For many Netflix (NASDAQ:NFLX) shareholders, their investing thesis is one built on subscribers. The company is spending billions of dollars per year on exclusive content to entice new viewers, surmising that over the long term, this would drive enough subscriber growth to offset rising cash burn and the mound of growing debt. The company has long believed that original content was the key to this equation, and investors have gone along for the ride.
Morgan Stanley analysts led by Benjamin Swinburne recently released their eighth annual Streaming Video Survey, and the results confirm several assertions long maintained by Netflix. It also serves as notice to shareholders investing based on the company's subscriber growth that their thesis is intact -- at least for now.
Why the big focus on content? In its third-quarter 2017 shareholder letter, the company said, "Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes." Now we have more than just the company's word for it.
According to the Morgan Stanley survey, 40% of people cited Netflix as "the best source of original programming." Among Netflix subscribers, a whopping 56% reported "good original programming" as one of the primary reasons for choosing the platform. About the same amount said that "a broad selection of content" was the principal motivation for subscribing.
Netflix appears to know this and has plans to spend about $8 billion on programming in 2018, with much of that going to exclusive movies and television shows. In addition to producing many of its programs, Netflix has engaged the talents of high-profile creators like Ryan Murphy (Glee, Nip/Tuck), Shonda Rhimes (Grey's Anatomy, Scandal), Shawn Levy (Night at the Museum, Stranger Things), and Jenji Kohan (Weeds, Orange is the New Black) to generate new shows.
"There can be only one!"
The above quote was immortalized in the 1986 film Highlander, and while it's used in jest, it helps to illustrate a point. Some investors believe that for each market, there can be only one winner. Some people in the financial media perpetuate that mindset by reporting on any new competition as being a potential "Netflix-killer."
The company has long taken the position that with more and more consumers adopting streaming, it would never be a zero-sum game, or a case of winner-take-all. In its fourth-quarter 2017 shareholder letter, Netflix addressed the transition from linear TV to streaming and the growing list of competitors, saying (emphasis mine):
As this trend becomes increasingly evident, more companies are entering the market for premium video content ... The market for entertainment time is vast and can support many successful services. In addition, entertainment services are often complementary given their unique content offerings. We believe this is largely why both we and Hulu have been able to succeed and grow.
The Morgan Stanley survey bolstered Netflix's view of the situation, pointing out a growing number of users who subscribe to multiple services. The results show that 46% of Netflix users also watch Amazon.com Prime Video, while 58% of Prime members subscribe to Netflix. The survey also found that customers who use either platform are far more likely to subscribe to other over-the-top services.
Among Netflix subscribers, 21% also have Roku, 16% watch Hulu, 14% use Amazon's Fire TV (which can access multiple streaming options), and 9% have Apple TV. For members of Amazon Prime, 18% have Roku, 17% use Fire TV, 13% watch Hulu, and 10% use Apple TV.
This illustrates what Netflix has long said -- there will likely be more than one winner in the streaming space.
Believe it or not
Netflix bulls have long taken the company at its word that original content was the key to its success. Recent subscriber gains seemed to bear that out. In the company's 2018 first quarter, Netflix subscribers grew to 125 million worldwide, the result of adding 7.4 million new members. While much of that growth occurred in international markets, the company added nearly 2 million new customers in the U.S., a market many believed was near saturation.
This latest survey adds to the growing body of evidence that when it comes to content and competition, Netflix was right all along.