The Future of Netflix: The End of an Era

Transcript

0:00 Speaker A: Netflix lost 200,000 subscribers last quarter, which is the first time in history that they've not been growing all the while. Speaker A: The subscription video on demand market has been growing 25% year over year. Speaker A: Just Netflix has been losing market share all the way from 40% to now, less than 30% of the market in the US at the same time, Netflix's stock has come down from 700 at its peak to 170, losing 70% of the value just in this year and being marked by Goldman Sachs as a seller.

0:30 Speaker A: In addition, they've gone through double layoffs in May, 2% of their workforce, and now another 300 people in June. Speaker A: Hi, I'm Sander and I'm really excited to explore with you why this is happening and is Netflix coming to the end of the road and what are the options and strategies they're using to keep growing. Speaker A: So why this is happening. Speaker A: Number one is that there's less and less of content available on Netflix. Speaker A: There's almost half of the content compared to the time 10 years ago when they launched their streaming service because everybody else has been taking their content away.

1:00 Speaker A: And at the same time, Netflix has had to continue increasing their investment into content. Speaker A: So they have half the content, but they're spending almost six times as much as they did before. Speaker A: At the same time, that's still not enough. Speaker A: If you look at the competitors like Disney and Discovery and HBO Max, who are all spending more than Netflix is spending and who come with an existing catalog content, which Netflix doesn't have either.

1:26 Speaker A: And more and more content is being pulled away from Netflix at the same time. Speaker A: So they're going increasing content investment while having less content. Speaker A: But when you look at the quality of the content, I was using the IMDb ratings for the top 10 most popular shows on the platforms. Speaker A: Now then the average score of Netflix, when we look at it first, like October 2020, Netflix was in the top right there, above Disney, above Prime Video. Speaker A: But if you look at it now, Netflix has fallen to number four, still 7.6 average score for the top most popular shows.

1:56 Speaker A: But Apple TV plus is leading with almost 7.8, followed by Disney plus closely and H so in content quality, if we use the user ratings for that, you can see that they're lagging behind and users are appreciating content on other platforms more. Speaker A: At the same time, if you add Netflix Studios business like the content that they actually produce, rather than just the originals that the commission elsewhere, the score drops even below Amazon prime video at 6.9 on IMDb.

2:26 Speaker A: So the stuff that Netflix actually creates in house. Speaker A: So there's a big challenge on the quality side. Speaker A: And you could argue that, yes, Netflix still has got more content available today than, for example, HBO Max or Disney plus, not really competing with Prime Video, that's got a vast, vast catalog. Speaker A: But if you look at the quality shows, which here are defined by real good as the score above 7.5 and higher, you can see that HBO Max actually has got more shows available than Netflix does in that category.

2:55 Speaker A: And they're very closely followed, you know, in the average category of 6.0 and higher, which is a good quality content. Speaker A: Prime Prime Video is higher than Netflix in that category. Speaker A: So in the quality of content, even though the amount might be higher, the stuff that is on the platform is less of quality. Speaker A: At the same time, the platform is the most expensive one. Speaker A: Netflix is charging more than anybody else in the industry and has kept increasing its prices year over year for the last three years.

3:22 Speaker A: And if you look at the bang for buck, like how much content are you getting for the dollar you spend, then Prime Video is absolutely outstripping anybody else. Speaker A: But if you look at the quality content space, then also actually HBO Max is higher than, for example, Netflix in that category as well. Speaker A: But Reed Hastings doesn't really see the rest of the subscription platforms as its competition. Speaker A: Reed Hastings, the CEO CEO of Netflix, sees the majority of the competition coming from sleep.

3:51 Speaker A: And I kind of agree with you. Speaker A: If you expand sleep to also every bit everything else that users can do online, meaning playing games, watching other services, going to social media, watching TikTok, etc. Speaker A: Which really expands the competitive landscape. Speaker A: And this is what I think is actually what we should be comparing Netflix against, rather than comparing it to other subscription services, because those pose the largest challenges for Netflix.

4:17 Speaker A: Number one is the talent pool, then discovery and monetization. Speaker A: Let's dive into each one of them on talent pool. Speaker A: For every single global TV or movie executive, there is at least 1,000 TikTok creators. Speaker A: That really is 5% of the whole platform on TikTok are creating or posting themselves, which just expands the talent pool massively. Speaker A: So if we went to, you know, also from the distribution side, you know, just having 100 channels available our TV to now on streaming services, we have thousand thousands of hours.

