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This Is the Single Most Important Aspect of Netflix's Dominance

By Neil Patel – Aug 27, 2021 at 11:33AM

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And it's why newer entrants will have a hard time keeping up.

There are a bunch of different streaming services out there that consumers can pick from today. Top choices include AT&T's (T 1.01%) HBO Max, Amazon Prime Video, and Walt Disney's (DIS -1.04%) Disney+. And then there are smaller services that just launched this year, like ViacomCBS' Paramount+ and Discovery's (DISC.A) (DISC.B) (DISCK) discovery+. 

But Netflix (NFLX -0.07%), the trailblazer of the streaming industry, still stands above the rest when it comes to success in this space. The Los Gatos-based innovator now has 209 million subscribers and generated $7.3 billion of revenue in the most recent quarter. One critical factor has led to this remarkable success. 

Let's find out how vital Netflix's first-mover advantage is in the highly competitive streaming market. 

A person's right hand holding a TV remote; a TV with several streaming options in the background.

Image source: Getty Images.

Early bird gets the worm 

Netflix co-founder and co-CEO Reed Hastings figured out pretty early on that the internet was going to fundamentally change the way people consumed video entertainment. Armed with this insight, Netflix began streaming domestically in 2007 and internationally in 2010, and the service is offered in over 190 countries today. The stock has followed this major expansion, skyrocketing more than 200-fold in the past 14 years. 

Underpinning this incredible rise is the simple fact that Netflix was the first mover in the industry. In the early days, there was no direct competition. Netflix was attracting users because it allowed people to watch their favorite shows and movies whenever they wanted. The convenience was everything, and it resulted in the business adding massive amounts of customers year after year. 

Further boosting Netflix's prospects was the rising number of broadband-enabled households in the U.S. In 2007 (the year Netflix launched streaming in the U.S.), there were 72 million of these households in the country. Last year, this figure eclipsed 120 million. Riding the internet's growth helped propel Netflix. 

Achieving scale matters 

The primary objective for Hastings was to gain as many subscribers as possible before rivals decided to take streaming seriously. And the reasoning is straightforward. Because Netflix essentially has a fixed-cost structure (lots of money is spent on content up front, but the costs for delivering it to your device are minimal), so the more customers (and revenue) it has, the more it can spend on content. It's classic economies of scale. Netflix had a huge head start compared to peers, and it's now able to spread out its massive content budget among the most customers, something that is proving to be a significant advantage.

This year alone, the company is planning to spend $17 billion on content. To put that in perspective, Disney+ is forecasting content spend of $8 billion to $9 billion annually by the year 2024. Netflix was able to reach scale when the competition was lower, and now it's in a superior position economically. Not only do smaller competitors have to fight for eyeballs when there is an overabundance of entertainment options today, but they have to do so with much smaller content budgets. That's quite a difficult spot to be in, which could be why AT&T's WarnerMedia division and Discovery announced a merger in June. The idea is to gain size in order to have a chance at battling the big boys. 

The investor takeaway 

It's fascinating to see how new-age, internet-enabled businesses compete with one another. While there are definitely many options for consumers these days, from a purely economic standpoint, Netflix is in the best position. Its 209 million customers allow it to spend the most cash on acquiring and developing compelling content, which would be hard for others to do unless they raised large amounts of debt. Even then, winning new subscribers would prove to be extremely challenging. 

For investors, understanding how crucial a first-mover advantage is in today's competitive landscape can help you better identify winning stocks for your own portfolio. And getting in on the ground floor could positively change your life financially. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel owns shares of Amazon and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool recommends Discovery (C shares) and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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