The Netflix Growth Problem

The streaming giant should have begun thinking differently about growth years ago.

The streaming giant should have begun thinking differently about growth years ago.

Most of the attention on Netflix‘s ( NFLX -1.24% ) earnings report this week has focused on the fact that the streaming leader lost subscribers for the first time in over a decade. The company’s total membership number contracted by 200,000 in the period, and in the current quarter, management expects a net reduction of 2 million more.

These results are in stark contrast to the pattern of tremendous growth that Netflix has achieved over more than two decades. But with the company reaching a degree of market saturation at 222 million subscribers, it’s worth asking how it could grow over the long term from here.

The answer is… Netflix may have a problem. 

Person watching TV at home.

Image source: Getty Images.

How Netflix makes money

The Netflix business model is simple. It charges monthly subscription fees to users, with tiers based on how many simultaneous streams users want their households to be able to access. There’s no need to decide between a cheaper tier with ads and a more expensive one without them — there just are no ads. It doesn’t operate any theme parks, and has only minimal box office releases. Total subscriptions and the prices per subscription are the only two meaningful levers of the business. 

This model has been incredibly successful for years, but it may have limits. Once Netflix reaches market saturation — and it may be nearing that point now — its only growth lever will be subscription prices. That, too, will have limits because consumers tend to be price sensitive, especially when they have numerous options, as they already do in streaming.

If Netflix wants to keep growing revenues and earnings substantially from here, its business model may need to change. 

Netflix simplicity versus Disney’s waterfall

Simplicity may have been Netflix’s calling card for the last two decades, but complexity in a content business is actually how media giants make a lot of their money. Contrast Netflix’s simplicity with Disney’s ( DIS -2.79% ) business complexity. Here are just a few tools Disney has in its business toolkit that Netflix doesn’t currently have. 

  • Advertising: Will Netflix look to find new ways to monetize content, including advertising tiers? 
  • Theme parks and toys: Disney has an enormous theme park and merchandising business that it uses to monetize its popular intellectual properties. Netflix could try to expand into these areas, but content could be a challenge. 
  • Franchises: If Netflix wants to expand into theme parks, toys, games, and other areas, will it be willing to start building more of its series into long-running franchises rather than canceling hits after just a few seasons? 
  • Gaming: Will gaming be a significant growth driver, and can it be an incremental revenue driver? Today, Netflix is viewed on other providers’ platforms, making gaming a more difficult launch for it than it would be for a console or streaming hardware provider. But it has launched a handful of mobile games.
  • Sports: Can Netflix expand into sports? It would make its service stickier and could allow it to boost revenue per user if done well, but Netflix hasn’t shown any interest in sports thus far. 

There are growth options for Netflix, but none of them seem like simple or natural moves. And therein lies the core problem. 

Competitors are here to stay

Netflix had the streaming video business largely to itself for about a decade, but now, the big media companies are bringing their A games to it. Disney+ has an exploding user base and a content vault that stretches back for decades, while Warner Bros. Discovery ( WBD -4.10% ) has its own prestige content and a large library of niche shows. Then there are Apple‘s (NASDAQ: AAPL) Apple TV+, Comcast‘s (NASDAQ: CMCSA) Peacock, and Paramount Global‘s (NASDAQ: PARA) Paramount+. All of these companies are giants with plans to throw billions of dollars at the task of drawing in streaming video viewers. And that doesn’t even consider Alphabet‘s (NASDAQ: GOOG) YouTubeTV or Amazon‘s (NASDAQ: AMZN) Prime Video offering.

I’m afraid that Netflix is now facing a growth problem with deep roots that reach back to when it single-handedly dominated streaming. The company chose at the time not to get into theme parks or sports or gaming, and now those options will be even harder for it to pursue. And investors seem to be realizing that this growth problem is bigger than it previously appeared. 

Read this article on Motley Fool

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