Netflix Inc. (NFLX, Financial) has played a crucial role in the digital content revolution. It pioneered streaming video, helping transform the way people consume content forever.
Thus far, Netflix has managed to maintain its dominance of the streaming market, even as new competitors have popped up to carve out niches of their own. Yet, as in any business, being the first to do something is no guarantee of a permanent place at the table. The company may end up learning this lesson the hard way as existing streaming competitors expand their footprints and formidable new players enter the market.
Amazon.com Inc. (AMZN, Financial) and Walt Disney Co. (DIS, Financial) are each pouring billions of dollars into their own streaming platforms. Netflix, which continues to lose money despite its enviable market share, could find it hard to compete.
Amazon: leveraging e-commerce power
Amazon is betting big on its Prime Video service. According its latest guidance, the e-commerce giant will invest as much as $7 billion on video and music content in 2018. In its first-quarter filing, the company disclosed it had already invested $1.7 billion in the first three months of the year, a 13% increase from a year earlier. Amazon can certainly afford the expense. Its $3.56 billion first-quarter profit contributed to a record high cash balance of $47 billion.
A monumental cash pile is not the only thing that sets Amazon apart from the pack. Its pricing structure also offers several benefits. Specifically, Amazon does not sell Prime Video on its own. Rather, it bundles it into its Prime membership service fees. With members paying $119 per year on average, Amazon has a very lucrative user base that it can leverage as it pushes further into streaming.
Disney: the king of intellectual property
Disney is the newest entrant to the streaming scene, having unveiled Disney+ to much fanfare last month. Priced at just $6.99, the new streaming service appears to be gearing up to make a play for Netflix’s crown. Disney’s vast media empire is extremely profitable. At first glance, its nearly $4.5 billion cash pile seems to be dwarfed by that of Amazon, but that is not quite the case. Disney also has $67.5 billion in treasury stock, which it could easily leverage toward further investment. The company clearly has the financial resources necessary to undercut Netflix on price without much fear of damaging its bottom line.
Disney’s greatest advantage in the streaming war is not money, however. Rather, it is its vast library of intellectual property. The vaunted Disney Vault is merely the tip of the iceberg. The media titan also owns the rights to Star Wars, Marvel Comics and Pixar. No company on the planet can boast such a valuable library of content. While Amazon and Netflix have to spend big money to license content or develop its own, Disney can lean on a proven stable of profitable content at no cost.
Netflix: market leadership through deficit spending
Despite its recent subscription price hikes, Netflix remains deeply in the red. Licensing existing content, as well as producing its own original content, is extremely expensive. To keep its status as market leader, the company cannot afford to let up. Its content budget for 2019 has reportedly expanded to an eye-watering $15.1 billion. The company expects a free cash flow deficit of $3.5 billion.
Netflix has been able to tap capital markets regularly to fuel its spending habits. It did so most recently in April, when it raised another $2 billion in debt. Before this raise, the streaming giant was carrying $12.3 billion in long-term debt. Lenders and shareholders have been willing to be patient thus far, but it is doubtful that it will be able to maintain confidence if profits never materialize.
Verdict
Though Netflix claims its 2019 operating deficit will mark the peak, it is hard to see how it will be able to throttle back investments in content appreciably. Pressure from competition, meanwhile, will make future price hikes less viable. Amazon and Disney have profitable businesses and vast financial resources to bring to bear. Netflix, on the other hand, has no external business lines to fund its operations.
While the streaming giant has a great advantage in terms of first-mover advantage and current market leadership, it will take massive and persistent investment in content to maintain that position. Whether it can do that on a sustainable basis, let alone at the level of profitability implied by its current $166 billion valuation, is far from certain.
Disclosure: No positions.
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