This is How Netflix Can Get Back to Growth

Business Tech Top July 20, 2018
Netflix Back to Growth

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This is How Netflix Can Get Back to Growth

Netflix reported slow user growth on Monday and is showing signs of maxing out their price elasticity as more competitors enter their space. As a result, their stock price took a tumble, dropping about 14%.

Over the past five years Netflix has been growing its revenue at an average of 35% a year, but its spending has increased by 40% a year. This was okay with shareholders so long as that spending continued to bring growth and led Netflix down a path of being the world’s largest media company. If you multiply out that difference in spending it means their annual spending to revenue ratio has increased by over 25% since 2013. They’re becoming less and less profitable as each year goes by. That ratio is only going up as Netflix has made it clear that they plan to continue increasing their annual spending on content.

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I’ve said in the past that yes, Netflix should be spending aggressively on exclusive content, because that’s what’s going to differentiate themselves from the competition. But, I believe they’re spending money on the wrong type of content, and that’s what hurting them (More on this in a below).

The other pain point for Netflix is signs of maxing out their price elasticity. Meaning they are going to find it difficult to raise the monthly subscription fee much more than where it is now. At the moment, most subscribers pay either $11 or $14 a month depending on how many users you have and if you want 4K streaming. Those prices have already increased over the past few years. Netflix could probably get away with bumping those to $12 and $15 respectively, but any higher than that and customers will start to question if the service is worth it. Especially when you have HBO at $15/month, Disney coming with their own service, YouTube with its trove of free content on top of its $40/month cable TV content. If Netflix’s pricing becomes maxed out that means the only method of revenue growth will come via acquiring new users. Which is getting more expensive and is slowing as they now have over 117 million subscribers. And questions are being raised about how big their total addressable market is. That’s why shareholders reacted in such a panicked manner.

How Netflix Can Continue Revenue Growth

My proposal for Netflix to get back on the horse of growth is multi-faceted. First, they need to actively pursue the creation of new “franchisable” content. By “franchisable” I mean properties that lend themselves to having many sequels made and revenue streams created around them. Think Marvel or Star Wars, franchises that allow for dozens of spin-offs and have cult-like followings. Before you say it, yes, it’s easier said than done. But, with the $12 billion Netflix plans to spend on content this year a good portion of it should be allocated to creating potential decade spanning franchises. They’ve already done it with their wildly popular show Stranger Things,  which is heading into its third season while also having rumors of movies coming to its fictional universe soon. It’s a hit or miss business, but one or two big hits could bring in loyal fans for decades to come.

The other movie vertical Netflix should be spending considerably more on is animated and cartoon content. Actors get old and die, cartoons span generations. My parents watched Mickey Mouse and Tom and Jerry when they were kids and so did I. That’s the power of creating iconic cartoon characters. Disney is a $150 billion company built on the back of cartoon animals and princesses because they appeal to all audiences and build a special nostalgic connection like no other form of content can. To add on to this look no further than Pixar and Dream Works, who have been able to dominate the box office for years with their animated films. Creating a “Netflix Animations” studio would not be a bad idea.

Back to the Theater Stage

Netflix should go to the theaters, and I have a few reasons why. One, to qualify for Oscar nominations their movies need to be shown in theaters. This is something that Netflix does somewhat care about, they’ve done limited releases of their movies in the past solely for this purpose. I wouldn’t say this is a huge deal for them, but when movies are nominated or win awards they often get a box office bump so that’s always a plus.

2018 US Box Office

Movie theaters are making a slight comeback, after years of decline, in 2018 revenue is expected to grow. This is partly because of services like Movie Pass (another company that needs to start making profits ASAP), and because theater chains have been forced to innovate and vastly improve the movie-going experience. Indeed, there have been rumors floating around that Netflix is interested in acquiring a theater chain. One name that popped up was LandMark Theaters who have been openly for taking acquisition bids for over a year now. I think owning their own chain would be the best option for them. They could make their movies exclusively available at Landmark theaters allowing them to retain the same control and exclusivity they enjoy on their own platform on the theatrical stage.

Side Note: I’m not sure if this would be an antitrust issue because Disney has run into issues of trying to own their own theater chain in the past, but I think Netflix could get away with it. Predicting legislation is certainly not my forte, but this is something to keep in mind.

By creating more “Franchisable” content and distributing it in theaters Netflix could create highly valuable IP which in turn would allow them to continue revenue growth in two ways: continued subscription growth because people want to watch their exclusive content, but more importantly they could merchandize and create “experiences” around their IP. The Disney model. Disney makes billions in the box office with their movies, but they make even more by selling toys, clothing, theme park attractions, events, and experiences.

E.g. Star Wars fans spend hundreds of dollars on tickets to go to Star Wars Celebration every year on May 4th. There’s even a mobile Star Wars museum that’s on tour right now that’s moving from city to city with Star Wars memorabilia that fans can pay to visit. If you’re a fan that might sound awesome, if you’re not that might sound lame, but it doesn’t matter because it’s one of dozens of revenue streams that Disney is able to generate through owning such coveted IP.

If Netflix wants to continue to grow they need to look to one of their biggest competitors and take notes. Disney knows what it’s doing and if Netflix is smart they can do the same.