Netflix is Bleeding Out, Here's Why...
Netflix is losing subscribers and its stock is down 68% year-to-date.
A lack of franchises that create caring and dedicated fans could be the hold in the business.
Acquiring broadcasting rights for a pro sports league could help Netflix keep customers.
Netflix needs to start thinking long term in order to make it a better entertainment company.
Pop Culture is Profits
In 2012, Disney ($DIS) purchased the Star Wars production company Lucasfilm for $4.05 billion, a price that I considered to be an absolute steal.
The economics of the movie business, as explained to me by a former producer, is that for the studio to consider a film a winner, the movie needs to earn three times the film’s budget. If that’s the case, there’s been a lot of wins for Disney with the Star Wars franchise.
Star Wars: Episode VII, the first film under the Disney umbrella brought in $2.06 billion world wide on a budget of $245 million, Star Wars: Episode VIII brought in $1.33 billion from a $317 million budget, Star Wars: Episode IX made $1.07 billion on a $275 million budget, and Rogue One: A Star Wars Story, brought in $1 billion from a $200 million budget. The biggest miss so far under Disney was Solo: A Star Wars Story, which brought in $392 million on a $275 million budget.
In addition to the Star Wars movies, Disney has squeezed even more out of the franchise by creating television shows for its streaming service Disney+ based on characters from the Star Wars movies. A move that has paid off with an uptick in Star War toy sales, despite not having a new Star Wars theatrical release since 2019.
Before acquiring Star Wars, Disney acquired Marvel Entertainment for $4 billion. With comic book sales in decline, and some of its best properties, like Spider-Man, X-Men, Fantastic Four and The Hulk licensed to other entertainment entities, Marvel made a bet on itself and produced the Iron Man movie. The movie did surprisingly well, grossing $585 million worldwide on a budget of $140 million. Disney saw Marvel’s potential and acquired them. Under Disney, Marvel has released over 25 films that have grossed over $22 billion dollars at the box office.
Disney, Marvel, and Star Wars aren’t the only ones that make films that fans reach new levels of fanaticism for. New Line Cinema / Warner Bros. ($WBD) has The Lord of the Rings franchise, Warner Bros. also has Harry Potter, and Universal ($CMCSA) has The Fast and The Furious franchise. These franchises have created very vested fans.
The Marvel movies, Star Wars, The Fast and The Furious, Harry Potter, and The Lord of the Rings have been culture shifters and big winners for their respective studios, and I believe it's because Netflix has few titles that have the fan buy-in like a Marvel or Star Wars movie why subscribers are leaving.
This Could Be an Age Thing
I consume a decent amount of Netflix ($NFLX) programming, but they don't have much I care about, and that could be because of my age. Spider-Man and his Amazing Friends made me a Spider-Man fan before I could even talk in full sentences. And watching George Lucas explain how he made Star Wars in a PBS special turned me into a lifelong Star Wars geek. Maybe there are properties on Netflix that have that kind of impact and they're just over my head.
Even when I reached the age where what was going on pop culture shouldn't have been a priority, I still made it a priority. I read a few of the Harry Potter books to find out what was in them that motivated kids to stand in line for a book, especially in a day and age of video games and the internet. After the release of the second Twilight movie I went to check them out, and the movies filled me in on why every teenage girl on the New York City subway in 2008 through 2010 had scribbled "Team Edward" or "Team Jacob" on their book bags and notebooks. Is there anything on Netflix with that level of fandom?
Netflix is Bleeding Out
In its review of its first quarter earnings, Netflix revealed that it had lost 200,000 subscribers. The news shocked investors and provided another reason to sell an already declining stock. The stock dropped 35% the day after the company released its Q1 earnings. The loss of subscribers came as a big surprise, because Netflix had predicted that it would add 2.5 million subscribers during the first quarter of 2022.
Netflix has an abundance of content and great original programming. The company's ability to produce content that becomes the talk of the town and the internet is unmatched, but I believe it needs more franchises that fans care about and go crazy for and anxiously wait on. They need another Stranger Things.
... people shed tears in the movie theater when Frodo left the Shire for the last time, and also when the snap took Spider-Man.
