Netflix: Lessons from the Media Titan Who is Struggling
From January until August 2022, Netflix lost $230 billion, 70% of its value capitalization. The competition for people’s attention is divided among the wide variety of alternatives that are emerging such as Disney Plus, Apple TV, or HBO Max.
The company described some reasons for its drop such as shared accounts, the Ukrainian war, and new competitors. Here are some aspects that the company has neglected but that cause investors to worry:
- It’s not a growth company anymore: Investors are not willing to pay high rates per share due to recent results, where Netflix lost almost 1M subscribers in the last quarter.
*Growth companies are attractive to investors because their market capitalization value increases over time. To maintain those growth rates they have to create disruptive technologies and create new markets. That is not the case with traditional companies, which must offer dividends to get investors’ attention.*
- Missing blockbusters: Competitors are vying for attention by developing legacy content, well-known content such as Disney princess movies. Waiting for new releases of a series with a large fandom might keep subscribers captive, but that anticipation is difficult to achieve when it is not flagship content.
- Vertical integration: Competitors’ business model include other ways of earning than just memberships. Disney Plus boosts cruises and collectible figures sales. Amazon Prime Video includes product delivery, pushing up- and cross-selling. Netflix’s income depends only on memberships.
Looking for growth. Netflix has launched some new bets that could bring back investors’ euphoria:
- Advertising: Netflix will include ads to basic subscriptions with Microsoft advising. Breaking up the market through different prices could bring wallet-conscious subscribers.
- Video games: Cloud gaming is growing fast. Netflix now offers some video games on its platform and it may go up to 50 different games this year. But right now, ~1% of subscribers play Netflix games.
Link to first and second quarter to shareholders:
https://s22.q4cdn.com/959853165/files/doc_financials/2022/q1/FINAL-Q1-22-Shareholder-Letter.pdf
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