Netflix reminded us this week that TV content does not come as easily as switching on your flat screen. The company’s stock price dipped 5 percent after news that Walt Disney is starting its own streaming business. That has investors all cautious and concerned. Disney contributes a hoard of TV shows and movies. Pixar, Marvel Studios, Lucas Films, ESPN and a host of other studios fall under its brand. Safe to say, the end of this deal will certainly not go unnoticed.
There is another up-and-comer though. Facebook also launched its its own video content hub. It houses original niche programs not unlike your favorite YouTube show. The video shows under Facebook cover sporting content, celebrity news shows, cooking shows, reality shows and more. For some, the new venture from the world’s largest social network seems like a small blip. Then again, so was Netflix 2 decades ago, and look at it now.
Fatal flaw for Netflix
Tech and entertainment giants are catching onto Netflix’s fatal flaw. Over the next decade, this problem could hurt the company’s value by a lot. See, Netflix is a great platform. It is relevant and trendy, entertaining and full of shows that draws more subscribers year after year. The thing is though, the company is essentially great at finding other content makers then securing deals to stream their shows.
Netflix is good and searching for content and licensing deals to offer that content on its platform. It effectively rents and does not own an overwhelming portion of the shows it streams. Here lies the company’s fatal flaw. If other studios decide to seek greener pastures, what does that leave Netflix? Very little, I assure you, at least nothing close to what it offers now.
This highlights the sizzling race among video content providers for more original, in-house shows. A lot of the Netflix Originals do not really belong to the platform. Orange is the New Black, House of Card and several other hits attributed to the streaming giant are actually not its property.
There are two methods of securing original, in-house content: make it yourself or buy it. Neither option is as simple as it sounds, nor is either option cheap. Netflix is learning the latter fact the hard way.
The bane of Netflix originals
In a bid for more shows, the streamer burned through cash like few other content studios. In 2015, $900 million was spent. The company then realized that it needed more content to feed and fuel its growing subscriber base. A year later, $900 million in expenses nearly doubled to $1.7 billion. Growing still, Netflix expects to fork out up to $2.5 billion this year alone.
That is mostly financed through junk bond deals. Netflix is in a fair $4.8 billion long-term debt hole. All things considered, this makes the company a good investment when you factor in its near $75 billion market cap. The stock is sound and projected to grow in years come. However, that original content content will hurt it if other studios get the same idea as Disney.
Disney’s departure is still dire for Netflix. There is hardly a way to tell how many Netflix shows belong to the studio. Friday bring news of a deal being made with the Mickey Mouse studio to retain certain blockbusters movies and shows. The Star Wars films and Marvel movies are a part of that agreement.
Right now, management probably feels the pain of not owning enough shows. Cheer up though, the company bought a comic studio this week. More buys like the Millarworld purchase are bound to take place as the company leverages its original content shortfall.