It's safe to say that Netflix (NFLX 1.74%) has had better days. The large media business has seen its stock fall 59% in 2022, driven by a bearish overall market and shrinking subscriber base. Thanks to a post-pandemic lull, further exacerbated by an extremely competitive streaming environment, Netflix is dealing with growth problems that it isn't used to facing.
The slowdown is forcing the company to rein in costs, especially in an area that is of the utmost importance to its long-term success. And that's exactly why I'm not interested in buying shares of Netflix today.
Limiting the company's biggest advantage
In 2013, Netflix released House of Cards, one of its first original series. Before that debut, the streaming leader licensed content from other companies, but as those companies recognized the growing importance of streaming, they launched their own direct-to-consumer offerings, pulling their content from competing services in the process. Netflix has rightfully focused on original films and series, and it has spent a total of roughly $80 billion creating content from 2014 through 2021, an outlay that no doubt contributed to the company's dominance in the industry.
But with slowing revenue growth of just 9.2% in the first half of 2022, compared to consistent double-digit gains historically, Netflix wants to rein in its investments in original content. Over the next couple years, management says content spending will be around $17 billion to $18 billion annually, in line with 2021's number.
"Our content expense will continue to grow, but it's more moderated as we adjusted for the growth in our revenue," CFO Spence Neumann said on the second-quarter earnings call. At the same time, after reporting two quarters of net subscriber losses in the first half of this year, management's goal is to get back on track growing its subscriber base. A notable part of that effort will be the introduction of ad-supported subscriptions.
In pursuit of franchises
The wildly successful releases of series like Squid Game, Money Heist, and Stranger Things have combined for billions of hours of viewing time. And movies like Red Notice and The Gray Man are two of the company's most successful films ever with both having star-studded casts.
Following the playbook of Walt Disney, Netflix executives hope to build franchises out of these movies in order to create cinematic universes with loyal fanbases. But this will be an uphill battle for the company given the characters and storylines don't have long histories like, say, the Marvel cinematic universe does.
With a cap on content spending, Netflix is also limiting its opportunity to create the next hit film or series with viewers. To introduce a sports analogy: It's like trying to score more and more points over time but only taking a set number of shots at each opportunity. To be fair, the company has clearly built up a meaningful level of competency in creating compelling content over the past decade, but it now has to hone that skill -- not everything can get the green light.
And the streaming industry is officially crowded. Having a first-mover advantage and access to cheap debt over the past several years was a major boon for Netflix. But as competition grows more intense than ever, Netflix is choosing to contain its biggest source of differentiation as a streaming service: fresh original content.
This move could prove to be a lucrative one from a financial perspective since it raises the chances Netflix continues to generate positive free cash flow in the years ahead. And I'm sure many investors would cheer such a possibility. Nonetheless, the streaming giant's next decade will be far more challenging than the last. For this reason, I choose not to be a shareholder.