I saw people shed tears in the movie theater when Frodo left the Shire for the last time, and also when the snap took Spider-Man. I heard people let out a sigh of relief after he who shall not be named turned to ash and blew away in the wind, and then people in the theater started hugging each other. And while I was too young to know what happened in the theater when it was said, but the phrase “...No, I am your father,” still resonates today. Who is Netflix’s Frodo or Spider-Man? What is Netflix's Harry Potter? Which of their franchises can they make a truck load of money on from merchandise?
Saying that Netflix has to change the way it does things seems extreme. Since it started curating exclusive content for its subscribers, Netflix has done well for itself. The streaming service has put out big hits like the aforementioned Stranger Things, Orange is the New Black, Bridgerton, and many more. It’s attracted big names over time to star in its original content. It’s been nominated for and won major awards for its content, receiving 27 Oscar nominations in 2022 and 37 nominations in 2021. The Power of the Dog, a Netflix original, won the Oscar for best director in 2022 as did Roma in 2019. The stock has made investors big winners as well. From 2016 to November 2021, the stock price went from under $100 per share to over $650 per share, marking an increase of ~550%. The S&P 500 over the same time span increased ~150%. But today, something is missing from Netflix, it's why the company is losing subscribers and the stock is losing value.
Could Sports be the Fix?
From the time Netflix became a full blown streaming service and began moving away from DVD deliveries, there’s been speculation about the company acquiring the broadcast rights for a professional sport. I think they will get the rights to broadcast a pro sport, but I’m pretty certain it won’t be the NFL.
There are many pro sports leagues throughout the world, getting the broadcast rights to one shouldn’t be a problem for a company like Netflix that ended Q1 2022 with $6 billion in cash and short-term investments. Fox pays the NFL $2.2 billion a year for broadcast rights, so the NFL isn't out of reach for Netflix from a financial standpoint.
Whether it be pro cricket, pro rugby, pro table tennis, pro gaming, or the rights to broadcast Allsvenskan, Netflix can get broadcast rights to a professional sports league. But that’s not what most people have in mind when they think of Netflix and sports. Investors are hoping that Netflix gets NFL games, but I don’t think that will happen.
During football season, a good NFL matchup can be a network's most highly watched broadcast for the week. Where the NFL wins and the NBA and MLB loses is in broadcasting.
Without having cable, a football fan gets four games a week. The CBS Sunday game, the Fox Sunday game, the Fox Thursday night game, and the NBC Sunday night game. In most markets, let's use New York City, for example, if you don’t have cable, good luck catching every game of your beloved Knicks and Yankees. For the NFL, going with Netflix is equivalent to putting football games behind a paywall, and that doesn’t benefit the shield.
Could MLB or the NBA help Netflix? I don't know. I think both sports have way too much inventory. When it comes to basketball, unless there is some compelling storyline, I'm not vested in the NBA until March when the push for the playoffs begins. For Baseball, almost the same thing. With 162 games to be played, it's tough for the sport to create suspense and tension in the early parts of the season, and because of that I don't tune in until late August, when the push for the playoffs starts.
Think Long Term, Build Franchises
Star Wars is over 40 years old. The Harry Potter and The Lord of the Rings movies turned 20 last year, as did The Fast and The Furious franchise. What's on Netflix today that will be talked about or cared about in 20 years? It’s time for Netflix to focus on building franchises that fans care deeply about. It won’t be easy, but it’s not impossible. There are thousands of stories waiting to be told. And if they can’t build one, they should buy one.
Universal Studios had plans to create a Monsters Universe in 2017, Think the Mummy, Jekyll and Hyde, Frankenstein, The Werewolf, and Dracula, being sent to the big screen yearly like Disney did with The Avengers. But the first movie, The Mummy (2017) with Tom Cruise and Russell Crowe didn't live up to the hype, and it appears plans for the Monster Universe have been scrapped. Are these properties for sale? The salesman in me thinks everything is for sale.
I've applauded Netflix in the past for its ability to produce content that goes viral, but what their loss of subscribers has indicated to me is that viewers feel like there is nothing to look forward to on the platform. Right now, Netflix is the king of the streaming, it is the ultimate streaming company, but Disney is the better entertainment company. It's time for Netflix to morph into an entertainment company, and it can do so by building franchises that are bigger than one week of memes and social commentary. Joe Exotic had two great weeks, Mickey Mouse has had the last 94 years.
