3 Threats to the Dominance of Netflix

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If you haven't heard of the acronym 'FAANG' before, it stands for Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX) and Google (NASDAQ: GOOGL) and is meant to represent a basket of big technology stocks.

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To summarize the scenario that Netflix now finds itself in, we will look at the man who coined 'FAANG', CNBC's Jim Cramer. In his own words earlier in October: 'We gotta get Netflix the hell out of FAANG'. With Netflix stock falling 21% this year and a range of competitors looming large on the horizon, there is every chance that the once-great streaming service could fall hard and fast, for three main reasons. 

1. Content

One of the biggest problems for Netflix this year has been the increasing costs it has incurred in securing new subscribers. Marketing and streaming content spending has risen significantly from $308 per new subscriber in 2012 to $581 today. This is made even worse by the fact that the streaming giant's second-quarter earnings in July showed a slowdown in growth, along with a decline in domestic subscribers. 

Another major issue lies in the fact that Netflix is still heavily reliant on 3rd party content, which makes up 63% of its viewing hours, despite spending millions per year on its own original content. In fact, two of the three top viewed streams on Netflix are 'Friends' and 'The Office', which will depart the service in the next two years, with little effort shown to replace them other than the expensive acquisition of 'Seinfeld' for 2021. 

There are some signs of desperation for the company as it recently signed a $200 million deal to employ out-of-favor Game of Thrones showrunners David Benioff and D.B. Weiss to create original content. With the pair receiving scathing criticism for how they concluded the fantasy series, they will also have time constraints, having signed up to create a new Star Wars trilogy. It seems as if Netflix is desperately throwing money at some big names in order to revitalize its dwindling numbers. 

2. Reliance On Credit

There are some extremely worrying signs surrounding the rising debts of Netflix. Netflix has been cash flow negative since 2014, "spending twice as much as it has earned...in an effort to differentiate itself from other streaming services" -- a precarious scenario for any company.

In early 2019 alone, Netflix raised $2 billion in debt, raising its total collective debts to $14 billion, with further projections from its latest earnings report suggesting a continued negative cash flow. This cycle of debt-fueled growth cannot be sustained forever.

If Netflix continues along this plan of constant borrowing for growth, it will need to find a way to increase its subscriber numbers. One possible consequence of this trend could be the creation of a negative feedback loop if the market continues to go against Netflix, potentially minimizing the company's access to low-cost borrowing. This may have adverse effects on the company's ability to acquire and create new content.

With so much competition now in the market and access to third-party series limited, it may be time for Netflix to focus primarily on its original content which has enjoyed so much success, including the likes of 'Stranger Things' and 'House of Cards'.

3. Competition

Finally, the biggest threat to Netflix is really the ever-growing number of competitors. 2019 may be remembered as the year the Streaming Wars really kicked off. Whereas the company has remained largely unchallenged, despite Amazon's best efforts, now, Netflix faces competition from HBO, Hulu, Disney, Apple, NBCUniversal, and Time Warner. 

Disney (NYSE: DIS) in particular appears to be a dangerous opponent and the most likely to prove a 'Netflix killer'. With almost a century of content creation prior to Netflix's existence, as well as original content in big-name acquisitions such as Marvel and Star Wars, Disney has a clear advantage. Apart from this, Disney+ has brand power and will come in a lot cheaper than Netflix at just $6.99 per month. 

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Though likely the biggest threat to Netflix, Disney is certainly not the only one. Apple, Amazon and HBO will also look to carve out some territory in the inevitable territory war for streaming market share. Netflix is at a disadvantage in regards to pricing too, increasing its prices earlier this year to $13 for its basic package, much to the annoyance of subscribers, who can now get Apple TV+ for $4.99, with Amazon, Disney and NBC boasting lower prices. 

Many will be looking to Netflix's Q3 earnings in mid-October as a make-or-break moment for the company, as it needs to show investors it still has potential for growth, or risk falling to its biggest competitors.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Netflix. Read our full disclosure policy here.