Could Netflix Be Declining?

Written by Jennifer Clark
Posted December 24, 2019

Netflix (Nasdaq: NFLX) has been the king of streaming, but over the last few years, that has changed. 

When Netflix first emerged, it wasn't exactly a pioneer. Its business focused on mailing DVDs to customers. I had a Netflix subscription back then — well, I shared one with my brother. We’d order the DVDs we wanted and mail them back when we were done watching them. It was easy; we'd just put the discs back into the provided packaging and place them in our mailbox.

Simple and convenient — that was the appeal of Netflix. As it got even more simple and convenient for its subscribers, Netflix became cool. The phrase “Netflix and chill” became popular. Now, it was socially acceptable to sit around and watch an entire TV series in one day, also known as “binge-watching.” 

A lot of companies got on board with this extremely successful business model. Thanks to Netflix, subscription services became even more popular. They offered the illusion of cost savings, with a monthly charge rather than a pricey one-time upfront fee. $9.99 a month was doable for the average consumer.

Fast forward to today and there are multiple streaming services on the market. Hulu, Roku, Amazon, Apple, and Disney+ are just a few popular options disrupting Netflix’s streaming dominance. 

Netflix is being dethroned. A Needham forecast indicates that in 2020 Netflix could lose up to 4 million U.S. subscribers from its premium tier. The company has been increasing its subscription-tier pricing over the past few years. I used to pay $9.99 a month, and now I pay $15.99 a month. It's still affordable for me, but if there were no new content or nothing I liked, $15.99 a month wouldn't be worth it. 

While Netflix has been good about producing its own original content, if it invests money in a show that isn’t binge-worthy, it’s a loss. With Hulu, Apple, and Amazon also providing their own original content, that puts even more pressure on Netflix to produce content that’s “worth it.” 

Netflix’s CEO, Reed Hastings, doesn’t seem to be too worried — or he’s at least trying to convince the company’s shareholders that he isn’t. In Netflix’s third-quarter conference call, he said:

From when we began in streaming, Hulu and YouTube and Amazon Prime back in 2007, 2008 we’re all in the market. All four of us have been competing heavily including with linear TV for the last 12 years. So fundamentally, [with the entry of Disney and Apple] there is not a big change here. It is interesting that we see [them both] launching basically in the same week after 12 years of not being in the market.

Reading that, you might think, “Oh, it’s just business as usual.” Of course, this massive company has big competitors focused on stealing some of its market share — it always has. However, there are indications of Netflix's decline.

The company has had a negative cash flow of $2.9 billion for the last 12 months while also increasing its investment in content to $15 billion in 2019. Its debt is up 20% from last year. These are signs that things might not be going too well for Netflix. Another competitor could easily swoop in and become a leader in the industry.

Netflix is on the path to losing its market share. Though it paved the way for a new way to access entertainment and aided in the downfall of the traditional cable company business model, the time has come for another company to rise and innovate this industry.

Until next time, 

Jennifer Clark
Pro Trader Today
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