In 2021, Netflix (NFLX -0.08%) spent $17 billion on content. And this year, the top streaming company plans to spend $18 billion to bolster its offering. Any way you look at it, these are huge sums of money. But that level of outlay is absolutely necessary for it from a competitive standpoint.
Compared to newer, smaller, and less-well-funded streaming rivals, Netflix's scale, and the massive content budget that scale allows it, are the primary advantages it has today. And it's extremely important for it to keep spending heavily if it wants to maintain its lead in the market.
Image source: Getty Images.
It's no longer about convenience
For much of its history, Netflix dominated its space because its streaming service was simply a better user experience than traditional cable TV. Consumers could watch whatever they wanted whenever it was convenient.
The company's subscriber growth demonstrates this. From the end of 2011 through the end of the most recent quarter, Netflix went from 26.3 million subscribers to 221.6 million. By contrast, the number of cable TV households in the U.S., which peaked at 105 million in 2010, is forecast to end this year at 68.5 million.
But because there is now a vast array of on-demand video entertainment options at consumers' fingertips, Netflix's previous advantage has eroded. People can watch Walt Disney's Disney+, Warner Bros. Discovery's HBO Max, or Alphabet's YouTube in their living rooms or on their smartphones virtually anywhere.
The convenience factor has, in short, been completely commoditized. The company's subscriber growth has stalled, and its share price is down nearly 75% from its 52-week high. Consequently, it's now strikingly clear that to woo and hold onto subscribers in the next decade, Netflix will need to find more effective ways to differentiate its content.
It's all about content
Developing high-quality video content can be an incredibly expensive endeavor. But with 222 million global subscribers and $30 billion in 2021 revenue, Netflix can still outspend its rivals for content on an absolute basis. Even better, thanks to its huge user base, doing so makes financial sense on a per-subscriber basis. That's why the streaming services that have the deepest pockets are the ones most likely to survive over the long term.
Netflix was the first to take streaming entertainment seriously, going back to original content it ordered up in 2013 with House of Cards. The competencies it built up over the years to develop hit TV shows and movies cannot be understated. And its efforts to cater to foreign markets by creating local-language content are working. Netflix currently has ongoing productions of new content in more than 50 countries. And three of its six most-popular series seasons of all time are non-English language titles.
Adding video games to the mix will also help differentiate its content offerings. The business has acquired a gaming studio this year and announced the purchase of another to bolster its service and hopefully attract more subscribers.
More customers translates to more revenue, which means more money to spend on content. Management's guidance that it expects to lose 2 million net subscribers in the current quarter has led many investors to question Netflix's prospects. Clearly, management must continue to focus relentlessly on expanding the membership base.
Today, as many as 100 million households are accessing Netflix by sharing the passwords of family members and friends. Netflix management says that is about to get significantly harder. A cheaper ad-supported option should also help convert some of them into paying accounts, and it might attract price-sensitive consumers who have up to this point never been Netflix customers. It will support increased revenue, and consequently, the company's content investments, which are sure to only increase going forward.
For streaming services, it's all about scale. Netflix must hold on to this advantage.
What should investors do?
In order to remain a Netflix shareholder, you have to believe that the company's recent troubles are a temporary situation and that membership growth will continue in the years ahead. An attractive valuation now makes it easier if you've been on the sidelines. On the other hand, if you dumped the stock, then I'm sure you have accepted the fact that the next stage of Netflix's operating history will be much more difficult than the booming success of the past decade.
While I recognize Netflix's massive opportunity to add subscribers internationally, I think its public willingness to introduce an ad version, which is a major strategic pivot for management, signals tougher times ahead. As a result, it's best that investors temper expectations going forward until the business can once again start adding customers at a rapid pace.
