Netflix will remain a blockbuster hit beyond the covid-19 era

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TO UNDERSTAND NETFLIX, forget the mullet-haired Joe Exotic and his antics in “Tiger King”. Think instead of the bearded El Profesor and the other rogues who populate “Money Heist”, the streaming firm’s exhilarating Spanish-language crime drama about stealing €2.4bn ($2.6bn) from the national mint in Madrid. Like the hijackers, Netflix is taking advantage of the lockdown in many countries to print money. Like El Profesor, the company’s goateed boss, Reed Hastings, is usually a step ahead of everyone. And like the heist’s perpetrators, it has always had one golden rule: stick to the plan. So far it has pulled it off. As one analyst puts it, Netflix is as much a household essential in the covid-19 age as Clorox. Its market value, at more than $190bn, has for the time being risen above Disney’s. Yet, as usual with Netflix (and with “Money Heist”), just when you think you can breathe easily, trouble starts.

Netflix’s story has had a Tinseltown quality to it since its founding in 1997. Even in its early, DVD-dispatching days Netflix won its subscribers’ hearts and minds—and so their wallets—with plentiful content and great customer service. In contrast to Blockbuster, it had a “long tail” of tens of thousands of DVDs for all tastes. It made recommendations to viewers based on their previous choices. It also had a clear-cut vision.

Mr Hastings believed from the start that films would eventually be downloaded from the internet. But instead of taking on the media incumbents, be they TV networks or film studios, he sidestepped them with novel approaches to distribution and film-making. In the process, he has built Netflix’s brand, customer base and ability to fund growth. Now the firm has gone global, in a way none of its media rivals has matched. Ben Thompson of Stratechery, an online newsletter, explains that Netflix moved from DVDs to streaming rights to original content, each time building on a user base acquired in the previous step. This “ladder strategy” enabled the firm to clamber into many of the world’s homes just in time to provide distraction during a global pandemic.

On April 21st it became clear just how sturdy the ladder is. As it reported its first-quarter earnings, Netflix said subscriber numbers had soared by 15.8m in the first three months of the year, more than double its previous forecast. They now total 183m. Most of the growth came from Europe and Asia. Though production of new shows has stalled in the pandemic, Netflix played down fears that people will binge through its catalogue. Its producers and animators are busily editing series in their bedrooms and kitchens. The firm is confident that the pandemic will not affect its planned releases this year. It also offered a response to those who say that its model of borrowing heavily to finance film-making is unsustainable. It generated free cashflow in the quarter for the first time since 2014, and said it would burn $1bn of cash or less this year, down from $3.3bn in 2019. This helps explain why junk-rated Netflix now borrows at similar interest rates to A-rated Disney.

Of course, no good plotline is without setbacks. Netflix acknowledges that subscriptions may simply have been accelerated by lockdown. If so, they may slow again when restrictions are eased. Cash burn could then tick up. The company needs money to bankroll new content but has yet to lay to rest a long-standing concern that its rising international revenues will not offset slowing subscriber growth in America, its biggest market. In the first quarter its foreign revenues were crushed by the surging dollar. At the same time Netflix faces new competition, both at home and abroad. Disney+, launched last November, has attracted 50m subscribers globally. Mr Hastings admits he has never seen an incumbent learn new tricks so quickly.

Look beyond covid-19 and the worry is not just that Netflix subscribers will flee to other streamers. It is that as other big media companies shift to streaming, they will refuse to sell it new shows (as Disney has done as it launched Disney+) or license it old stuff (as happened this year with “Friends”, bought by WarnerMedia in 2019). That would force Netflix to spend ever more to keep up.

Running and streaming

Yet this ignores the devastating impact of the pandemic on media conglomerates in general. WarnerMedia (owned by AT&T, a telecoms giant) has just announced it will launch HBO Max, its streaming service, on May 27th. But lockdown restrictions mean it must forgo the razzle-dazzle reunion of “Friends” cast members. Because of the pandemic, NBCUniversal (which is part of Comcast, a cable operator) has staggered the start of its Peacock streaming service, giving Netflix more time to consolidate its lead. On April 22nd AT&T reported falling revenues at WarnerMedia owing to a meltdown in advertising. Both it and Comcast are weighed down by debts. A recession may convince their dwindling base of lucrative cable subscribers to cut the cord in favour of streaming, further depressing revenues. Disney is likely to be the first of the covid-stricken media titans to get back on its feet when lockdowns end. But right now it is ailing. Its theme parks, the biggest source of its profits, are shut in America and Europe. Its ESPN sports TV network has almost no live competitions to broadcast. And like everyone in show business apart from Netflix, it relies on advertising.

That sets the stage for an endgame to the “streaming wars” that will unfold sooner than anyone might have imagined. Rather than starving Netflix of content, some of its rivals will struggle to survive. Their debt-laden parents may be forced once more to license shows to Netflix. Disney, its most formidable nemesis, will lack the financial muscle to kill it off completely. Amazon and Apple, whose streaming services have nothing like the depth of Netflix or Disney+, have bags of cash to shake up the contest. Meanwhile, Netflix will try to entrench its global lead, not least by banging out more international smash hits like “Money Heist”. When El Profesor declares, prophetically, “We are the Resistance”, he could be channelling Mr Hastings. ■

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