It’s lonely at the top of the streaming world — especially if you peer over the cliff and see the hordes of rivals clambering up to take your spot.
That’s where Netflix finds itself at the moment, as the company that turned itself from a DVD-by-mail business 20 years ago to a $75 billion media colossus with more than 100 million customers around the world faces problems it hasn’t had to deal with thus far in its meteoric rise.
The company has grown quickly thanks to its solid value proposition: unlimited online streaming of thousands of movies and entire seasons’ worth of TV shows, for roughly $10 a month. Contrast that with cable television services that can cost five to 10 times that much.
Netflix has not so much made inroads into the traditional TV model as it has built an eight-lane superhighway right through it.
The company’s scale is enormous. In addition to its back catalogue of old movies and shows, the company will release 30 of its own movies this year, spending up to $500 million in the process. That’s about 10 per cent of its total costs, which are themselves ballooning to more than $6 billion this year — more than any TV network save ESPN will spend on content this year.
So far, higher costs have been justified because the company has been growing quickly too, with customer numbers up 25 per cent in the past year and almost quintupling since 2012.
But critics are starting to wonder if that can go on forever. Since 2010, Netflix has grown its revenue by about 24 per cent a year, compounded annually. But the amount it spends on new content has gone up by even more — 42 per cent, according to a recent report from investment research firm New Constructs.
“The realities of Netflix’s costly business model are finally catching up to the firm,” analysts David Trainer and Kyle Guske said in a recent note. “Netflix is beginning to acknowledge the challenging economics of producing original content.”
Not all of…