Peter Csathy
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New rumors swirl in our Media 2.0 world about one massive potential tantalizing and game-changing deal – Disney buying behemoth SVOD service Netflix. That makes sense – and may happen – but Apple (or even Amazon) make even more sense.
Each has the means (Disney’s market cap is about 3X Netflix’s, Apple’s is a whopping 12X, and Amazon’s is 8X). In any event, Netflix will be bought. It’s only a question of when.
First, let’s set the stage.
Yes, all of us are Netflix users – and that “us” is increasingly global. We all happily shell out our low monthly fee without even thinking about it. Netflix is killing it, right?
But, that strength of reach and easy subscriptions is also its fundamental Achilles heel. Those subscriptions – that content — alone drive its business model. That’s it. No diversification.
So, in order to be long-term profitable and survive, Netflix must continue to acquire massive numbers of new customers, retain those that it has, and do it in a way that keeps its subscriptions at a low price we are conditioned to pay. Amidst the endless array of competing SVOD services worldwide, however, that will be harder and harder to do. Its growth both in the U.S. and overseas has already raised red flags.
Netflix’s “special sauce” to stay on track– its key draw – is its “Originals” (premium content it develops for Netflix customers only). “House of Cards” started it all. But, once we binge watch our favorite Netflix series, what keeps us there when switching to another show on another OTT platform is so easy? More exclusive originals, that’s what.
That means continuously “feeding the beast” — our voracious demand and expectation for new compelling premium A-list-driven content. That’s why Netflix’s Chief Content Officer Ted Sarandos just recently announced that its goal is for 50% of its content to be originals in the next couple years. Netflix has no choice.
But, that beast is increasingly expensive to feed (especially at that scale). Those costs will only skyrocket moving forward, as the expanded playing field of SVOD competitors fight for access to a limited supply of A-list marquee talent they too hope will attract new customers (and keep them there). Netflix’s Originals-only formula — that singular model — is not sustainable long-term for a company of Netflix’s size.
It can be sustainable for behemoths Disney, Apple and Amazon (and others like them). Disney monetizes multiple content platforms (not just Netflix’s one) – movies, television (including crown jewel ESPN), OTT (including Maker Studios as a result of its $700 million-ish acquisition), theme parks, merchandise. In Disney’s Magic Kingdom, Netflix makes sense. First, Disney can absorb Netflix’s existential financial pressures in a way Netflix alone never can.
Second, Netflix can be the long-term premium video OTT solution it needs to calm its own long-term pressures that are more “traditional” in nature. Wall Street has hammered Disney of late primarily because ESPN – its cash cow via traditional Pay TV carriage deals – is under siege in our OTT video world where cord cutting, and a whole generation of cord-nevers, are real mega-threats.
Apple is an even more obvious Netflix buyer. Apple desperately wants its own OTT “Netflix Killer,” but Hollywood has stymied its efforts to date. Netflix itself could be the answer. We’ve already seen this movie before on the music side when Apple’s own streaming efforts failed. Apple bought Beats for $3 billion and re-branded it Apple Music.
Netflix’s price-tag certainly would be massively more costly, but the core strategic rationale is the same. For Apple, Netflix and Beats don’t need to justify their existence by their stand-alone financials alone. At Apple, content is essentially a marketing expense — a Trojan Horse used to lure us in to buy its high margin hardware (iPhones, iPads, Macs, Apple TVs). Netflix is a success even if it doesn’t generate a single stand-alone $1 of profit, so long as we buy more Apples.
Amazon may be another logical buyer, even though it already offers its own Netflix competitor – Amazon Prime Video (and we consumers don’t even need to pay extra for it, so long as we are Amazon Prime members – and why not, free shipping!). Netflix could be an even deeper hook to draw even more of us in to its sky-mall, keep us there, and shop and shop and shop. If that works, Amazon is happy.
Whether current rumors are true remains to be seen. But, these underlying realities will not change. Netflix will be bought.
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