Netflix in recent years has arisen as a streaming service that is trying to be an alternative to Hollywood. Rather than focus primarily on gaining the rights to stream prime time television or movies to attract customers, they are choosing to create their own. This has led to the company spending massive amounts on title creation without an obvious immediate return on investment. Can Netflix continue to greenlight the amount of projects they have in the past couple of years or will they be forced to cut spending drastically?
With traditional Hollywood movies the calculation is quite simple, you spend x amount of dollars, bring it to theaters and it makes y amount of dollars. If y is more than x you usually make a profit and its a win for the studio. Netflix instead is using the idea that if they bring enough people in from original series and have a low enough price point, they will be able to profit. The subscription model has worked before on many types of products, but the problem with Netflix is the products they are creating are costing way too much money.
If you look at Netflix's stock you can see that there is something called a p/e ratio and it is at 215. That is the price to earnings ratio and basically in laymans terms it is the amount of years worth of earnings that it would take to justify the share price. Technology price to earnings ratios are always a tad bit higher because you are betting on the future, not the present, but 215 is still an absurd amount. If you were just counting earnings it would take 215 years to earn back your investment. Why is this number so important? Simply put it shows Netflix isnt earning the money many people think they are. In fact I would say Netflix is probably burning money like crazy.
In my opinion, Netflix will not be able to continue the current amount of spending without some big changes I would expect to come in the future. Especially with net neutrality seeming to go out the window, Netflix is probably going to have to pay internet service providers to even allow base customers to have access to them, or they will charge the base customers. In my opinion an immanent price rise is unavoidable, especially with recent circumstances. If they want to continue spending the way they are, they are going to have to bring in more money.
I also expect that Netflix will start to crack down on sharing of accounts which is so prevalent. Almost everyone I personally know uses someone elses account. Because five people can all use the same account as long as they arent streaming at the same time, it makes it very easy to share. I would imagine they are going to do what similar services do and have you register a certain amount of devices that you can stream on. All these changes arent going to be friendly to the consumer, but they are probably necessary to the long term survival. I really like Netflix and how they are throwing a wrench in the traditional system, but they cant continue like this forever.
-Calaber24p
I just cancelled my account.... so probably not! Sell your NFLX stock!
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I bet if Netflix took some sort of countermeasure or wrote an algorithm against account sharing they'd nearly double their profits. Although with Net Neutrality gone and all now they're likely going to have to raise their prices, additionally less people are going to want to pay for access to it, So online streaming sites, and torrent sites are almost definitely going to skyrocket in popularity in the near future.
Is good to emphasize -crack down on sharing of accounts-, is totally correct, in my country as we don't earn good amount of $ we purchase package of 5 accounts so we can share the payment between us; so that means for example that that if Netflix has 3,000,000 15$ that probably most of the cases is a shared account, they are loosing millions of dollars just for that. But if they cancel the 5 devices account, they will be closing the doors to people who use the service without sharing the account.
Buena información, para estar informado sobre lo que aveces desconoces en el mundo del cine, saludos.!
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@calaber24p
Completely agree with you on P/E ratio. It so ridiculous. Huge, reliable companies have average of up to 20 p/e.
But, that’s what the stock market does, they invest in the future, perhaps there is something Netflix does well.
I'm afraid you're right.
They already cut some series that had very high production values but they couldn't afford - I'm thinking Marco Polo - but the account-sharing situation and the rise of some competitors is hitting them, hard. It's a shame, because I love the stuff they produce and I love their philosophy, but unfortunately the laws of the market are ruthless - and they'll have to survive somehow.
I will tell you more , you don't need to use someone's account, you create a new one use a trial for one month and then repeat :) That way you get their service for free.
Thanks for this article, I have thought about this before but never really took the time to look into the business model in detail. That PE is ridiculous! The content they are producing is outstanding though, I think they have a little bit of room to increase the prices, but not much...
Not to mention all the lawsuits they get thrown at...
Nice post. I love Netflix and I'd be happy to pay more per month, but also to see more product placements in movies and shows (So much better than commercials). I haven't watched any TV for about 2 years.
Agreed - Despite the fact that Netflix does produce some great content, there's no way they'll be able to keep putting things out at the rate that they're currently doing it at. The change in net neutrality is going to force them to have to implement changes that will affect the end user. This could be a higher monthly cost, some type of premium service, or less original content.