We may soon find out just how addictive Netflix can be
The whole world is switching on to Netflix, but an increasingly crowded market could hamper its growth, writes James Titcomb
Last week, reports emerged of what may be the world’s first case of Netflix addiction. A 26-year-old man in Bangalore, India, checked himself into a clinic claiming he had suffered fatigue and eye strain through months of compulsive binge-watching.
It is something many of us could relate to. The video-streaming behemoth, which has had hit after hit with glossy TV shows such as Stranger
Things and Orange is the New Black, has eaten up so many hours of subscribers’ lives that there is seemingly little time left in the evening for it to conquer.
Reed Hastings, Netflix’s chief executive, is fond of saying many users only tune out when it is well past bedtime. “You get a show or a movie you’re really dying to watch, and you end up staying up late at night,” Hastings said last year. “We actually compete with sleep. And we’re winning!”
Winning is something Netflix is used to. The company, founded as a DVD rental service 21 years ago (it only started letting users watch shows over the internet in 2007 and it was not until 2011 that streaming contributed the majority of revenue) has taken a seemingly unassailable lead in the online TV market.
In the UK, 28pc of people say they have used the service in the last month. The company’s subscribers watch an average of 50 minutes of Netflix a day, and the service accounts for 15pc of the world’s internet traffic, more than any other service.
Among younger viewers, Netflix simply is TV: surveys show that more 12 to 15-year-olds in Britain have heard of it than BBC One.
The Queer Eye-maker has also been a sensational stock-market story. Shares have multiplied a hundredfold in the last 10 years, a return closer to Bitcoin than for a company of its size. This year, it briefly surpassed Disney as the world’s biggest media company.
The company’s extraordinary rise, and investors’ belief in it, can be traced to two moments. The first was March 2011, when the company that had long relied on licensing TV companies’ shows ventured into original programming, buying the rights to the political thriller House
of Cards. Its catalogue has swelled to hundreds of titles. The second came in 2016, when overnight the service was switched on in every country around the world, bar a couple of exceptions (it is not available in China, although it retains ambitions there, or Crimea, Syria and North Korea due to US sanctions).
It catapulted Netflix from a streaming company into a worldwide service akin to Facebook or Google, with a potential market of billions. “You are witnessing the birth of a global TV network,” Hastings said at the time.
“In a very short period of time, Netflix has become a global brand,” says Paolo Pescatore, an independent tech and media analyst. “It is the first truly global subscription video-on-demand provider.”
Much of the world is still to be conquered. It was only this year that the number of people who subscribe to Netflix outside the US surpassed those in its home country. Its 130m paying customers represent a fraction of the market.
But some detect signs that Netflix’s rise to greatness is far from guaranteed. “I don’t believe the future is as bright and rosy as people think,” says Pescatore.
Netflix is often grouped in a cluster of giant tech companies – the “FANGS”, along with Facebook, Amazon and Google’s parent company Alphabet – that have come to symbolise the tech boom. All four are valued far higher than one would expect given their profits, but Netflix is a special case. Its $142bn (£107bn) valuation is 56 times 2020’s forecast earnings. The next closest is Amazon, at 47 times future earnings; Facebook and Alphabet sit around 20 times. Netflix investors are relying on many years of breakneck growth, as is the company. It has embarked on a stunning investment in content since its original bet on House of Cards, and committed to paying $18.4bn over the next five years, a sum that is expected to continue to rise.
Operating profits are still relatively low, and the company is burning through cash – up to $4bn this year alone – so the company relies on borrowing to fuel its huge investment in original material. Long-term debt has trebled in the last three years, from $2.4bn to $8.3bn in June. It has been cheap and easy, too. In April, the company borrowed another $1.9bn in its biggest financing ever.
In other words, Netflix’s stockmarket boom over the last few years has been accompanied by a cycle of higher growth, more spending and cheap borrowing. That is fine, and the company has delivered. But the slightest sign that things are not going to plan meets a tumultuous reaction.
In July, the company’s shares slumped after Netflix slightly missed investors’ growth expectations. Subscriber numbers grew by 5.2m in the second quarter of the year – an impressive figure, but a million below forecasts – leading shares to drop by 14pc. It predicted growth would be slower in the third quarter and will reveal results on Tuesday.
A rout of tech-company shares last week hit Netflix particularly hard. Rising yields from government bonds threaten to push up the company’s cost of borrowing. It was with tricky timing, then, that David Wells, the chief financial officer, announced he was leaving after eight years.
Netflix shares have now fallen by a fifth since their peak in July, although after their meteoric previous rise, they
are still up 70pc this year. “I don’t think anyone at Netflix is watching stock-market moves,” says Rich Greenfield, an analyst at BTIG Research.
More concerning could be the threat the company faces as technology and media companies charge up rival services. Amazon’s Prime Video service is growing rapidly, and the company has shown itself to be just as willing to spend heavily, if not more so. Amazon is using video to encourage people to sign up for its delivery subscription service Prime, so is under less pressure to make money from it.
To date, Amazon and Netflix have coexisted peacefully – many households are happy to take two internet TV services – but what about three, or four? Apple has spent years gearing up for a push into on-demand video, and while its plans remain closely guarded, rumours suggest it is preparing to offer its shows for free to those who buy its hardware.
The biggest challenge may lie in Disney, however. The media giant handed Netflix a huge boost six years ago when it inked a deal with the company in an age where streaming was still tiny, but last year it vowed to pull its material and launch its own by the end of 2019. Fresh from its acquisition of 21st Century Fox, it boasts a formidable library of material, from Star Wars to the Marvel superhero empire, and has promised to beat Netflix on price. Last week, Warnermedia, the At&t-owned media giant behind the American network HBO, announced plans to build its own streaming service. “The market’s already looking very crowded from a subscription point,” says Richard Broughton, of Ampere Analysis.
But while none of the entrants are likely to topple Netflix, they could hamper its growth. Broughton says that if subscriber growth starts to slow down, investors’ focus will shift to how much it is able to raise prices.
The company has increased the prices it charges subscribers – the most expensive package in the UK costs almost double what it did when it launched in Britain – but not enough to keep up with production bills.
Content costs will continue to rise, especially in Europe, where the EU is set to demand almost a third of the catalogue being produced locally.
Broughton estimates the company could easily increase the cost of its subscriptions by 50pc without losing too many customers, given its success in raising prices to date.
Such a move is unlikely to be popular. It may also be the test of just how addictive Netflix can be.
‘In a short period of time, Netflix has become a global brand. It is the first truly global subscription video-ondemand provider’
‘The market’s already looking very crowded from a subscription point of view’
Netflix has ploughed billions into shows such as, clockwise from left, The Crown, Orange is the New Black and Maniac, but finds itself leading an increasingly crowded TV streaming marketplace