4:47 Speaker A: Content produced actually on social platforms has tens of thousands of hours complete abundance of content that is produced every minute, for example, like the CEOs. Speaker A: And Netflix can decide only for the six and a half hours of content that they produce every day. Speaker A: That's about 2,800 hours of content produced yearly. Speaker A: But YouTube produces the same amount of content in just five minutes with 500 hours of content uploaded, the same amount in that Netflix makes in a year.

5:16 Speaker A: YouTube gets posted every five minutes. Speaker A: That's just an insane difference in the talent pool that they have access to. Speaker A: Not to even talk about the different formats that those platforms have really innovated on, like interactive video or vertical video, live video or using AR and making the creation process much more simpler. Speaker A: Now moving on from the content side to discovery, Netflix's average session is just two videos per session.

5:41 Speaker A: And somebody like TikTok is seeing actually 26 videos consumed per session. Speaker A: So the number of triggers that the platform can get from all the way from, you know, what somebody searched, searching, scrolling through, stopping, view throughs, click throughs, what they're adding to their list is limited on what you can get on Netflix. Speaker A: Just for two choices that the consumer makes on TikTok, the consumer makes 26 choices, plus you can add all the other metrics that they are engagements that they have on the platform, you know, duetting with other creators or adding it to your favorites or commenting, which are not really available on Netflix at all.

6:17 Speaker A: So the number of triggers that input that you get to make the discovery so much more better is so much more powerful on TikTok or YouTube and otherwise also represented in App Store ratings. Speaker A: TikTok boasts 4.8 together with Apple TV plus, which I was surprised about as well. Speaker A: YouTube's got 4.7. Speaker A: And you can see Netflix is lagging behind with 3.8. Speaker A: You can see the consumer satisfaction also respected, really reflected in their rating App Store ratings as well.

6:43 Speaker A: And the overall distribution and creation is controlled. Speaker A: You know, Netflix's executives decide what's going to be coming on the platform, what they commission the content or what they license for the platform. Speaker A: And what is completely algorithmic, what gets put in front of people, what people upload first of all is completely open and then what gets put in front of people is completely algorithmic. Speaker A: So you could really have many, many more skews of different interest groups that can benefit from having more content available.

7:09 Speaker A: And you can see it in consumption habits. Speaker A: You can see the time on YouTube increasing while the time on Netflix decreasing year over year and now even more. Speaker A: So TikTok is expected to overtake YouTube in 2022 in the US which it already did briefly in and Android devices last year and also in some months in the us but the matter of fact is we're spending less and less time going to cinemas.

7:34 Speaker A: We're spending less time watching traditional TV and we're spending more and more time on our mobile. Speaker A: And that's what really Netflix needs to unlock. Speaker A: And the third area, monetization. Speaker A: That's again where Netflix is in a really uncompetitive position compared to the social platforms where, you know, TikTok content funds is 200 million and other content funds might be reaching, you know, billions of dollars, but it's nothing compared to how much Netflix has to spend in order to have the library available that they have.

8:01 Speaker A: And the more challenging thing is that while in 2019 Netflix was making more money, bringing in more money than the competitors then, today YouTube passed Netflix in 2021 in the total annual revenue. Speaker A: And TikTok passed it way in 2020, making more money than Netflix has did in 2019. Speaker A: So you can see the power shift in monetization and revenue that they can attract.

8:27 Speaker A: So what's next? Speaker A: How is Netflix looking to solve these challenges that we just talked about? Speaker A: They're talking about new economic models like lower ad tier models, also content updates and new lines of business which we're going to go through. Speaker A: Almost every other platform out there, whether it's subscription or ad supported platform has got free and paid tiers, which Netflix is now, first time in history, entertaining as well. Speaker A: But they've been always saying there's no ads, but this time they're saying that the ad supported version will be coming.

8:54 Speaker A: Disney plus will also launch an ad supported version later this year. Speaker A: And the argument there is very simple. Speaker A: If you take somebody like hulu who makes 599 for the people who are just using the ad supported version and makes $11.99 from people who are using the non ad version, the complete subscription package, then actually Hulu themselves, it's more economical for them to have the people watching ads and paying that lower tier because they can make almost $14 $13.99 for every user compared to somebody who pays for the full amount $11.99.

