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Netflix Has Lost the 2020s Entertainment War

The third season of the hit series “Stranger Things” is out on Netflix and the reviews are generally good (with some exceptions). But the well-received nostalgic horror show isn’t enough to overcome a structural defect in Netflix’s business model.

I know that Netflix (NFLX) enjoys a $163 billion market cap, and reported $4.52 billion in earnings Q1, and is continuing to add eyeballs–subscribers–at a record rate.

Here’s the bad news: in 2019, the pie for the next decade or so has been sliced, and Netflix didn’t get a piece. It’s totally their own fault.

The winners here are AT&T, Disney, and to some extent, Google and Amazon. To use a different analogy, if entertainment for the next decade was a game of musical chairs, Netflix is still running around the circle, and the music has stopped.

To win the next decade, a company needs to have more than eyeballs. It needs production, deep intellectual property, and a robust physical presence in the “last mile” to those eyeballs. Netflix has one out of three, which isn’t enough.

Let’s look at the winners. AT&T owns DirecTV, Warner Media, HBO, Cinemax, CNN, Turner (TBS), and of course its own mobile, digital and cable operations. From soup to nuts, AT&T can produce, distribute, and deliver content over multiple streams. Disney—well, c’mon it’s Disney. The Mouse owns 20th Century Fox, Marvel Entertainment, Lucasfilm, ABC, and a plethora of popular cable networks. It’s really insane.

Disney is about to launch its own streaming service, and most are betting it will take a bite out of Netflix. Between AT&T and Disney, the largest slices of the entertainment pie have already been served.

Second-tier winners are Amazon and Google. Amazon owns an incredible amount of online content, and an unbeatable worldwide distribution system capable of bringing any product to any home in America in almost impossible timeframes. Amazon also owns one of the most well-developed online storage and delivery systems, rivaling Microsoft. And finally, Amazon owns its Prime streaming service, along with its home automation system featuring Alexa that easily rivals Netflix. Amazon boasts 101 million Prime subscribers to Netflix’s 149 million, only 60 million of whom are in the U.S.. Add to that: Amazon offers way more benefits to its subscribers than Netflix.

Google owns YouTube, Google Fiber, and the Internet’s default search provider. Youtube Red, the paid subscription offering, is struggling (the company has never publicly released subscriber numbers), but there’s plenty of time for Google to recover, and Youtube has an unlimited source of content, with ads built-in. Alphabet, Google’s parent, is literally into everything, from self-driving cars (Waymo), to curing cancer (Calico), to thermostats (Google Home, née Nest). Google is an 800 pound gorilla and it can be anything it wants to be.

There’s also Apple, but it’s still an enigma, so I won’t go there.

Netflix owns its subscriber service, as long as it offers the service ad-free.

Twenty-three percent of respondents to a recent Hub Entertainment Research survey said they would definitely or probably drop their Netflix subscription if it began running ads at its current price point or a dollar cheaper, according to Streaming Media. That percentage would represent a loss of nearly 14 million subscribers from Netflix’s 60 million paid subscribers in the U.S.

Netflix could lose almost a quarter of its subscribers if it started running ads, study shows, CNBC, July 5, 2019

The company also has its own content, but is losing access to content it does not produce itself (Disney is basically gone). Netflix produced 38 original movies in 2018, and so far in 2019 they’ve done 25, which will yield a total of 50 at that pace. They’ve got a lot of other content in the hopper, but they lack a compelling way to present that content. HBO combined its online presence with its traditional cable model to capitalize on Game of Thrones for 10 years. Stretching out the delivery of content creates lasting buzz and anticipation. Netflix dumps an entire season at once. In a few weeks, everyone who wants to binge-watch Stranger Things 3 will have done so, and the buzz will have passed.

Netflix should have bought a cable network or two. It should have moved further into U.S. distribution channels, not just online using other people’s access to homes. It should have focused less on international markets. But it didn’t.

In 2004, Blockbuster Entertainment, taken public by Viacom in 1999, two years after Netflix’s founding, had 9,000 stores, and was the king of the video market. Netflix went public in 2002. By 2010, Blockbuster was in bankruptcy. The last of the Blockbuster stores, in remote locations like Bend, Oregon and in Alaska, are all but gone (the company is long gone).

The consensus, and the corporate myth preserved by Netflix, is that Netflix killed Blockbuster. But that’s not true at all. Viacom killed Blockbuster. Viacom is still around, with a profitable stable including BET, Paramount, and Nickelodeon. Viacom could have invested in Blockbuster but instead it cashed in.

I’m not saying that Netflix has killed Netflix. Netflix will probably be around for a long time, but it missed its chance for the next decade. Unless it cracks the intimidating walls, and bridges the corporate moats that the leaders have built around their business models, Netflix will be relegated to table scraps in the entertainment war.

I’ll binge-watch “Stranger Things 3,” and I’ll eagerly await the next season of “Lost in Space.” After that, at $12.95 a month, with the kids glued to Prime and YouTube, I am not sure I’ll continue to pay for the streaming service.

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