https://www.marketwatch.com/story/netflix-sees-sharks-approaching-from-both-sides-in-apple-and-disney-2018-01-22
Netflix sees sharks approaching from both sides in Apple and Disney
Therese Poletti
Netflix Inc.’s view of its competition is a study in the evolution of the
digital streaming business, and the most recent update shows that Netflix
realizes rivals are closing in from the realms of tech and media.
Netflix reports earnings every quarter in a shareholder letter that always has
a section titled “Competition,” which addresses rivals in the streaming space.
As an example of how that space has changed just in the past year, consider
that in reporting first-quarter earnings last April, the company mentioned only
“skinny bundles” and Amazon.com Inc.’s sports ambitions in that section; as
part of its fourth-quarter blowout earnings on Monday, Netflix mentioned
Amazon, Apple Inc., Facebook Inc., Alphabet Inc.’s YouTube and Walt Disney Co.
in just three paragraphs.
Netflix basically said more on Monday about Apple‘s streaming ambitions than
the iPhone maker has said about its own moves in the space, specifically
predicting how it will incorporate original content it has begun to purchase.
“Apple is growing its programming, which we presume will either be bundled with
Apple Music or with iOS,” Netflix said, noting that as the trend toward
streaming video becomes more evident, more companies are entering the market.
It was the second consecutive quarter Netflix has mentioned Apple in the
“Competition” section. Last quarter, Netflix basically regurgitated a report
last August by The Wall Street Journal, noting that Apple was reportedly
planning to spend $1 billion to buy and produce original content to beef up its
iTunes business, a big part of its services revenue. Netflix’s more specific
comments Monday could indicate that it is seeing more of tech behemoth Apple in
Hollywood, perhaps in bidding wars for talent and shows amid a mutual quest to
create original content.
Apple is not alone among tech companies making a play for video content, but
there are differences, which Netflix pointed out. For instance, it doesn’t seem
to think Facebook and YouTube are truly competitors, as they are supported by
ads instead of subscriptions.
“With their multibillion global audiences, free ad-supported internet video is
a big force in the market for entertainment time, as well as a great
advertising vehicle for Netflix,” the company said about Facebook and YouTube.
The biggest competitor to Netflix may be coming from the other side of the
content feed, in the form of former partner Disney. Disney split with Netflix
last year, saying that it would not renew a contract that provided Netflix
subscribers with Disney movies while launching its own streaming services,
which will be buoyed by Disney’s acquisition of $52 billion in select assets
from 21st Century Fox. It’s also worth noting that video-streaming service
Hulu, regularly mentioned by Netflix, will become majority-owned by Disney
after its deal with Fox closes.
Disney to charge 'substantially' less than Netflix for streaming
In the company’s staged “interview” with an analyst, Netflix CEO Reed Hastings
admitted that he will subscribe to Disney’s service, just as many Disney and
Fox executives subscribe to Netflix. Hastings stressed that other streaming
services can be complementary to Netflix instead of a substitute, a constant
refrain from the company.
Netflix’s main response to new competition is to bolster its content offering
even more, in an effort to attract and retain customers before these budding
rivals have a chance to build and deliver their own video library. The company
now plans to spend $7.5 billion to $8 billion on content this year, an increase
that will add further pressure to its already stressed balance sheet.
“We’re growing faster than we expected, which allows us to invest more in
original content than we had planned,” executives said in their letter to
investors, noting that Netflix’s negative free-cash flow is expected to as much
as double to $4 billion this year.
With the company’s far better-than-expected increase in subscriber numbers on
Monday, putting the stock on track for a $100 billion in market cap for the
first time, it’s hard for investors to find fault with Netflix at the moment.
Even before Monday’s late gains, Netflix shares were up 64.2% in the past year,
while the S&P 500 index had increased 24.7%.
However, it’s clear that more big competition is looming, and Netflix’s
free-spending ways could be an issue if its subscriber growth flags, despite a
major head start on both tech rivals seeking content and content producers
aiming for streaming services. How the company navigates waters that are being
actively filled with new sharks will determine if that $100 billion valuation
will continue to grow in the coming years.