Much ado was made about Netflix Inc. (NFLX, Financial) missing its subscriber growth numbers for its second quarter last week, prompting many dire forecasts and warnings from analysts. The company’s most recent third-quarter results exceeded analysts’ expectations by showing a modest return to growth.
For the past three years, digital streaming consumers’ demand for original series and productions has been insatiable. Netflix has been able to sustain its growth and maintain customer loyalty, in part, through its unrivaled ability to deliver a high volume of new content that meets this ravenous demand.
If one believes that supplying a constant stream of original and compelling content is one of the recipes for success and market stability, an important question that needs to be addressed is how does the breadth of Netflix’s original offerings stack up against the content of the new kids on the block, Disney (DIS, Financial) and Apple (AAPL, Financial)?
Which media company has the most content on hand?
Consider the following inventory assessment of Netflix and its new competition collected by Credit Suisse:
The investment bank's content tracker shows Netflix has many more original content releases slated for the third quarter, in particular for international original series, as well as Hollywood dramas, including Martin Scorsese’s highly-acclaimed production, "The Irishman," planned for the fourth quarter.
Credit Suisse notes that Netflix’s original slate dwarfs the new entrants. It tracked 48 titles in development at Disney+, 43 at Apple’s TV+ and 23 at HBO Max . This compares with Netflix’s 71 English-language dramas, 62 non-English series, 32 comedies and 108 films currently in development.
These figures indicate that Netflix will continue to spend heavily to ensure turnover in its inventory of new programming. This analysis of original content inventory on hand clearly indicates that though their streaming services are priced well below Netflix’s standard rate, the extent of content offered by Disney and AT&T is limited by comparison.
The big question, however, is what will be the nature of consumers’ media streaming package preferences? One school of thought holds that the copyright holders of tried and true programming staples, such as "Friends," "The Office" and "Seinfeld," will command the greatest audience, regardless of all the other content offerings, however compelling.
Another question arises: Will consumers opt for trading among the services or paying for more than one bundle at a time? Only time will tell, and those who claim to already have the answers are engaged in a fool’s errand.
One of the looming dangers of the packages offered by the new competitors, is their multi-tiered complexity. AT&T (T, Financial) has a confusing array of packages with different price points for diverse content. Disney will offer enhanced services in addition to its basic Disney+ package. Will consumers pay up for better content? Can Disney deliver original content beyond the scope of its existing franchises that will appeal to a worldwide audience?
No one can predict with certainty whether the new global streaming market will evolve into a zero-sum game, or one where multiple parties can compete by offering diverse packages that are fungible to consumers. It very well may be the case that the plethora of current varied offerings is so overwhelming to customers that they prefer to stick with what they know best. Disney and AT&T may have secured the rights to TV content that currently remains popular, but what about their international offerings?
Netflix has produced content for worldwide audiences that is region-specific. For example, the company has made numerous productions for an Indian audience in response to the growing demand in that country for streaming services. A question arises: What is the market appeal for "Friends"Ă‚ and "The Office" in India, Europe and Asia?
Forecasts are difficult to make for a market in its infancy
Realistically, how far is the reach of Mickey Mouse? Will it be sufficient to secure a loyal international audience? No one knows the answers to these questions because it is difficult to quantify as yet unknown consumer preferences, viewing behavior and the link between new subscribers and quality, compelling original offerings. Investors and analysts alike are in uncharted waters here.
At this point in the burgeoning digital original content market, one factor is certain and, for the moment, inexorable: spending for securing and producing original content will skyrocket. One of the principal beneficiaries of the new streaming wars are established Hollywood directors, producers and A-list actors. A bidding war for talent has broken out over the past year that has caused expenses for producing and directing new programs to escalate rapidly.
It is ironic, but Netflix, in a sense, is a victim of its own success in being able to supply a high-volume, never-ending supply of original content that very likely will, in the near to intermediate term, create an original content spending environment of mutually assured destruction. Every increase in original content spending by one media player will lead to a comparable match by all others competitors, leading to an expenditure scenario that will have a deleterious financial impact for all digital streaming companies.
The difficulty inherent in projecting the financial impact on Netflix from new media entrants is the scope of the acquisition and customer retention costs that will be incurred in order to maintain subscriber growth and keep existing customers from defecting to the competition.
Despite predictions that increased competition among new implacable media entrants will eliminate the Netflix “moat,” the digital streaming original content market, compared to legacy linear TV, is, relatively speaking, in its infancy.
Despite the premature conclusions of some securities analysts, what this means is there are a host of imponderable factors that will likely have an impact on the status of the market players, but whose significance, at this point in time, remains murky at best and, at worst, unknown.
Disclosure: I have no positions in any of the securities referenced in this article.
Read more here:
- Seth Klarman on 'Born Bulls'
- Yield-Hungry Investors Should Consider Preferred Stocks
- Investors Exit Stock Funds
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
