If we inspect carefully the number of subscribers lost, actually Netflix is just fine. The streaming giant only lost 200 thousand subscribers from a total of 221 million. It is a tiny fraction, less than 0.1%. It is no big deal. Netflix said that number comes from 700 thousand losses due to Russian things. If we neglect Russia – Ukraine number, Netflix has an additional 500 thousand subscribers. Not bad. Far from it. Case closed. So, why we are here? To address a more important issue: Netflix’s Competitive Advantage.
Spoiler Alert: Since the beginning, Netflix doesn’t have it.
Innovation – once again – is not a sustainable competitive advantage.
We didn’t write it wrong – Netflix has no decent competitive advantage. The Calif-based company indeed has an advantage as the prime mover of the streaming trend. Yet, it’s just a technological tool. It is not a kind of economic moat. In the end, everybody could make it. Just come to Amazon Web Services and tell your need. They will set and you are ready for streaming.
Also, making an integrated business – in the case of Netflix – making the content in-house, is not a competitive advantage. What matters most is the content streamed. This is where Netflix lack of competitive edge.
Doesn’t mean telling you that Netflix has no great content at all. House of Cards, Queen Gambit, Orange is The New Black, BoJack Horseman, and The Stranger Things are good ones, but Netflix still relies heavily on licensed movies. Including The Office, Friends, and Grey’s Anatomy. Most of us may be surprised to know that licensed content contributes nearly 60% of Netflix’s services.
So when the content owner doesn’t want to go with Netflix or plans to stream by themselves, Netflix will not get the franchise.
The Weak Bargaining Power
Throwing back at 2019, Netflix had to pay 100 million for the Friends license – three times larger than when they pay for the previous year for the same franchise. In the end, Netflix loses FRIENDS (now it is part of HBO Max). But the pursuit of popular sitcoms does not end there. In 2021, Netflix pays half of a billion to get another popular sitcom, The Seinfeld.
This underlines the low bargaining power of Netflix against the supplier and its dependency on others’ content.
The point is, that streaming doesn’t make you have a sustainable competitive advantage.
Wait, what do these content things do with the subscriber loss? Nothing. But, we ask you, why do the mainstream media talk like 200 hundred subscriber loss as a disaster? Why now?
House of Cards, House of Mouse, House of Dragon(1). Why do they stream? Ecosystem economy.
Is Netflix’s Competitive Advantage eroded when the competition heats up?
Catching Netflix, Disney has Disney+ and Amazon has Amazon Prime Video. Also, we have Apple with Apple TV. To be honest, Disney has the best content since it is family-friendly. Its movie could be seen thousand times without boring. Your daughter will watch Elsa Frozen again and again. But these are not a significant advantage over the others. But still, it matters.
Netflix’s business model as the streamer pure player has a great disadvantage here, since Amazon, Disney, and Apple could burn the money and subsidize its streaming service. They do not need to be profitable. Their streaming content is designated to enhance the ecosystem. Unlike Netflix.
Netflix needs to be profitable, others don’t.
- House of Cards refers to Netflix’s original series 2013, a good series. House of Mouse is our nickname for Disney since it creates Mickey Mouse. House of Dragon is the sequel (CMIIW) of GOT (Game of Throne) owned by HBO Max.
When to stream? Subscriber based economy
Microsoft Business Model to answer Netflix’s Competitive Advantage.
If we take a broader approach, streaming could be classified as a subscriber business. So, Netflix, HBO Max, Apple TV, Amazon Prime Video, and Disney+ are in the same world as Microsoft 365, Adobe Creative Cloud, and other subscriber-based businesses.
The point is the subscriber-based business is best when coupled with switching costs. Since it will prevent competition to grow or move. For instance, once you subscribe to Office 365, you hardly subscribe to G Office too. In this case, Microsoft switching costs prevent you to pick others. Streaming has no this kind of barrier to entry, you still can subscribe to Disney and benefit from Amazon Prime membership.
Once again, you see that streaming is not a sustainable competitive advantage.
Picking The Winner
Technology and unique business models never be an answer
So, which one will become the king of the streaming hill? This question is difficult to answer. If the criteria are the pure player, like Netflix or HBO, so I won’t recommend investors to pick any. It is better to choose Amazon or Apple – if both of them are classified as streamers too. The streaming battlefield begins to be cruel, and we don’t like to invest there.
How we think about Netflix could be extended into the bigger and more general issue. We begin with our premise: Innovation doesn’t bring you to a sustainable economic moat. Being different, and leading new business doesn’t bring you color to a decent competitive edge. Netflix has changed how we watch movies or TV series, but it doesn’t mean that it will be exclusive to Netflix forever. Others can replicate.
And this is also true for any disruptors.
Companies like DoorDash, Airbnb, or Lemonade could face the same fate if the incumbent goes the same path. Even, a newcomer with a high budget could replicate their business model and network. This is why we didn’t recommend these kinds of stocks for an investor to put their money there.
What about Tesla?
Hmm, let’s try this challenge for Tesla. Everyone could make EVs – the old and incumbent like Toyota, GM, and Volkswagen could manufacture the EV and corner Tesla. Well, there are several significant differences between Tesla and Netflix even though both of them are the disruptors.
- Tesla has a strong brand identity that Netflix doesn’t. Tesla is identical to a car, EV, fast, cool, modern, sporty. Netflix is associated with streaming but has no close relationship with the content itself. Mickey Mouse is Disney, but we can’t say BoJack Horseman is Netflix. It is not that strong. As a result, Netflix won’t have similar loyalty as other strong brands.
- Tesla has vertical integration like Apple that could bring them to delicious profit margin – or, if needed, reduce the price to strike the competitors. Netflix has no pricing power or low cot producer advantage. They simply can’t afford to make sitcoms, like FRIENDS, in the house.
This underlines the low bargaining power of Netflix against the supplier and its dependency on others’ content. But, it doesn’t mean that heating competition in EVs will not trim Tesla’s profit margin. It is just another story.
Recapping what we have
It is about competitive advantage again and again.
So, let’s make this clear:
- Netflix’s business model has no prevention against newcomers or strikes back from the incumbent or other entities with content.
- In our perspective, Netflix is more like a distribution channel rather than a content provider. Netflix could take this route, but it is difficult to get done in both of them. Even if possible, it needs a billion money to fund this battle. And we argue investors are ready for this.
So, is Netflix’s Competitive Advantage losing? It never has a decent one.