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3 Threats to the Dominance of Netflix

By MyWallSt Staff - Updated Oct 14, 2019 at 12:44PM

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Despite being at the top of the pile for almost a decade, the streaming giant is in real danger of being knocked from its perch.

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If you haven't heard of the acronym "FAANG" before, it stands for Facebook, Amazon (AMZN -0.26%), Apple (AAPL 0.63%), Netflix (NFLX -0.08%), and Alphabet's Google, and is meant to represent a basket of big technology stocks.

Here's how CNBC's Jim Cramer, who coined the term FAANG, summarized the scenario that Netflix now finds itself in: "We gotta get Netflix the hell out of FAANG." With Netflix stock falling 21% so far this year and a range of competitors looming large on the horizon, there is every chance that the once-great streaming service could fall hard and fast, for three main reasons.

1. Content

One of the biggest problems for Netflix this year has been the increasing costs it has incurred in securing new subscribers. Marketing and streaming content spending has risen significantly from $308 per new subscriber in 2012 to $581 today. This is made even worse by the fact that the streaming giant's second-quarter earnings report in July showed a slowdown in growth, along with a decline in domestic subscribers.

Red Netflix logo on black background

Image source: Unsplash.

Another major issue is the fact that Netflix is still heavily reliant on third-party content, which makes up 63% of its viewing hours, despite spending millions per year on original content. In fact, two of the three top viewed streams on Netflix are Friends and The Office, which will depart the service in the next two years, with little effort shown to replace them other than the expensive acquisition of Seinfeld for 2021.

There are some signs of desperation as the company recently signed a $200 million deal to employ out-of-favor Game of Thrones showrunners David Benioff and D.B. Weiss to create original content. With the pair receiving scathing criticism for how they concluded the fantasy series, they will also have time constraints, having signed up to create a new Star Wars trilogy. It seems as if Netflix is desperately throwing money at some big names in order to revitalize its dwindling numbers.

2. Reliance on credit

There are some extremely worrying signs surrounding the rising debts of Netflix. Netflix has been cash flow negative since 2014, "spending twice as much as it has earned ... in an effort to differentiate itself from other streaming services" -- a precarious scenario for any company.

In early 2019, Netflix raised $2 billion in debt, raising its total collective debts to $14 billion, with further projections from its latest earnings report suggesting a continued negative cash flow. This cycle of debt-fueled growth cannot be sustained forever.

If Netflix continues along this plan of constant borrowing for growth, it will need to find a way to increase its subscriber numbers. One possible consequence of this trend could be the creation of a negative feedback loop if the market continues to go against Netflix, potentially minimizing the company's access to low-cost borrowing. This may have adverse effects on the company's ability to acquire and create new content.

With so much competition now in the market and access to third-party series limited, it may be time for Netflix to focus primarily on its original content, as it has enjoyed so much success with shows like Stranger Things and House of Cards.

3. Competition

Finally, the biggest threat to Netflix is the ever-growing number of competitors. 2019 may be remembered as the year the Streaming Wars really kicked off. Even though the company has remained largely unchallenged, despite Amazon's best efforts, it now faces competition from HBO, Hulu, Disney (DIS 2.21%), Apple, NBCUniversal, and Time Warner.

Disney, in particular, appears to be a dangerous opponent and the most likely to prove a "Netflix killer." With almost a century of content creation prior to Netflix's existence, as well as original content in big-name acquisitions such as Marvel and Star Wars, Disney has a clear advantage. Apart from this, Disney+ has brand power and will come in a lot cheaper than Netflix at just $6.99 per month.

Though likely the biggest threat to Netflix, Disney is certainly not the only one. Apple, Amazon and HBO will also look to carve out some territory in the inevitable battle for streaming market share. Netflix is at a disadvantage in regard to pricing too, as it increased its prices earlier this year to $13 for its basic package, much to the annoyance of subscribers, who can now get Apple TV+ for $4.99, with Amazon, Disney, and NBC boasting lower prices.

Many will be looking to Netflix's Q3 earnings in mid-October as a make-or-break moment for the company, as it needs to show investors it still has potential for growth, or risk falling to its biggest competitors.

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Image source: MyWallSt.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Netflix. Read the full disclosure policy here.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$249.11 (-0.08%) $0.19
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$455,170.00 (0.55%) $2,472.75
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$124.26 (2.21%) $2.69
Apple Inc. Stock Quote
Apple Inc.
AAPL
$173.19 (0.63%) $1.09
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
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