![]() ![]() The narrative that Netflix holds significant pricing power is false. Pricing power means a firm can make money while charging lower prices than its competition. After a year when Hulu grew subscribers at a faster rate than Netflix, it decided to lower the price of its most popular plan by 25%, to just $5.99/month. Meanwhile, competitors smell blood in the water. What is Netflix to do? What is defensible about the Netflix business model? But, Netflix has to raise prices to attempt to stem its unsustainably high cash burn. Raising prices makes it harder for Netflix to grow subscribers. Raising prices makes it easier for firms to compete for subscribers with Netflix. The more Netflix charges subscribers, the more its competitors can charge. Price Increases Will Slow Subscriber GrowthĮvery price increase makes Netflix’s competitors more powerful. ![]() Additionally, NBC Universal could also pull The Office, which, according to recode “NBCU execs say Netflix has told them “The Office” generates more viewing hours than anything else on the service.” Such a loss (or losses) would truly test the stickiness of Netflix’s original content. Furthermore, Warner Media could pull the popular Friends series, which Netflix just paid $100 million to keep on its platform for another year. ![]() Losing “Successful” Content Will Slow Subscriber GrowthĪ big part of Netflix’s success in growing subscribers has been the content that its competitors provide.ĭisney has already stated that it plans to end its licensing agreement with Netflix and pull its content by the end of 2019. These new entrants, with vast resources, could pose a significant threat to Netflix when it comes to licensing existing content. * Includes live TV channels commonly available through cable or satelliteĪpple (AAPL), Disney (DIS), Warner Media (T), and NBC Universal (CMCSA) are all expected to release their own streaming platforms by 2020. Increasingly, investors are less willing to believe that leverage will ever emerge, per Figure 1 above.įigure 2: Netflix’s Revenue Growth Lags Spending Growth by 50% The leverage investors need to see in Netflix’s business model has not been present in the past and has still not emerged. To date, the model is not working – not even close. For the Netflix business model to work, subscriber revenue growth has to cover the cost of increased expenditures. The difference in revenue and expenditures means Netflix has burned through nearly $13 billion since 2011. Since 2011, revenue has increased by $12.6 billion, which is half the total increase in expenditures over the same time, per Figure 2. The main reason investors are losing confidence is that Netflix’s subscriber growth has not generated enough revenue growth to cover the increase in content spending. Subscriber Growth Not Enough to Justify Content Spending See Appendix II (below) for more details. Should debt investors grow more weary of Netflix’s massive cash burn, the liquidity they’ve provided could dry up quickly. Since 2017, the cost of debt has risen 275 basis point to 6.375%. In the last year, that skepticism has grown, as the yield on its issuances has increased 150 basis points. In fact, they’ve always been more skeptical and assigned Netflix’s debt “Junk” ratings since as early as 2015. NFLX Share Price 2H 2018 New Constructs, LLCĭebt investors are not happy either. ![]()
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