 2017, Netflix spent $8.9 billion on securing the rights to videosfrom outside producers, as well as on making its own. In 2018, that ballooned to over $12 billion. This year, that number is expected to be above $15 billion.
And a lot of that money for creating shows, and buyng the rights to others, comes from debt. At the end of the Q3 this year, Netflix had $12.4 billion of long-term debt, and just days after reporting that number, they announced they would be selling $2.0 billion of additional bonds.
Meanwhile, Amazon, for whom the video streaming component is just one part of what makes Amazon Prime such a desirable subscription service, spends about $5 billion annually on content.
And on November 1, things are about to get even more difficult for Netflix…
Competitors are Gunning for Netflix’s Top Spot
After Netflix’s success with streaming its own content, as well as HBO’s eight-year success with the Game of Thrones TV show and Amazon’s wildly successful Marvelous Mrs. Maisel, among many others – lots of companies have caught content fever.
I’ve said many times on my appearances on Fox Business’ Varney & Co. that this truly is the golden age of video content. For TV content, the old school networks are clearly second tier content providers. In fact, the only “original” TV network in the top five networks in terms of this year’s Primetime Emmy nominations was NBC, coming in 4th place behind HBO, Netflix, and Amazon Prime Video.
And new powerful competitors in the video subscription wars are just getting started…
First, on November 1, Apple Inc. (AAPL) is launching its new video streaming service, Apple TV+. At less than half the monthly cost, and focusing almost exclusively on brand-new, original content, Apple’s upcoming entry into the video streaming space has already been one of the big factors that sent Netflix’s stock down this year.
Taking a page from Netflix’s strategy, Apple has already spent more than $6 billion on original content. On November 1, the service will launch with a number of exclusive shows with big names attached to them:
Jennifer Aniston is returning to TV for the first time since Friends, in The Morning Show, co-starring with Reese Witherspoon and Steve Carell. Ronald D. Moore, creator of the hugely successful sci-fi reboot of Battlestar Galactica is creating another space-oriented TV show for Apple, called For All Mankind. Mystery and thriller screenwriter and director M. Night Shyamalan is creating Servant, a psychological thriller series.
There’s plenty coming, and Apple is promising even more as time goes on. All of these will be exclusive to Apple TV+. And to sweeten the deal, the company is offering one year of the service for free to anyone who buys a new iPhone, iPad, or Mac. In addition, Apple is also vastly undercutting Netflix’s $12.99 base subscription rate by offering a $4.99 price.
But the headache for Netflix doesn’t end there.
Because less than two weeks later, on November 12, Disney is launching its own video streaming service, called Disney+. The appeal of Disney’s library of movies and TV shows goes without saying: all the classic Disney animated fairy tales, as well as the more recent live-action remakes will be available exclusively on Disney+.
In addition, Disney owns the Marvel, Star Wars and Pixar franchises. It is pulling those movies from Netflix and has promised that upcoming shows from the these mammoth brands will only be available on Disney+. Disney is also planning a number of Disney+-exclusive Star Wars and Marvel TV shows that are sure to draw fans of those franchises to the service.
Like Apple TV+, Disney+ will also be cheaper than Netflix, and Verizon Communications Inc. (VZ) is offering some of its customers one year of Disney+ for free.
But movies from Disney, Marvel, and Star Wars are not the only content Netflix is losing. Comcast Corp. (CMCSA), which owns NBC, has begun pulling its content from Netflix and Hulu as well. AT&T Inc. (T), the parent company of Time Warner, is doing the same.
And while some of Netflix’s original content has been very well-received by critics, the movie and TV studios have done their best to keep them out of high-profile awards such as the Oscars and the Emmys that could boost Netflix’s appeal.
Roma, a Netflix original movie, was nominated for ten Oscars and won three. But it only ran in a few theatres in the weeks leading up to the nomination. Movie studios have pushed to require a much larger run.
Now, there’s no doubt that Netflix’s debt is building, and the headwinds, from competitors to the wider movie industry, is mounting.
After an 8% jump in its stock price after its earnings last week, Netflix stock has dropped 12% on concerns about the coming competition:
There are some positives for Netflix – it has first-mover advantage. Their streaming technology is proven, they are a household name, and they are the brand that comes to mind when people think about streaming video.
They are the video streaming-company that everyone is gunning for.
But with a huge debt burden and serious competition coming from deep-pocketed companies, any new investment in NFLX should wait until some data from Apple and Disney tells us how successful they are. For all of these reasons, the future direction of NFLX’s stock price is the least certain of all the FANGMA stocks.
Great trading and God bless you,
D.R. Barton, Jr.