The picking apart of Netflix

This piece, by CNBC’s Todd Haselton, looks at AT&Ts plans for expanding HBO’s on-demand offering – a move that will pull even more content off Netflix. This is the final paragraph of Haseton’s piece:

The service is just one of many new streaming products set to launch in the coming years. Disney’s $6.99/month Disney+ will launch this November and will include 18 of Pixar’s 21 movies, Marvel films, 30 seasons of the Simpsons, Disney animated movies and the Star Wars franchise of films.

I’m starting to wonder if Netflix’s approach, the most walled-garden of all the on-demand players, is beginning to be a weakness.

Its decision to neither become a portal service, with add-on channels like HBO for an extra fee, nor allow itself to be part of someone else‘s portal, risks leaving Netflix isolated.

Its Originals are successful, but incredibly expensive to keep producing year-after-year. Netflix is putting incredible pressure on that part of its business, as its back catalogue is being whittled away: Disney, Pixar, Star Wars, The Office, Friends – all going or gone as competitors have started to go it alone, making their own channels which are then made available through portals like Amazon Prime Video or Apple TV.

How long can Netflix keep up the investment its making in Originals? Good question – and one this piece in The Information examined recently, suggesting the company might be getting a little more budget-conscious:

[Ted Serandos, Netflix head of content] told the group that spending on film and TV projects, particularly big budget movies, needed to be more cost-effective, according to people familiar with the meeting. Netflix has long measured the efficiency of its TV shows and movies using a ratio of their cost to a measure of viewership that gives more weight to new subscribers and those viewed at risk of canceling, say former employees. Mr. Sarandos made clear that in the future big-budget projects should bring in lots of viewers, a shift from the past when they might have gotten a pass if they were expected to get buzz and build industry credibility. 

In other words: acting like a normal TV company, even down to ordering pilots of shows before going ahead with a full series.

The Information ultimately concludes that the big spending isn’t over yet, but investors might want to question how long it can continue:

This kind of programming blitz has helped Netflix maintain subscriber growth—it hit 149 million global subscribers in the first quarter, up 25% on a year earlier. But it has also kept the company spending more money than it brings in, requiring it to continue borrowing money. Last year, for instance, Netflix had a cash shortfall of $3 billion and has projected that will increase to $3.5 billion this year. Netflix has said it expects this cash burn to decline starting next year.