Netflix, with its humble beginnings in DVD sales and movie rentals, has become a leader in subscription-based media services since its founding in 1997. For most of its rise, it has not had to face the tough competition it will soon be facing from the likes of Apple and Disney. This is a fascinating time to watch how Netflix responds and these giant companies jockey for top positions.
In fact, the new competition is spending big money. I’m talking billions of dollars. Players include Apple, Disney, AT&T, HBO, and Comcast. Because these companies are so well-established and are starting from scratch, they have massive budgets to get things going…and quick.
Take Apple. They spend $15 million per episode of their sci-fi show, “See.” Disney ponies up roughly the same for “The Mandalorian,” their Star Wars spin-off premiering in November (like I said, they’re moving quick). AT&T hasn’t been shy to spend either, recently buying back the exclusive rights for “Friends,” and Comcast doing the same for “The Office”—in total, these purchases have cost them hundreds of millions.
So, make no mistake, there’s a lot on the table for the taking and this is only the beginning. Let’s look at how Netflix spends its money to get a sense of its position in the industry.
How Netflix Lines Up
Any new company needs to make projections. When you’re the likes of Disney or AT&T, you can be pretty confident that what you sell is going to be bought. But still, the numbers matter. Let’s go over Netflix’s numbers first.
Netflix spends approximately $100/customer per year to produce content. In return, it makes approximately $120/customer per year. $20 profit multiplied by its 150 million subscribers means…well, you can do the math.
Looking into the future, there is word that Netflix’s content spending is going to slow down and even drop. Combined with the expectation their earnings will continue rising, Netflix is creating an efficient financial game plan. So, I don’t expect Netflix to give up much of its lead in the race soon.
But now, let’s look at the competition.
How the Competition is Lining Up
Disney is currently spending about 1 billion on original content and expects this to double in 5 years. And their projections look more promising: 60-90 million subscribers on the low end and a staggering 130 million subscribers on the high end expected in the next 5 years. By just next year, Disney expects 13 million subscribers for Disney+. Combined with its subscribers on its other video-on-demand services (Hulu and ESPN Plus), this would mean 50 million subscribers. Disney is moving fast into this new territory. And with a cost of $6.99 per month, it’ll offer its service for far cheaper than Netflix.
AT&T is already spending 85 million dollars a year for exclusive rights to “Friends,” and is looking to increase its other original content spending to about $500 million dollars a year. This is no small loss for Netflix; “Friends” is their second-most watched show. Moreover, AT&T already has HBO subscribers to draw from. But…the question remains how many new subscribers they can reach instead of just transferring their HBO subscribers to HBO Max. Time will tell. WarnerMedia CEO, John Stankey, expects 70 million subscribers—double the existing American HBO subscriber count.
Apple is looking very promising because of its unique position in the industry. Its spending approximately 1 billion dollars a year on original content and expects to spend more than 4 billion dollars by 2022. I expect them to reach a lot of subscribers given their large reach. But what did I mean by unique? Remember that Apple also makes hardware. With required hardware purchase for every Apple TV+ subscriber, they can make even greater gains. And though they are late to the game, they already have experience overtaking an incumbent leader in a media subscription service. Remember Spotify? Apple beat them and it looks promising that they can do the same with Netflix.
Finally, Comcast haven’t revealed much besides their 100 million dollars per year spent on exclusive rights to “The Office.” Like with “Friends,” losing “The Office” must hurt for Netflix. In fact, it’s their most watched show.
My Take on All of This
I think the future is bright for all of these companies. They have good management, solid customer bases to build off, and good plans to soften any risk.
Disney owns Hulu with 28 million subscribers. They can always fall back if needed. AT&T has the existing HBO subscriptions. Apple has huge brand loyalty as well. Finally, Comcast is going to have a massive customer base by offering its service for free to all cable subscribers, making bank off advertisements instead.
I look forward to seeing how this all plays out…but one thing is for certain…Netflix needs to watch its back as a storm is coming.
– Investing Insider Magazine
