There's no denying Netflix (NFLX +0.34%) remains the ruler of on-demand video. While Walt Disney's (DIS +2.85%) Disney+ is growing fast, Netflix's 204 million paying customers maintain the company's commanding lead of the streaming market. It typically pays to own the strongest name in any given industry.
It would be naive, however, to ignore clear strategic decisions Netflix is making that suggest change is coming...big change. These are subtle hints that Netflix's hold on its piece of the market is weakening. The next 10 years are going to be much more difficult than the past 10 have been. That's going to work against the stock.
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Plenty to worry about
Giving credit where it's due, Netflix isn't just the powerhouse of the streaming arena. It created the industry itself, and has led it since its inception.
Nothing invites competition like clear success, however, which is why Disney, Comcast, AT&T, and Amazon -- just to name a few -- have all upped their streaming games in recent years or created a streaming brand from scratch. Netflix proved the model's viability.
This new competition is now forcing Netflix to respond. Two of these responses, in sum, subtly suggest the company is starting to play a little more defense and a little less offense, underscored by an alarming prediction from an independent onlooker.
One of the responses in question is the current crackdown on password sharing.
1. Why a password crackdown now?
It's always been a challenge, but never treated like a glaring problem. Non-paying consumers "borrow" a paying customer's account to enjoy programming, but in many cases it wasn't worth Netflix's time or effort to put an end to it. Now it seems to be. Many subscribers are now being forced to verify their log-in credentials when signing into the app.
On the surface it just seems like good business, particularly in light of market research outfit Magid's estimate that around a third of paying Netflix subscribers share their passwords with non-paying viewers. Those unauthorized users will now be forced to sign up for a paid membership.
That's a bold assumption on Netflix's part, though, if that is indeed the plan. As nScreenmedia's Colin Nixon put it, "a [Netflix] password shared is not a subscription lost." This subset of streamers may only be willing to watch Netflix for free, and some analysts fear the tightening control of account usage increases churn risk for existing members.
Now read between the lines. Needham analyst Laura Martin and Benchmark analyst Matthew Harrigan both believe it's a sign that Netflix knows slower growth awaits.
2. Why the interest in licensing originals now?
The other big change Netflix may be putting in place is licensing of its own exclusive content to other entertainment names.
It's been neither confirmed nor denied by any parties involved. But "people familiar with the situation" suggest to The Information that Netflix is in discussions with media brands like Comcast's NBCUniversal and ViacomCBS, seeking to monetize original-but-aging content like its 2018 film Bird Box.
It's savvy on the surface. If these originals are no longer needed to attract or retain customers, why not license them and extend their useful life?
There's a downside to doing so in a market as crowded as today's streaming arena is, though. That is, if consumers figure out they'll eventually be able to view a hit show or movie at a lower price (or even for free) later, many will be patient.
In this vein, Hub Research's recently released Evolution of Video Branding report touts Netflix as the name with the best original programming, jibing with other, similar reports. If not all of those originals also remain exclusives, Netflix's marketing firepower weakens.
3. Analysts and onlookers calculating a loss of leadership
Then, of course, there's the sheer strength of new competition. Digital TV Research analysts expect Disney+ will be serving 294 million worldwide subscribers by 2026, surpassing Netflix's headcount in the process. That outlook may or may not correctly factor in the effect of price increases Walt Disney will have to put in place between now and then. Still, it speaks volumes about the potential of newcomers to also disrupt the status quo.
Keep it in perspective
Don't jump to a sweeping, absolute conclusion. Netflix's best days may be in the rearview mirror, but that doesn't mean the days ahead will be bad ones. It's still the leader of a fast-growing industry, and the company's finally got enough scale to cover all its costs. That is to say, the streaming titan has remained firmly net-profitable since 2017.
Still, this is a stock that's commanded a premium valuation and driven gains based more on its prospects and less on its present. Now those prospects are waning.
If selling it creates unwanted tax consequences now, there's nothing wrong with holding it for the foreseeable future. But would-be newcomers may want to hold off until there's better clarity about Netflix's true hold on its share of this fast-growing but quickly changing market. Try something else in the meantime.
