Netflix: What Comes Next?

You can only have so much user growth for so long. At a certain point, growth will naturally slow. It seems like Netflix is hitting that point after weak guidance. What does that mean for Netflix?

Beyond Users

When you stop growing users, you need to make more money in other ways. You either keep more of the money you make (grow your margins) or you drive up your ARPU (average revenue per user). Lots of companies have gone through this transition before and have laid out the road map for Netflix.

Operating Leverage

Netflix is in a tough spot right now. Ideally Netflix could scale back their spending to drive up margins (and rely on the catalogue of historical content) but competition is increasing. Other companies with huge back catalogues of content are finally embracing streaming. I’m not convinced that Netflix needs to be spending billions of dollars on content. If they cut their content spend in half, would that have a meaningful impact on churn? I personally don’t see a clear answer here, but Netflix clearly believes it would based on their historical and current spend.

Netflix + Optionality

Times like these are where optionality becomes important. Netflix has shown shockingly little optionality. Fundamentally, they are the same company as when they started. Don’t get me wrong, Netflix has made two amazing pivots in their business model (from physical to digital and from licensing content to owning it), but 20 years in and they have one source of income.

Netflix has shown some increased interest in shifting beyond their normal business model and have added some gaming. This is a good move by Netflix, a worthy experiment. I question how much success Netflix will have here, but it’s a low cost high upside experiment that should be made every time. The other area of obvious opportunity for Netflix is live content/sports. They’ve been reluctant to enter this space, but have been changing their tune on the subject which could give us an idea of their future moves.

Pricing Power

I do think Netflix has some pricing power. They’ve historically shown the ability to raise prices and I think they will continue to raise prices successfully. Despite these price increases, churn remains remarkably low. Netflix clearly has pricing power.

Nowhere To Go

This isn’t the first time Netflix has been punched in the face. They’ve been doubted over and over again and found a way through it. I don’t know how Netflix will overcome slowing user growth, but I’ve learned to not bet against them.

Author: fatbabyfunds