Nearly 221 million
subscribers, across 190 countries over 1 billion
hours. Watch for a single TV show. A near 10% hold of global
Internet traffic. 226 awards. And at one point, a market
cap of $314 billion for 25 years. One company changed
the landscape of film and TV forever, with revenue and
subscriber base growing a whopping average of more than
30% a year. But things are looking
different for Netflix in 2022. In Q1, its revenue growth
fell to just over 2%, compared to more than 7% in the same
quarter the year prior. Its stock dropped 35% and $50
billion was wiped off its market cap. The company lost
nearly 1 million subscribers, and competitors are catching
up. Investors and Netflix watchers
are wondering the days of the astronomical growth are
simply over. Blockbuster Total access. Netflix, essentially, they
work the same way you order movies online. They come
right to your mailbox, you watch them, then mail them
back in a prepaid envelope. This is an ad from
Blockbuster's marketing campaign that launched in
February of 2007, its goal to take a shot at then rival
Netflix, but a similar business model of renting
DVDs online. For many years, Blockbuster
simply ignored Netflix. And one of the charts that I
maintained kind of showed different quotes over time
that Blockbuster Readership had. And one of the things
they consistently said was this online thing, no more
than 5%, no more than 5%. So they purposefully ignored
us for years. This is Dr. Joel Meyer. He's currently a professor at
the University of Richmond. And from 1999 to 2007, he was
the marketing director at Netflix. In early, version, Netflix had
DVD rentals and DVD sales, Walmart, Best Buy, etc. They're going to begin to
procure inventory and they're going to have economies of
scale that we're simply never going to have. And so in that
moment, they realized sales is not the future. They made the
decision to kill all sales. Right. To kill all sales and
to bet big in solely on rental. So they overnight
said no sales are done. They killed 95% of revenue. They took all those
resources. They ended at. Rental. The company went
public in 2002 at a share price of $15 for the next
five years. The company and its business
model of subscription-based renting was an immediate hit
as revenue and subscribers soared. Netflix was facing
steep competition from then-rival Blockbuster in the
renting wars. But for Netflix, the DVD by
mail business was never in its future. In July of 99, I go into the
office. It's totally chaotic, it's
disheveled. It's just unlike anything
I've ever seen in my life. And I meet this guy who's the
CEO, Marc Randolph, and we're in his office and we're
chatting and he's really relaxed and really mellow and
just and he tells me something that I just struck me as
like, What the hell are you talking about? He said to me, Yeah, DVDs are
already dead. In 2007, the company
introduced streaming. $40 million was invested in
data centers. Netflix's Watch Now feature
became an instant hit. And slowly but surely, the
company pivoted from DVD by mail to a streaming first
company. Streaming revolutionized how
film fanatics and TV junkies consumed content. Studios and production
companies weren't accustomed to licensing for streaming,
allowing Netflix to strike cheap deals. So this is how Netflix built
its business. That basically went to all of
the different producers of media and said, We will pay
you tens of millions of dollars for your stuff that
is not currently live on TV. And these companies said,
great, nobody else is paying for this. So this is just
free money for us. As Netflix became more and
more aggressive about the rights that they want
specifically for television shows, they want something
called stacking rights. They want the ability to show
the entire library all at once. And until this point in
the early aughts, the only companies who had the
rights to distribute that type of stuff or the studios
themselves when they sold them on box sets of DVDs or the
cable companies. In 2007, the same year,
Netflix turned to streaming Amazon and then start-up Hulu
jumped on the streaming bandwagon. The next ten years
proved to be crucial for Netflix as the company
expanded its reach and content offerings. Netflix indulged
in a growth story few companies had witnessed
prior. In 2012, its first-ever TV show Lilyhammer launched. It was a critical first step
for Netflix, introducing the binge model by releasing all
episodes at once. The following year, Netflix
introduced more originals with its first hit, House of
Cards, in 2013. Netflix's focus on streaming
started to pay off. Stock prices surged, revenues
jumped, and subscriber growth skyrocketed. By 2017, there
was expansion abroad and its content lineup. Netflix Eclipse A 100 million
subscribers revenues neared $12 billion and its stock
prices reached close to $200. Netflix outspent competitors
on content as it developed one of the largest libraries
online. Netflix became an aggregate
of content from other studios and major media companies,
and licensed content accounted for 93.2% of Netflix's
catalog. In the years 2018, 2019, and
2020. If you take a look at the
Netflix stock price, it is just up and to the right. It is up and up and up. Wall Street was basically
cheering on Netflix to spend more and more and more. That was a huge irritant to
the legacy media companies who did not have the same mandate
from Wall Street. Wall Street was telling those
companies, we want you to be more financially responsible
with your spend. Whereas what it was telling
Netflix was basically, if you can get all the customers
now, we don't care how much money you need to spend. What we see here is the
destruction of the legacy media model. As long as you
guys can just keep adding subscribers because the more
subscribers you add, the more people will say, You know
what, I can live on Netflix. So it was sort of the
ultimate disruption. That's what Wall Street was
saying to Netflix. Between 2012 and 2020, those
legacy media companies had lost 25 million customers as
fewer and fewer Americans were turning to cable or
satellite. So naturally they wanted in
on streaming. At that point, the older media
companies meaning Disney, NBCUniversal, Paramount,
Global, Warner Media, they all decided, you know what, the
jig is up here. We can't just give away all
of our stuff to Netflix. Instead, we're going to pull
back all of that stuff, create our own streaming service,
and we're going to end this idea of licensing our best
stuff, even if it's old to another company. Disney is expected to unveil
details of its new streaming service, Tim Cook just
announcing that Apple Tv+ will start to roll out its first
shows on November 1st. Nbcuniversal's streaming
