Netflix's Business Model Isn't Sustainable - Seeking Alpha Article
Fascinating dissection of Netflix's quarterly investor call from Seeking Alpha. It's a long article, but it has a lot of very interesting trend data and concludes that Netflix cannot continue on its current path without compromising the quality of the product at some point.
The short of it is that Netflix has seen tremendous revenue growth, which has excited investors. However, as I've pointed out in other discussions here, Netflix's content acquisition costs are skyrocketing as the deals they used to launch their streaming service have started coming up for renewal. As streaming usage has multiplied, the studios now want to get paid accordingly for supplying the content.
Also, now that Netflix has started bankrolling original programming, their expenses will only keep increasing at a much faster rate than revenues.
Another interesting point is that Netflix's cash-on-hand is only about $350 million. That may seem like a lot, but it's a pittance compared to what other media companies have. Here's the bottomline as written in the article.
In a nutshell, Hastings said content will continue to get more expensive to acquire, but Netflix will not overspend for content at the expense of their bottom line. If the company adheres to such fiscal responsibility, its product will undoubtedly suffer just as competition from a broad range of players intensifies. Netflix will ultimately face a chicken versus egg dilemma (or is it a double-edged sword?). It needs to secure more and more content to compete, but it cannot survive on the trajectory of its current and necessary shopping spree. While it really cannot afford to cut back strategically and theoretically, it will need to cut back from a financial sustainability standpoint.
As it stands, the Netflix business model of impressive growth combined with mind-boggling expenses that will only go up is simply not sustainable.
Sooner rather than later, Netflix will run into a cash flow problem. Netflix has short written all over it. Two years from now, I think we will be talking about one of two things: a sub-$100 NFLX share price or Netflix Streaming by (take your pick of) Apple, Google (GOOG), Verizon (VZ), or AT&T (T).
I think Netflix is basically in the middle of a land-grab like the old Wild West. Whether that's the right move or not, I can't say. Maybe it'll pay off. There's lots of untapped revenue sources, and by overpaying for licensing, they're raising the bar for other people to get into the biz. At some point they might have more bargaining power with the studios and might finally start dictating terms. Or not.
I subscribe to their service and I really like it. I don't believe it'll hold the line on pricing for long though. I think there's lots of potential for them to re-jig their subscription pricing over time, and right now their sort of giving it away to build a strong base. Eventually I think we'll see them charge variable rates according to number of new releases/old catalog titles you stream in a month. But first they have to train their market. That might be their gamble.
I DON'T USE Netflix.
THE BEST PIC Q is BLU, and they are a buck fifty at Redbox. THIS suits my lifestyle better,
but have heard nothing but luv from Netflix fans. Never tried it myself.
Get a ton of free content from On Demand.
HOPE Netflix makes it, but they better watch their wallet, and hope that their customers
figure out that they don't need them.
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Panny DVDA player
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Yeah, I agree that Netflix is making a land grab for market share. They were able to ramp up their service with low cost content (i.e., older movies and programs that have already made the rounds), but now they're trying to sustain their growth by inching into newer releases and original programming.
Originally Posted by kexodusc
With every added programming upgrade exponentially increasing costs, you're right that we'll likely see tiered pricing start to appear. $8 a month for what Netflix has proposed with their programming just cannot be sustained. They have considerable leverage with their subscriber base, but the studios have a lot of leverage of their own, given that they hold the keys to the content.
Already, you're starting to see some programs getting withdrawn from Netflix's streaming service and that might exacerbate with Amazon and possibly Dish/Blockbuster ramping up their respective offerings and potentially competing with one another for exclusive access to certain programs and movies.
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