CASE STUDY: NETFLIX

CASE STUDY – NETFLIX

ASSIGNMENT REQUIREMENTS:

  1. Brief write-up on Netflix
  2. Based on the state of the company (slow growth in terms of subscribers) provide your solutions to:
    1. Product strategies that should result in more subscribers, more options and anticipated competition.
    2. Pricing strategies to accompany product strategies (is bundling an option, for example).

Streaming video no longer impresses investors, so media companies need a next act

  • It may be time for streaming services to introduce more out-of-the box ways to grow subscribers.
  • Netflix’s dramatic share plunge in January may put more pressure on legacy media companies to show growth.
  • For the past two years, media and entertainment companies have been dead-set on showing Wall Street that they have a strong streaming video strategy to counter traditional pay-TV decilnes.
  • The thesis was follows: Taking more of a consumer’s cash directly, rather than collecting negotiated fees from a wholesale pay-TV model, will eventually be a better business than bundled cable TV. Or, if not better, at least good enough to survive.
  • The thesis worked for a while. The pandemic accelerated the push to streaming video, as people looked for entertainment options while stuck in their houses. Quarter after quarter in 2020 and 2021, Netflix, Disney, AT&T’s WarnerMedia, NBCUniversal’s Peacock, ViacomCBS’s Paramount+, and other streaming services have shown consistent growth, as CNBC has charted.
  • Along the way, Disney nearly doubled from a pandemic low of about $79 per share to $155 to start 2022. Netflix continued its torrid pace, gaining 71% from its March low to the start of the year.
  • But after Netflix forecast first quarter subscriber additions that missed analyst estimates, investors seem to have soured on streaming, or at least curbed their enthusiasm.
  • Netflix now has 222 million global subscribers. It is predicting just 2.5 million new net additions in the first quarter after adding 8.3 million in the fourth quarter. Netflix shares are down 37% this month alone. Disney has declined 11% in January and reports its earnings on Feb. 9.
  • Superficially, it seems odd that one low Netflix quarterly forecast would scare investors from the entire segment. But if Netflix growth is slowing, that may mean the world’s total addressable streaming market is significantly lower than previously expected.
  • LightShed analyst Rich Greenfield told CNBC he still believes that number is “six, seven, or eight hundred million subscribers.” But it’s possible the number is actually far less.
  • If that’s true, the value proposition around the streaming industry changes dramatically. Netflix could focus on raising prices and cutting back on content spend as profitability as investors treat it more like a value stock. Free cash flow could begin to matter more than future subscriber growth.
  • Cutting content spending would likely slow subscriber growth even more, especially as newer competitors ramp up their content spend and global reach to build out their subscriber bases. NBCUniversal’s Peacock announced it’s doubling its content spend to $3 billion 2022 and $5 billion “over the next couple of years.” WarnerMedia plans to expand HBO Max to many countries internationally in 2022, Jason Kilar told CNBC this week. HBO Max is currently in 46 countries, compared to more than 190 countries for Netflix.
  • “If you start slowing down content spending when everyone else is raising, by nature the risk is you’ll have less hits,” said Michael Nathanson, an equity analyst at MoffettNathanson.
  • In late 2020, Disney dramatically bumped its global estimate of Disney+ subscribers by the end of 2024, projecting between 230 million and 260 million. (The old range was 60 million to 90 million.)
  • Given Netflix’s low first quarter subscriber forecast, there’s plausible concern Disney won’t reach its new target. That could push investors to further sour on streaming — making NBCUniversal’s decision to live with billions of dollars in near-term losses from Peacock much more questionable strategically.

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