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Netflix Inc. (NASDAQ:NFLX) has reworked the leisure panorama, bringing streaming media into the mainstream. That transformation has confirmed costly, as the corporate licenses huge quantities of content material to stream on its platform.
The corporate’s content material licensing behavior has grown more and more costly in recent times. With competitors intensifying, that downside will seemingly solely worsen.
Prices proceed to escalate
At instances, the tempo of content material license price escalation appears to come back as a shock even to senior administration. Throughout a quarterly earnings name in October 2019, for instance, CEO Reed Hastings gave the impression to be below the impression that content material prices had risen by roughly 30% to 50% over the previous 5 years. Chief Content material Officer Theodore Sarandos swiftly corrected Hastings, nevertheless, stating that the licensing price of the most well-liked collection had risen 30% within the earlier 12 months alone.
Licensed content material continues to make up a big a part of Netflix‘s bills. As Investopedia’s Brian Beers defined in August, that is mirrored within the streaming media firm’s steadiness sheet:
“Securing licensing agreements is among the largest bills for Netflix. On the finish of 2019, Netflix had $24.5 billion of content material property on its steadiness sheet, up from $20.1 billion the 12 months earlier than. Of this, licensed content material accounted for $14.7 billion in 2019 and $14.08 billion in 2018. The corporate is devoting extra of its monetary assets to creating its personal TV applications and movie. It had $9.eight billion in produced content material in 2019, up from $6 billion in 2018.”
Whereas Netflix has continued to speculate closely in its unique content material library, it’s nonetheless spending considerably extra on licensed content material from different producers, studios and media corporations. That isn’t prone to change anytime quickly, that means that Netflix will proceed to license content material that’s ever extra pricey to acquire.
The streaming wars intensify
Even when Netflix had the monetary wherewithal to constantly outbid its rivals, a rising proportion of top-shelf streaming content material is not within the licensed media market in any respect, as a substitute discovering new properties on rival streaming companies. The Walt Disney Co. (NYSE:DIS) has made an enormous wager on streaming with its Disney+, Hulu and ESPN+ platforms, as produce other rivals.
Rivals’ streaming efforts have solely intensified following the outbreak of the Covid-19 pandemic, which has disrupted conventional distribution channels, as Bloomberg’s Tara Lachapelle noticed on Dec. 14:
“Till now, main studios had treaded rigorously of their relationships with theater operators as a result of the trade was too vital. In any case, Disney took a one-third share of the $11.three billion field workplace in 2019, whereas AT&T Inc.’s Warner Bros., Sony and Comcast Corp.’s Common break up one other third. However within the wake of Covid, the businesses appear to be giving up on cinemas in some methods. Even with a vaccine, theater patronage may by no means bounce again to the extent wanted for any leisure large to justify prioritizing theaters over streaming. Warner stated this month that every movie it places in cinemas subsequent 12 months will instantly turn out to be accessible on the $15-a-month HBO Max app for one month.”
With extra streaming companies available on the market, Netflix faces each higher competitors for top-tier content material licenses and the lack of content material to their house owners’ platforms. That could be a downside since Netflix‘s unique content material isn’t its hottest. Based on The Leisure Technique Man, a broadly adopted media analyst, simply 4 licensed exhibits account for a whopping 6% of all Netflix views within the U.S.
Netflix has gained over a number of enthusiastic buyers with a narrative of long-term streaming media dominance. Sadly, competitors is just intensifying in an ever extra fragmented streaming market. Whereas Netflix stays the highest canine in streaming for now, the excessive price of licensing content material, along with inevitable losses of top-tier content material to different companies, will make it arduous to maintain its place.
In my evaluation, Netflix is unlikely to have the ability to overcome the elemental challenges and disruptions which are reworking the streaming trade. Over time, competitors is prone to eat into Netflix‘s market share and its share price.
Disclosure: No positions.
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In regards to the creator:
John Engle is president of Almington Capital Service provider Bankers and chief funding officer of the Hashish Capital Group. John makes a speciality of value and particular scenario methods. He holds a bachelor’s diploma in economics from Trinity School Dublin, a diploma in finance from the London College of Economics and an M(BA) from the College of Oxford.