I was right about Netflix

When you make projections and predictions, in is a rare occurrence when you are rewarded with instant gratification; you predict something will happen “someday” or “eventually” and then within a week it happens.  Predicting the ice caps will melt by 2075 is one thing, but to have the water lapping at your ankles in 2019 is something else.

A while ago I predicted doom and gloom for Netflix, thinking that in a few years, when the streaming market shook out and they had serious competition, they might be in trouble.  But this week Netflix released its latest subscriber data and, as the kids say, “Boom goes the dynamite!”

Netflix reported a loss of subscribers, its first loss in seven years.  The result?  Netflix lost $17 billion in one day.  Now, the good news for Netflix is that it was so rich it could lose $17 billion.  My total assets are slightly less than $17 billion, so I never have to worry about losing that much, even if I misplace my coin purse.  But still, that’s gotta hurt.

The explanation for why the prospect of competition would hurt Netflix now is the economic concept that predictable future events will manifest their impact immediately in any rational marketplace; this is known as the Efficient Market Hypothesis.  If I am an investor, and I know that at some time in the future Netflix will have to compete with the Disney+ streaming service, the Warner’s HBO MAX service, NBC’s streaming service, CBS All Access, and so on, then there is no reason to wait for these entities to come into being before dumping my stock.  If I dump it NOW, there is no risk of mis-timing the market and being caught in a sell-off.

Netflix’s problem is two-fold.  Competition will drive down the price they can charge for their streaming service, while at the same time content providers pulling their content from Netflix drives down the demand for their product.  Friends, The Office, and the Marvel properties were reasons to subscribe to Netflix; with those on other platforms, not so much.

As I said before, Netflix is sort of a legal Ponzi scheme.  They assume future increases in their subscriber base, and then borrow against the assumed future revenue to finance the creation of Netflix Original content.  This system works great, at least until the last Bushman in the Kalahari Desert subscribes and no further growth is possible.  This is why Netflix’s stock price is susceptible to downturns when there is a report that subscriber growth has slowed (much less dropped). 

I’m no expert, but I’m not sure I see a way out for Netflix.  Unless the streaming market gets oversaturated by breaking up into too small bits (when other streaming services fail because they have too small of a market share) and then re-coalesces with Netflix able to re-acquire titles due to their excess capacity.  Netflix is banking on the high quality of their original content, instead of content bought from others, but in my opinion Netflix original content has been spotty at best.

Of course there is Stranger Things, but as good as it is the franchise is showing signs of wear after the third installment (don’t get me wrong, I loved Stranger Things 3, just not as much as I loved 1 or 2).  They had good luck with the Marvel-based original content (although, again, these properties aged fast), but Jessica Jones, Luke Cage, Daredevil, and Iron Fist were canceled and won’t be back unless it is on Disney+.  I know people who like some of their imported series, but none has appealed to me.  Arrested Development was run into the ground by going back to the well once (maybe twice) too often.  Dead to Me is a critical success, but as much as I love Christina Applegate you can’t base a network on 13-episode seasons of sitcoms (about a woman searching for the killer of her dead husband) starring Ms. Applegate.

Yes, Netflix was second among networks with Emmy nominations with 117, but that says more about the fractured nature of network television than the quality of Netflix’s product.  Netflix Originals, as a producer, only got 13 nominations, mostly for GLOW (5 nominations) and the departing A Series of Unfortunate Events (3 nominations). 

This is all conforming to how economic forces work in a marketplace.  Netflix had vision to see the opportunities in the streaming market, and gets content providers to let them distribute streaming content for a modest payment.  When companies see how much profit Netflix makes, they decide that maybe they could make more money by distributing it themselves instead of leasing it to Netflix.  A bunch of companies enter the market, many find the technical requirements to challenging, and maybe, eventually, Netflix can make a comeback.  But that’s probably years away.

In the meantime, dump your Netflix stock and start boning up on the terms of service for CBS All Access, Disney+, NBC Streaming, HBO MAX, and all the other new market entrants, not to mention already established streamers like Hulu and Amazon Prime.  It’s going to be a bloodbath out there in the streaming market.