Netflix - The Champ's Achilles Heel

Netflix is killing it. And its investors are on a high – literally. Its stock is at an all-time high on the heels of reporting its highest quarterly subscriber growth numbers ever. What could go wrong? You have Netflix. I have Netflix. We all have Netflix. And, that “We” is increasingly global (since more than half this past quarter’s growth came from outside U.S. borders).

But, make no mistake. Netflix’s long-term challenges are real, they are daunting, and they come directly from Netflix’s Achilles Heel – its own one-dimensional business model (for an excellent separate detailed analysis of Netflix's relevant metrics and financials, read "The State and Future of Netflx v. HBO in 2015" by Liam Boluk, recently published in Redef).  

You see, Netflix is a pure-play video service.  The company monetizes that subscription service only.  That means that Netflix must be profitable based on content revenues alone (unless and until it finds a way to expand beyond that – (more on that later).

Compare that to Apple. Remember them? Oh yeah, digital media’s worst-kept secret is very much alive again -- i.e., Apple hopes to launch its long-anticipated (overdue?) OTT “Netflix Killer” subscription service by fall. Apple's business model is fundamentally different than Netflix's.  For Apple, its "coming soon" OTT video service can be (and likely will be) a loss leader -- a losing proposition that ultimately wins for the Cupertino crew.  Here’s why.

Apple's core DNA is unlike Netflix's.  Apple benefits from multiple revenue streams. And, although the company frequently positions itself more broadly as being a media company, its primary stream is very un-Netflix-ian – it is hardware-driven pure and simple. Apple makes money (boatloads of it) by selling “cool” metal -- iPhones, iPads, Apple Watches, Apple TVs (and ultimately the iTV?).  That means that Apple's new subscription video service essentially will be a "marketing" expense that drives incremental hardware sales.  That also means that Apple can (and will) subsidize its content licensing costs in order to keep its subscription pricing down. Netflix can’t do that.

So, how scared should Netflix (and its investors) be of Cupertino and the host of other behemoths soon invading Netflix’s OTT turf? And, what can Netflix do?

First, let’s be clear. Netflix has a formidable head start and I’m not saying that the “mother of all OTTs” will go away anytime soon. But, that alone is not enough. After all, unlike Netflix, Apple is expected to offer both VOD AND live/linear TV (likely including both ESPN and HBO).  And, switching costs are low (essentially non-existent). All you need to do is go online and cancel.

So, Netflix can try to contain the inevitable Apple threat (and the threat of all other Apple-like behemoths) in at least five ways – the first two of which also lead to diversification: 

• Take its formidable lead and find a way to effectively mine and monetize the data it has already collected on all of us;
• Continue to develop and feature kick-ass exclusive original content like House of Cards and Orange Is the New Black that can monetize not only via individual subscriptions, but also via global content licensing deals. That original content can also deflect at least some of the Apple threat in a very HBO-like way. After all, will those passionate audiences abandon their favorite characters? Likely not;
• Continue to offer and deepen its pool of content (including via exclusive licensing) that Apple can’t match … at least for a long time;
• Emulate Apple, Sling TV and now also Sony VUE by adding live/linear TV programming to the mix (including the critical ESPN ingredient); and
• Offer lower pricing with an $8.99 monthly new sub charge that Apple and others likely won’t match (after all, under its recently announced deal, Apple will charge Apple TV customers $14.99 for stand-alone OTT HBO Now by itself). 

Of course, many of these counter-attacks will be increasingly harder to do based on the significant costs involved – and the pressure they place on Netflix’s Achilles Heel. 

But, there’s also always M&A. After all, the much-anticipated Apple threat is not just a threat to Netflix. It is an ear-splitting shot across the bow of myriad global players in the video game. So look around. Which of those players have multi-faceted business models (like Apple), a heavy dose of media in their strategies (like Apple), and plenty of cash to make a run at Netflix? Hmmm … let me think …. Google, Samsung and Amazon come to mind ...

… I’m just sayin’….