Netflix in recent years has arisen as a streaming service that is trying to be an alternative to Hollywood. Rather than focus primarily on gaining the rights to stream prime time television or movies to attract customers, they are choosing to create their own. This has led to the company spending massive amounts on title creation without an obvious immediate return on investment. Can Netflix continue to greenlight the amount of projects they have in the past couple of years or will they be forced to cut spending drastically?
With traditional Hollywood movies the calculation is quite simple, you spend x amount of dollars, bring it to theaters and it makes y amount of dollars. If y is more than x you usually make a profit and its a win for the studio. Netflix instead is using the idea that if they bring enough people in from original series and have a low enough price point, they will be able to profit. The subscription model has worked before on many types of products, but the problem with Netflix is the products they are creating are costing way too much money.
If you look at Netflix's stock you can see that there is something called a p/e ratio and it is at 215. That is the price to earnings ratio and basically in laymans terms it is the amount of years worth of earnings that it would take to justify the share price. Technology price to earnings ratios are always a tad bit higher because you are betting on the future, not the present, but 215 is still an absurd amount. If you were just counting earnings it would take 215 years to earn back your investment. Why is this number so important? Simply put it shows Netflix isnt earning the money many people think they are. In fact I would say Netflix is probably burning money like crazy.
In my opinion, Netflix will not be able to continue the current amount of spending without some big changes I would expect to come in the future. Especially with net neutrality seeming to go out the window, Netflix is probably going to have to pay internet service providers to even allow base customers to have access to them, or they will charge the base customers. In my opinion an immanent price rise is unavoidable, especially with recent circumstances. If they want to continue spending the way they are, they are going to have to bring in more money.
I also expect that Netflix will start to crack down on sharing of accounts which is so prevalent. Almost everyone I personally know uses someone elses account. Because five people can all use the same account as long as they arent streaming at the same time, it makes it very easy to share. I would imagine they are going to do what similar services do and have you register a certain amount of devices that you can stream on. All these changes arent going to be friendly to the consumer, but they are probably necessary to the long term survival. I really like Netflix and how they are throwing a wrench in the traditional system, but they cant continue like this forever.
-Calaber24p