wsj.com Opinion | How Bad Will It Get for Netflix?
Holman W. Jenkins, Jr.
Netflix got there fustest with the mostest, in the apocryphal words of a Civil War general. Its dominance of the streaming entertainment business is reflected in its market cap, which rose 15-fold, to more than $150 billion, in eight years. But a line in its latest earning report was a stunner: Its U.S. subscribers actually dropped in the second quarter.
More Americans left the service than signed up. Wow.
Netflix blamed a weak lineup of new shows. It said growth would soon return. And maybe it will, but the episode reminds us of one way streaming is different from cable TV: the ease of quitting. And with the arrival now of determined competitors, Netflix’s next decade is likely to be very different from its last.
Take the loss of its two most popular shows, “Friends,” which AT&T’s WarnerMedia is reclaiming for its forthcoming streaming service, and “The Office,” which NBCUniversal is taking back for its own streaming service. Netflix’s Reed Hastings and Ted Sarandos anticipated this moment. They long since got Netflix heavily into the business of producing original shows. Netflix expects to spend a massive $15 billion this year. But the shows and franchises it creates will be new and unfamiliar—Netflix doesn’t have the library of cultural comfort food that some of its rivals have, nor the guaranteed access to studio franchises and content hoards that produce instant cachet with viewers.
Into this challenge Disney plans to inject a new complication. In the fall, it will launch its own much-awaited streaming service at $6.99 a month, about half the $12.99 Netflix charges for its basic high-definition service.
With diabolical intent, Disney seems out to scramble viewer perceptions of what constitutes a “premium” service. Netflix positioned itself as the basic cable of streaming, valued for its breadth of watchable stuff even if you then also subscribed to HBO or Showtime for their cultural landmark shows.
Disney clearly wishes to unbase these expectations. Its price point is meant not only to get Disney’s service taken up but Netflix’s canceled. Disney further upped the ante this week by announcing that for the same $12.99 Netflix charges it will throw in Hulu and ESPN+ as well.
This seems like a plan to get Netflix demoted from the must-have tier to the nice-to-have tier, which I’m pretty sure is not how Netflix imagined it would be positioned in the future streaming wars.
All this comes when Netflix watchers are noticing that throwing money at stars and producers is (unsurprisingly) no guarantee of good results. Then there’s another wrinkle: Disney and others have ways of generating revenue from content that Netflix doesn’t have, including from advertising, cable fees and theme parks, etc. Even worse, several giant competitors, such as Apple , Amazon and AT&T, basically are using streaming as a sweetener, sometimes even as a free add-on, for much larger underlying businesses.
Now throw in the possibility that these complicated economics, along with the industry’s giant collective overspend on content, will be hitting the fan just as the economy enters recession. Will consumers treat streaming subscriptions the way they did their cable bills? Back in the day, Americans cut back on food before they cut back on TV. Perceptions of streaming’s superfluity of content may be very different. If you drop Netflix, how much you will really miss a show you haven’t found time to watch in weeks? Plus you can always renew and catch up later. Netflix was once the last service a consumer might think about canceling. Not anymore.
Netflix’s proposition to consumers used to be simple: “more content than you can possibly watch for the price of a movie ticket.” With the ease of switching and proliferation of alternatives, customers will start asking “which service has the most enticing lineup this month?” With its lack of sticky unrelated offerings, Netflix will be under constant pressure to roll out eye-catching new content. It will also be under pressure to cut deals with rivals allowing its content to be bundled with theirs. Is Netflix up to the creative challenge, especially when it lacks the safety net of, say, live news and sports that some rivals may have?
This column does not make stock recommendations (though you would have done well if you heeded my Netflix-isn’t-doomed column in 2011). Let’s also recognize that Netflix’s executive team has shaked, shimmied and adapted with the best of them. Purely from a sporting perspective, though, its business model will soon be facing a competitive environment completely unlike the one in which it thrived till now.
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