The pricing power and indispensability of Netflix
The future of streaming giant Netflix is a popular topic in the industry today. Its success often makes it the target of a lot of speculation—possibly none quite as funny and timely as this satirical opinion piece titled Netflix Morning Meeting which ran last Saturday in The New York Times (to be fair, we should point out the piece is authored by a writer for the Emmy-nominated television series Silicon Valley which runs on Emmy-tying rival HBO).
As for the business of Netflix, there are many questions out there today about the future of the business model in the wake of massive content spending. The truth is, Netflix will not be able to cut back on content spending given increased competitive peer spending for available show licenses and originals. Earlier this year, The Economist projected Netflix would end up spending $13 billion this year despite previous projections of $8 billion.
While there is no consensus regarding growth rates, everyone agrees there will be aggressive spending in the future. A better growth indicator can be found by delineating Netflix’s domestic vs. international footprint, as Netflix’s growth prospects, as well as content acquisition drivers will be increasingly international.
Netflix’s cash burn has long been a source of controversy; however, investors have been willing to overlook Netflix’s cash burn as cash investments in content and marketing support subscriber growth and competitive gains. If there is a sustained deterioration in subscriber metrics then this could prompt an investor focus-shift to more traditional media company metrics.
As more studios withhold content for their own streaming services and growth slows, Netflix will likely increase price – and given past reactions, Netflix will receive some pushback but ultimately subscribers will pay given the service’s strong value for the price. Recent Magid research shows that Netflix continues to successfully earn its indispensability with consumers across nearly every generation. The more indispensable Netflix becomes, the more pricing power it gains – and the more able Netflix is to weather price increases successfully.
Netflix’s massive content spending is putting tremendous pressure on competing services. Behind the scenes, they are outbidding on scripts and talent, putting pressure on others. Because Netflix does not need to show profits right now, it has made it increasingly more difficult for others to meet consumer expectations as well.