service in the works is called Peacock. Hbo Max The new streaming
services needed content and they needed it fast. One way was to take back the
content they'd licensed to Netflix and Disney. Nbcuniversal and WarnerMedia
did exactly that. While the content mass exodus
was tough on Netflix. It didn't come as a complete
surprise. They always knew that they
were going to have to make their own stuff because they
knew that they were going to put a lot of people out of
business. So they had to prepare for a
time when they lost the most popular content on their
platforms. Rewind back to 2016. Netflix CFO David Wells
announced the push for more Netflix originals, and in
just six years, that number of original content went from
2.8% to roughly 50% of total content. There is some value
of Netflix for having licensed content in 2021. Netflix's most watched show
was Criminal Minds, accumulating over 30 billion
minutes, watched across 12 seasons, though licensed
content made up most of the top shows for Netflix that
year. Shows like Squid Game proved
to be a massive hit, with one season pulling in roughly
half of the viewing time as criminal minds. However, that
value of licensed content is quickly moving off the
platform. Criminal Minds, the most streamed show in 2021,
was pulled from Netflix and moved over to Paramount Plus. Netflix is still the most
dominant streamer in terms of overall subscriber base, but
Disney Plus is already catching up since launching
in 2019. Netflix holds firm with 220.7
million subscribers. Disney Plus already has
152.1. Disney's other streamers,
Hulu and Espn+, account for 46.2 million and 22.8
million, respectively. Disney's total subscriber
base across all three platforms accounts for 221
million subscribers in its Q1 of 2022. Netflix reported 200,000
subscribers were lost and many analysts and investors feared
that Q2 would look even worse. On July 19th, 2022, Netflix
announced its Q2 earnings. The company beat expectations
as Netflix lost nearly 1 million subscribers instead
of the projected 2 million. Yet its rival, Disney Plus
continued to grow rapidly, with 14.4 million new
subscribers in its last quarter. For so long Netflix
appear to be unreachable, but that's all changing as
Netflix is losing, subscribers and competitors have more
creative offerings. Netflix sits in an interesting
place almost exclusively in the media universe all of a
sudden, which is they're the only one that only does
premium video subscription and only video premium
subscription. So they are competing with not only
people who do exactly what they do, but they're also
competing with huge trillion dollar platforms. But Disney has sports, local
news, ABC, Hulu, ESPN, and they're able to bundle those
things together and offer a myriad of services to the end
user that Netflix simply cannot. Does not have sports,
does not have news, does not have local. In addition,
Disney can bundle in theme park tickets. Paramount Plus
just teamed with Walmart Plus to create a really
interesting bundle that I think is going to do really,
really well. And then you look at Amazon
and Apple who are offering a raft of different services as
a bundle to the consumers. Yes, you can order Amazon
Prime Video or Apple Tv+ as a standalone product, but a lot
of consumers take Amazon Prime as a bundle with free
delivery of their Prilosec and their audio subscriptions and
a number of other discounts at Whole Foods. During its challenging first
half of 2022. Netflix cut about 450 jobs
and announced it would reduce spending growth until 2024. Yet the company still plans
on investing an estimated $17 billion on content. Netflix has always been known
to spend lavishly on original content, and it was that kind
of spending that was cheered on by investors on Wall
Street, though the sentiment now has recently changed. If Wall Street is now no
longer valuing Netflix on pure subscriber growth, it may
start valuing Netflix by other, more traditional
metrics, such as net income or revenue or EBITDA margins or
whatever it may be. Over the past year, Netflix's
stock has plummeted significantly. It peaked at
over $690 per share in 2021, as the company was riding the
pandemic stay at home orders to its lowest in 2022 at $175
per share. Though the stock took off
after beating projections in Q2. There would have to be a new
narrative that overwhelmed the media industry in order for
Netflix to get to $600 a share any time soon. In order for Netflix to get
back on top of the streaming wars it helped start, the
company is planning on making some drastic changes to its
business model and its content changes that would hopefully
secure new subscribers, retain existing ones and improve its
stock, such as ads and cracking down on password
sharing. Maybe the biggest, most
impactful new thing that Netflix is planning on
launching is an advertising supported tier. This will dramatically lower
the price of Netflix, so it may introduce a whole new
audience out there. The second one is forcing all
of these password sharers to actually pay for a Netflix
subscription. Again, I don't know what
percentage of the 100 million subscribers that Netflix says
are sharing passwords will actually sign up. The way Netflix plans on
doing this is to actually go after the account holder
that's sharing the password and asking the holder, Hey,
are you willing to pay an extra couple of dollars per
month? However, including
advertisements to content. Well, that may be easier said
than done. Netflix is going to have to
pay for the right to sell ads in the content that's already
running on their platform, and they now have to ask for
permission to insert ads into that content. And the studios
are answering the phone and saying, Hi, how are you? You destroyed our ecosystem. Yeah. You want to put ads in
that? Cool, cool, cool. That'll be a lot of money. After its rough first half in
2022, Netflix still believes there's room for growth with
lofty goals to reach up to 800 million subscribers
worldwide. What is the total addressable
market of global streaming subscribers? Netflix used to
say this number was somewhere between five and 800 million. Again, Netflix has 220
million subscribers today. So if that number is right,
then there will be a second act here and Netflix will
again start adding customers like crazy. This is just a temporary
lull. I think the going thought on
Wall Street is that that number is way too aggressive. Netflix declined CNBC's
request for an interview, but with global hits like
Stranger Things, Squid Game and Money Heist, Netflix
revolutionized how industries distribute content and how
audiences consume it, but it's still unclear how Netflix
will continue its story.
