As Netflix Burns Cash & Loses Daily Users, Can the Company Compete With New Services?

Looming competition from Disney and Apple have investors spooked about the future prospects of Netflix.

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Since July delivered a disappointing second quarter earnings report, Netflix (NFLX) shares have fallen around 23% as Wall Street analysts trumpet the looming challenges from Walt Disney Company’s Disney+, Apple (AAPL)’s Apple TV+, at&t’s HBO Max and Comcast (CMCSA)’s Peacock. As of this writing ahead of the company’s Q3 earnings report later today, Netflix boasts roughly 60 million domestic subscribers and 150 million worldwide to pace the streaming industry by a considerable margin.

But with Netflix losing domestic subscribers last quarter for the first time in eight years, paying an estimated $15 billion in annual content expenditures, and collecting roughly $13 billion in growing debt, we spoke to several experts to explore the company’s future prospects.

Will the streaming competition slay the incumbent dragon or be burnt to a crisp?

Netflix’s Q3 Earnings Report

UPDATE 4:00PM: In its Q3 earnings report, Netflix listed revenue at $5.24 billion vs $5.25 billion expected. Domestic paid subscriber additions stand at 517,000 vs. 802,000 expected while international growth includes 6.26 million new overseas subscribers vs. 6.05 million expected.

Analysts pointed to Netflix’s price increase last quarter as a primary factor behind its depressed growth. But with Stranger Things 3 included in this quarter, and high-profile content such as Martin Scorsese’s The Irishman and Henry Cavill’s The Witcher arriving later this fall, a quarterly rebound of sorts is expected.

Predictive data provided to Observer from SimilarWeb, a leading market intelligence company, appears to support that conclusion. According to the company’s usage tracking insights report for Q3, Netflix should see its quarter-over-quarter growth pick back up while international year-over-year growth will continue to decelerate.

“International growth is losing steam and in the U.S., the percentage of users opening Netflix daily is declining,” Ed Lavery, SimilarWeb’s investors solution business manager, told Observer. “Netflix will still continue to grow, just not at the same rate.”

Open rate, or the percentage of users using the app daily, has declined which may play a role in churn rate once Apple TV+ and Disney+ launch next month. Overseas, SimilarWeb found India to be the biggest decliner, a particularly concerning result as Netflix CEO Reed Hastings has publicly eyed 100 million new subscribers from the country. Still, Netflix maintains a significant head-start on its competition overseas.

“They will have been investing in certain markets for years,” Dallas Lawrence, chief brand officer at marketing platform OpenX, told Observer. “It seems like they will continue to have these all to themselves for awhile longer as many of these new entrants focus on the U.S. market.”

In July, the company predicted it would add 7 million customers in this period, per Bloomberg, though analysts remain skeptical.

Netflix’s Financial Forecast

Netflix’s debt has ballooned over the years, topping out at around $13 billion at the moment. The company has long operated under the idea that amassing a swelling worldwide customer base will eventually push revenue ahead of content costs. As the company pivots away from expensive licensed content to in-house productions, its expenses should theoretically lessen. There is some evidence that Netflix is succeeding in ushering users to its library of originals and away from licensed reruns. But massive nine-figure deals for legacy programming such as Seinfeld and the rights to make Dwayne Johnson’s action blockbuster Red Notice, originally set up at Universal, raise doubts about the company’s spending.

Netflix’s cash burn rate advances at a staggering pace and will remain under pressure as the company is pushed to spend even more just to sustain its current domestic customer base in the face of mounting competition. Hastings has always maintained Netflix’s opposition to traditional advertisements, but an ad-supported model is the clearest path to monetizing its healthy subscription lead and addressing its debt. There is $70 billion spent today on TV advertising in the U.S. (and $200 billion worldwide), yet only 5% of this goes to streaming platforms. The opportunity for revenue growth is there though it does not come without investor drawbacks.

“An ad-supported product outside the U.S. in emerging markets where the ability to pay $10 to $20 per month is limited might be viewed as a positive by Wall Street,” Steve Birenberg, founder of Northlake Capital, told Observer. “But an ad-supported model in large developed markets like the U.S. would be viewed as admitting the growth phase is over and the Street would not be happy.”

Birenberg is long on Netflix for the first time since 2015.

Hulu’s hybrid model—which offers a less expensive ad-supported option and a premium priced ad-free option—appears to be working. The streaming service surpassed 28 million subscribers earlier this year and earns 70% of its revenue from the ad-supported plan.

One alternative to traditional ad-supported tiers that hasn’t been discussed is content-specific advertising. New exclusive series drive subscription growth while Netflix series that haven’t moved the needle by Season 3 don’t posses much growth potential, per Deadline. A hybrid ad-supported model that includes light advertising on longer-running series instead of flashy new originals may appease both factions by monetizing the existing customer base without disrupting new exclusives.

34% of Americans and 41% of millennials feel ads they’ve seen on a streaming service or device seem more relevant or personalized to them than a traditional TV ad, according to OpenX’s research with The Harris Poll. As such, 51% of Americans and 63% of millennials have paused what they were watching to go to the advertiser’s website and make a purchase or learn more about the product advertised. Overall, 36% of viewers are more likely to engage with an advertisement seen on streaming as compared to primetime linear television.

Another revenue-generating option that Netflix is likely not too keen on is a more traditional cinematic release model. “I think it would help if they would ease up on theatrical distribution so that they could underwrite their big expensive movies with a month at the box office,” Birenberg said. While major theater chains require an exclusive 90-day window ahead of streaming availability, there are theatrical opportunities Netflix could embrace it it wanted to incorporate ticket sales into its business.

Netflix’s Competition

There are currently more than 200 active streaming services available. By 2020, there will be eight major direct-to-consumer platforms connected to well-equipped studios and deep-pocketed tech giants: Netflix, Amazon (AMZN) Prime Video, Hulu, cbs All Access, Disney+, Apple TV+, HBO Max and Peacock.

“Consolidation seems unavoidable,” Jon Giegengack, Principal at Hub Entertainment Research, told Observer. “I think consumers will look to add providers that are distinctive (i.e. they don’t duplicate content that can be found elsewhere), have desirable content (e.g. at least some high profile shows), and are a good value for the money.”

Disney and Netflix are equipped to offer all three of these based on content and pricing thanks to established high-profile franchise brands and a sizable cushion in the rat race, respectively. “The greatest pressure will fall on other platforms that don’t offer all of those,” Giegengack concluded.

The other element of this equation is distribution where Apple may have the greatest advantage. Apple TV+ will have access to one billion worldwide devices and with a free one-year subscription included in a purchase of a new iPhone, iPad or Mac laptop, it has the opportunity to convert hundreds of millions of people per year into paying customers.

“With this huge install base, Apple could eventually be the ‘aggregator’ platform consumers use to build their own ‘streaming bundles’ as they connect their sports and entertainment packages into the Apple experience,” Lawrence said.

All of this is a long-winded way of saying that the competition is multi-faceted and dynamic, but the incumbent remains in the driver’s seat. Disney+ and Apple TV+ may prevent the streamer from dashing passed quarterly growth expectations like a running back streaking to the end zone, but Netflix isn’t about to crash and burn.

As Netflix Burns Cash & Loses Daily Users, Can the Company Compete With New Services?