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Abu Dhabi, UAEWednesday 19 September 2018

How Netflix will survive its divorce with Disney

Streaming service faces threats as quest for content hots up

Krysten Ritter in Marvel's Jessica Jones. Myles Aronowitz/Netflix
Krysten Ritter in Marvel's Jessica Jones. Myles Aronowitz/Netflix

My wife and I are just about to wrap up Wet Hot American Summer: Ten Years Later on Netflix. With our busy schedules, it took us a few weeks to get through the relatively short comedy series. The same goes for the second season of Master of None, which we finished last month.

Next up, we’re tackling crime drama Ozark on the advice of friends. As a fan of comic books, I’m also jazzed for Marvel’s The Defenders, just added this past weekend. My wife is still working her way through teen drama 13 Reasons Why and I’ve been meaning to get back to Dear White People. All of this should easily get us to the new season of Stranger Things, coming in October.

This isn’t meant to be an ad for Netflix, but rather to highlight the fact that the streaming service is doing a good job of keeping the eyeballs in my household occupied. The same is likely the case for many of its 100 million subscribers worldwide.

And then there’s the upcoming content. Over the past two weeks alone, the company announced deals with late-night talk show legend David Letterman and Shonda Rhimes - the superstar producer behind shows such as Grey’s Anatomy and Scandal - to create new content.

Netflix has also acquired comic book publisher Millarworld, so there should be plenty more of those super-hero adventures that I like coming.

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The bottom line is there are many reasons to subscribe to the service. Netflix is spending US$7 billion on content next year, up from $6bn this year.

That kind of outlay will keep the company's pipeline full for some time to come, in the hope that loyal Netflix viewers will keep on tuning in. But the challenges the company faces are mounting, with many predicting difficult times ahead.

Chief among the doom prophets is Barron’s, which predicts a 50-per-cent decline in Netflix’s stock by 2020, following the recent news of the company’s split with Disney. The 'House of Mouse' announced in early August that it will eventually pull its content - which includes Pixar, Star Wars and Marvel movies – from Netflix and house it on its own dedicated streaming service, which will launch in 2019.

In Barron’s analysis, Netflix is spending too much on content and could end up having to fork over even more cash in future, given that competition is ramping up.

The company doesn’t just have Disney to contend with. US network CBS also recently announced plans to expand its "CBS All Access" streaming service internationally starting next year.

Facebook has also launched original video content, and Apple is planning to spend $1 billion in Hollywood next year, according to the Wall Street Journal. That’s in addition to the likes of Amazon Prime Video, Hulu and the other local streaming services found in many other countries. There’s also the likelihood that HBO, home of Game of Thrones, will eventually expand its U.S. streaming service globally.

All of this competition means the cost of acquiring or making content is likely to go up, but the prices that streaming services can charge consumers will have to stay relatively low. It’s a double pinch that is sure to hurt, especially for companies that don’t have other businesses to fall back on - namely, Netflix.

It’s a logical argument that holds a lot of weight; Netflix shares are down more than 8 per cent since news of the Disney divorce broke. Still, the company does have several advantages over competitors that many think will help it weather the storms ahead.

For starters, it’s the early market leader and has brand recognition. For many consumers, Netflix is synonymous with streaming – it’s the Kleenex or Q-Tips of online video.

In the US, the world’s most advanced streaming market, an estimated 53 per cent of people will subscribe to at least two streaming services by 2018, according to analysis firm Activate. That number will climb to a total of 62 per cent by 2020, with 43 per cent opting for two services and only 19 per cent choosing three or more.

Netflix will form the foundation of those bundles, Activate says, with Amazon and Hulu – currently available only in the US – coming in second and third. Late-comers such as CBS and Disney will face an uphill climb in battling their way into that top three.

Netflix is thus the new basic cable, the service that most households will subscribe to by default, with others added on as household time and budgets permit.

So far, Netflix is also delivering high-quality content. Indeed, the streaming service was second in total Emmy Award nominations this year, beaten out only by HBO. Quantity, if my own experience is any indicator, is also not an issue.

Even if Netflix were to cut back a bit on how many shows it produces, and even if it continues to raise subscription fees marginally, it is still serving up a ton of content to watch, and much of it is very good.

There’s no reason to believe Netflix won’t continue to be successful for some time to come for those reasons, and because streaming isn’t a zero-sum game. In this truly global market, there is room for many competitors.

And if there has to be a small decrease in the number of shows plugging up our viewing backlog, my wife and I would be the better for it.

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