9:26 Speaker A: So it economically makes more money, more sense for the users and lowers the barrier of entry for getting new customers on board. Speaker A: The second thing is content updates. Speaker A: There's a new release cadence. Speaker A: You know, Netflix was the one who really brought binge watching to the market and now they're kind of pulling back because with the recent season four release of Stranger Things, they did not release the last two episodes. Speaker A: They waited for five weeks to drop them.

9:51 Speaker A: And obviously you can see how that should help them increase their lower their churn. Speaker A: And you can see the new cadence being used or Coming back from the old TV days where some of the episodes are released in bulk but others are waited out for a month in order to make sure that you renew when the retention is higher. Speaker A: Disney plus Apple TV have been doing that from the beginning with a kind of weekly release cadence. Speaker A: But Netflix seems to be going back to that as well.

10:18 Speaker A: On the content side also, they are getting, they're really losing more and more of their licensed content to other platforms who are also competing and bidding for that content now. Speaker A: Or some of them who might be the content owners who have their own services that they're getting their content back from Netflix. Speaker A: So Netflix is refocusing their content for those big hits to really build their library as well. Speaker A: And they've told Hollywood executives all around that they want to focus on those broad appeal big shows.

10:44 Speaker A: So we'll see more and more of that coming as well. Speaker A: On the content side, in addition, they're experimenting with new formats. Speaker A: They launched Fast loves in 2021 where you could have those TikTok style vertical scrollable videos with mostly comedy. Speaker A: And now they're using it for other formats as well, like Stranger Things to attract viewers in and have that much better mobile consumption experience. Speaker A: On the new lines of business, Netflix has entered the gaming space on mobile.

11:09 Speaker A: They've acquired Next Games, who was making the Stranger Things game, but also Night School Studio to build out their mobile gaming platform. Speaker A: In order to tap into those other moments beside just, you know, sitting behind a TV or watching content on a mobile phone, they want to enter into new mediums. Speaker A: It's to be seen how that. Speaker A: Well, that's going. Speaker A: In addition, Netflix is also trying to build new lines of business by limiting account sharing. Speaker A: They're now cracking down in Latin America and Costa Rica where they're asking for a two to three dollar depending on the country to add additional people to your accounts.

11:40 Speaker A: So unless you co locate or cohabit a single location, they will ask you to start paying for the additional users that you might be sharing your passwords with today in order to increase the market share and make it easier for them to monetize all of the users. Speaker A: And there are rumors that they might be entering into the value chain more vertically integrating by buying Roku. Speaker A: That's to be seen because I think there's lots of sensitivities where it doesn't make sense because Netflix will be then competing with a lot of the platforms who are bringing them the customers.

12:10 Speaker A: But that's I'm clear. Speaker A: It's clear that those are the new business areas that they're looking to enter. Speaker A: By the way, if you want to see more of the content around, like who's controlling the Rails and who are becoming the new cable operators, you can check out this video right above the info button. Speaker A: But what's happening with Netflix? Speaker A: They promised no ads, they promised binge watching, they promised unlimited content on their platform and we had that 10 years ago. Speaker A: Now we have a lower tier ads ad supported tier coming.

12:37 Speaker A: We have new release schedule. Speaker A: No longer can we watch everything at once. Speaker A: We have to wait a month or a week to see the rest of the content. Speaker A: And the content is getting more and more limiting by more being taken away from the platform. Speaker A: If you go to Netflix website, it still says, you know, unlimited shows and gives you all those promises. Speaker A: But I'm not sure if that's the case because Netflix in my mind might be transforming into a traditional TV network. Speaker A: And this is certainly how the market sees Netflix as well.

13:03 Speaker A: In 2021, Netflix was valued at 10 times their revenue. Speaker A: And now by losing 70% of their value, they're valued about 2.8 times their revenue. Speaker A: While the previous revenue in 2021 was much similar to where Google and Facebook and Meta are Now, between the 6 to 10 range multiple on the revenue then Netflix debt today is much more similar to what Warner Discovery or Disney's value that.

13:29 Speaker A: But I put that question back to you. Speaker A: How do you think Netflix will be able to keep growing from here onwards? Speaker A: And if they're gonna manage to keep this tech company status or they kind of fall back to the traditional TV network? Speaker A: Thank you very much for watching. Speaker A: I hope you enjoyed this video. Speaker A: If you did, please give it a thumbs up. Speaker A: Subscribe to the channel and watch these videos. Speaker A: Subscribe.