Rarely are things ever simple in the world of investing, and the current streaming wars are no different.
Whilst Netflix have been the market leader for some time, gigantic companies like Disney, Apple and Amazon have now joined by offering streaming services.
What I did notice, is that when Disney announced that they were going to launch Disney Plus, a lot of people instantly gave up on Netflix.
I believe that was a mistake.
The sole reason that Netflix exist is to produce content. For companies like Apple and Amazon, it falls into an additional service offering.
In many ways these two companies are playing a bigger game. They want multiple ways to get customer eyeballs and streaming is the latest customer acquisition path.
The other factor that needs to be considered ism original content. And Netflix lead this category by far. In 2019 they spent $12bn on producing original content.
Apple are also playing the original content space. Disney do to a lesser extent but most of Disney plus is essentially going to be an extensive back catalogue of movies.
Here’s why original content matters.
Original content means that you control the distribution of that content. As we have seen with The Office and Friends being withdrawn from Netflix, having control over your own content is powerful.
Birdbox is a prime example of original content. This film had 45 million views in its opening weekend. And we’ve all seen the viral nature of Stranger Things.
Original content gets people talking on social media. It gets coverage across various other media outlets and creates extraordinary free PR for companies like Netflix. Even generating FOMO.
Whilst Disney will also do this with their widely successful Marvel films, at this stage, they still want people to see these big hits at the box office. A completely different business model.
Getting into the numbers
Netflix is starting to mature as a company.
Revenue has grown substantially and isn’t looking to slow down anytime soon. In 2016, revenue was $8.8bn with it growing to $15.8bn this year.
There are some analysts predicting that revenue will grow to $30bn by 2022.
A lot of this revenue growth is thanks to their international subscribers which has grown by 23% contributing more then a 30% increase to total revenue.
The company still does have a lot of debt at this stage. In fact, it currently sits at $12.4bn. The main reason for taking on debt has been to develop its original content.
Debt in this current climate isn’t necessarily a big concern because it is so cheap. Netflix currently generate enough cash by EBIT to pay for the interest.
The real question around debt is when will they start paying it down and will this impact the share price.
My final thoughts
There’s a general law in business that it always comes down to two. Two companies will dominate market share with the remaining share distributed among a number of other smaller companies.
For me, Netflix will be one of the remaining two companies in this space considering this is their entire business model. I believe they will come out on top and continue to be Netflix + 1.