I published recently a piece in one of the leading business online newspapers of Norway, E24.no. The title, translated from Norwegian was «Apple takes off the streaming gloves». You can find the article HERE. In that column my argumentation tries to support two key messages for investors and the media industry at large.
My first message was that Apple has a huge advantage now that the giant of Cupertino enters the video streaming business with Apple TV+, because it has decided to bundle one year of free Apple TV+ with the purchase of virtually any Apple product apart from Apple Watch. Matematically Apple needs just to sell 10 million additional iPhones (a mere 5% increase) in order to recoup the hefty 6 billion dollar investment in proprietary content just for 2019. And that’s just on iPhone sales. Of course, the quality of the content delivered will be a crucial factor anyway.
My second message was that any player in the realm of video streaming must have a core business capable of subsidizing the huge investments in exclusive content in the billions of dollars that Netflix has made subscribers used to. Those that don’t have it are playing a “loss leader” game without a safety net and therefore Netflix is in a very weak startegic competitive position . The following figure shows how the finances of Netflix are suffering due to this reality. The company is burning 15 million dollar every single day.
Apple, Disney, AT&T Warner Media, Amazon… all those competitors have the safety net of a huge catalogue of content and/or impressive cash flows from other operations.
In addition, these same competitors have alternative promotion and distribution channels they can use to funnel new subscribers into their video streaming services. Taking Apple as an example again, the company could sell over 70 million iPhones just in this holiday season, all of them bundled with Apple TV+ for a whole year. This means plenty of time for Apple to launch more content to keep subscribers interested, specially at the lowest price point among all competitors, 4,99 dollars a month. In short, Apple could have half the number of subscribers Netflix has in just three months from now, as shown below.
It is not the first time such a thing would happen. Apple Music has now more paying subcsribers in USA than Spotify, despite having launched its service 8 years later.
And still, there are some ways Netflix could survive on, and even leave its troubles behind.
First, it could countinue issuing junk bonds. In the current climate of near negative yields and with the latest IPOs performing weak or coming close to a fraud, investors could look at Netflix as “better than the alternatives”. It looks like this road has already been taken.
Second, it could increase subscription prices hoping that competitors will increase their prices too in order to make more profit. Such a move should be carefully tested because nobody knows yet the price elasticity of streaming services when consumers have a real choice.
Third, it could copy Amazon Prime, and charge a lower price for its services, but upfront. Such practice would improve massively the liquidity of the company and its operative cash flows. At the same time, this would probably harm the bottom line, but there is not where the problem is right now.
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It could include some kind of native advertising in its content. Some Netflix shows already display product placement. The Cable TV advertising business is worth over 70 billion dollars in the USA alone, so there is a possibility there.
It can also reduce its investments in content to around half they are now or less. That would make cash flows become neutral or positive. It may work as long as subscribers consider that the current pile of content of Netflix is good enough to justify the price tag in the face of alternative services. I guess Netflix will be very carefull with this option and test it a lot with real customers before going all in.
It could also split itself into two different business units: A distribution network and a content producer. The distribution network could be leased to other big players in order to distribute content if / when they decide to enter the video streaming on demand business (like Comcast, Telia or any other telco in the world with limited or regional Content Delivery Networks). The content production business could create content for other streaming services.
These two different businesses could indeed be listed as separate public companies like Hewlett Packard did some years ago. This could create a new “story” for investors and lift the share price or issue new shares and relief the balance sheet of both companies.
It could change its business model entirely, entering related or unrelated businesses using its huge customer base as a base. Could Netflix end up selling home alarms or video surveillance services?
A new investor could acquire a part of the company and inject cash by issuing new shares. A candidiate could be the Chinese media colossus Tencent. This company has already take positions in different western online and social media like Snap, Spotify and Funcom. In addition, Tencent has its own video streming service and is trying to expand outside of China. Acquiring a part of Netfilx would put the company on the fast track of making it happen.
Alibaba and Baidu are other Chinese conglomerates with interests in both online media and video streming that could be interested in Netflix too, specially because they are locked with Tencent in the competition for the Asian video streaming market. Baidu has previously signed a collaboration agreements on content distribution with Netflix. Another potential interested investor could be Softbank although less probable because its first Vision Fund is already 70% invested and the secong Vision Fund will be focused on AI.
Finally, it could be acquired as a whole, but the net value of the company is presently over 110 billion USD. For most players with that amount of cash to spend, it would be easier to buil a new service from scratch, unless someone feel they are in a real hurry and desperate. For this alternative to be possible, Netflix will probably have to show a credible path to positive free cash flow and steady growth of subscribers at the same time.
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