Netflix (NFLX 0.28%) still stands above all the other streaming networks, with 220 million subscribers and $8 billion in revenue. However, it continues to take a beating from the many other streaming companies that are trying to topple it and capture market share.
While it tackles these issues from atop its precarious perch, there's a major drawback that it has compared to almost all of its competition -- and it makes owning Netflix stock look a bit risky right now.
A completely new streaming landscape
Let's walk back a few steps to see what led to this situation since Netflix didn't change, but the world has. Disney had Disney+ in plans before the pandemic, and it was first launched in the U.S. in November 2019, just prior to COVID-19.
The unforeseen circumstances that followed had a massive effect on the streaming industry. Disney+ was adopted at a greatly accelerated rate, Netflix itself enjoyed unusually high subscriber growth, and several other studios jumped on the bandwagon with their own streaming services to grab a piece of the pie.
The results is that there is now a flooded market, with many services that are not differentiated (save for which titles they feature). It also means that Netflix may be in trouble. Not only did its subscriber growth fall, but subscriber count actually fell in the 2022 first and second quarters.
Netflix still has a lot going for it, so far retaining the highest subscriber count. It continues to roll out popular original content that's drawing new subscribers in some regions, and it has remained profitable, as well as cash flow positive.
However, as competitors make inroads and subscriber count falls, Netflix has had to change its model to stay competitive. It recently added gaming services to its platform, and it's in the process of working out a free, ad-supported version similar to Roku to add revenue and keep more viewers.
However, there's something else it's missing that could be a key ingredient in a winning model.
What other streamers have in common -- and Netflix doesn't
Leaving out Roku, the other major streaming channels are Disney+, HBO Max, Peacock, Paramount+, Amazon Prime, Apple TV+, and Discovery+. That's a lot of competition for the same dollars. Out of all these, the only one besides Netflix that doesn't come along with a film production studio that releases to theaters is Apple. Disney owns several studios, including Marvel and Pixar, in addition to the Disney label. Both HBO Max and Discovery+ are owned by the newly created Warner Bros Discovery. Peacock is owned by Comcast, which owns Universal Studios, Paramount+ is owned by Paramount (PARA -2.76%), and Amazon recently acquired MGM Studios.
At various points in time, Netflix had deals with many of these companies to stream their content on its platform. However, many of the studios have pulled their content from Netflix to stream on their own channels. With some exceptions, much of Netflix's content at this point is from its own studios.The benefit of that system is that Netflix can send its content straight to streaming, which is a good thing for subscribers. It also makes for fresher content instead of recycled content from other studios.
However, it also becomes very expensive. And that's where Netflix's competitors have an advantage. The studio-owned streaming sites -- which are all of the above except for Netflix, Roku and Apple -- take billions of dollars in proceeds at the box office. That goes a long way toward covering production expenses before bringing content to streaming, and that operational model gives them more resources to cover straight-to-streaming content as well.
If Netflix wants to be able to compete with these studios, it needs the resources to produce content on the same level as the major studios. Prior to the pandemic, it was moving in that direction. But with all the streaming companies pouring money into new content to capture market share, Netflix has also raised its content spending, without the benefit of ticket sales to cover costs.
I first noted this as an advantage for Disney, but the new management at Warner Bros Discovery is moving to make the most of the model as well. It recently said that it would focus on sending more feature films to theater before streaming, and it's also entertaining the idea of launching an ad-supported tier.
Without the option of sending films to theaters, Netflix will have a much harder time recouping costs for high-caliber films. And if it wants to stay competitive, it needs high-caliber content.
What are Netflix's options?
So far, Netflix is taking the other approach -- moving toward the ad-supported model to get more viewers and make money in other ways, a similar model to Roku. Roku's advertising business is strong, enough so that it was able to roll out its own original content last year. They have been a great success with viewers, and Netflix may succeed this way, with an ad-supported tier, as well.
Does it make sense for Netflix to release its films to theaters? That's another avenue it might be pursuing. It has done so in a limited way in the past, and according to Bloomberg, it's in talks with AMC (AMC -6.28%) and Cinemark Holdings (CNK -4.87%) about a trial run for some of its upcoming releases.
The only network we didn't talk about is Apple, which is unique because it's a streaming-only studio attached to another business. It's also not banking on a huge library to capture viewers. So while it may be losing tons of money on the service, it's negligible on Apple's total business.
Where does all this leave the top streaming provider? I would say Netflix is in a risky place right now as it struggles to find its footing again, and investors should keep that in mind.