Netflix’s ‘Competitive Moat’: Can Streaming Giant Spend Rivals Like Disney and Apple Into Oblivion?

Netflix just laid down the gauntlet, essentially telling its competitors: Catch us if you can. The streaming heavyweight is now on the verge of hitting 150 million global subscribers, Netflix reported on Tuesday, giving it a formidable lead on new challengers like Apple and Disney that have announced plans to enter the streaming race later in the year. Netflix has built that lead in large part thanks to heavy investment — with $15 billion earmarked for content in 2019 alone — but can that breakneck spending continued unabated? First, it’s worth pointing out that pumping big dollars into programming is critical to Netflix’s continued dominance. “Content spend remains highly predictive of forward subscriber additions,” Goldman Sachs analyst Heath Terry said in a note to clients on Wednesday morning based on a study of internal data. He added that the company’s “accelerated” spending between 2018 and 2019 leaves “considerable upside” for Netflix to attract new customers. Of course, that should be the case. As Netflix invests in more shows, especially in local content aimed at budding markets like India, it should appeal to a wider audience. Gradually raising subscriber fees, as Netflix continues to add more customers overall, has allowed the company to pour more of its revenue back into content, including home-grown hits such as “Narcos,” “Stranger Things” and “Queer Eye.” (Netflix has also aggressively tapped into the debt market to fund its shows; the company now has more than $10 billion in long-term debt.) Netflix’s free-spending ways make the investments from its new competitors look paltry by comparison — Apple put about $1 billion into its upcoming slate of shows, Disney+ will hit $2 billion on original content by 2024. So far, Netflix has looked to spend any potential threats into oblivion. However, some analysts are skeptical that Netflix’s spending advantage will remain so stark. “Netflix’s ability to maintain the gap between what they spend and their competitors — it’ll be harder to maintain that,” Todd Klein, partner at Revolution Growth, said. One reason? Klein pointed to the $6.99 per month cost of Disney+, the Mouse House’s streaming service that launches in November. That price will “constrain” Netflix, Klein said, acting as an anchor that will make it tougher for it to raise its prices significantly moving forward. And that could stifle Netflix’s ability to continue increasing its content spend, year after year. Or, even more ominously for Netflix and its investors, give subscribers a reason to consider dropping their accounts — something Netflix has largely been immune to so far. “When you have a big price differential like that,” Klein said, alluding to the price gap between Disney+ and Netflix, which runs $15.99 per month for its most expensive package, “people make value trade-offs. How much value am I getting for that? This is going to be a core question as Netflix navigates new competitors coming into the market.” This concern isn’t shared by most Wall Street analysts. “Netflix leads a category that contains material multi-year growth potential. As consumer content dollars shift from traditional TV to streaming, we think the market will support multiple players, with Netflix leading the way,” Piper Jaffray analyst Michael Olson said in a Wednesday note. “In other words, despite new services on the horizon from Disney and Apple, we expect minimal impact to Netflix subscriber additions and retention.” UBS analyst Eric Sheridan agreed, saying on Wednesday that Netflix is poised to widen its “competitive moat” because its service has proven to be less susceptible to price increases. Klein is bullish on Netflix’s long-term prospects as well, saying the company will likely remain “king of the hill” in the streaming space. But not only is he wary that Netflix will be able to keep spending as it has, he’s unsure there will even be the same amount of content to spend its dough on. Disney has already pulled its content from Netflix. WarnerMedia, when it launches, could decide to do the same with classic shows in its library like “Friends,” which Netflix in December paid $100 million to keep it on the service in 2019 alone. There will also be other streaming competitors bidding on hot library content. These are headaches Netflix has been able to avoid. A dip in quality content could spur members to “cycle in and out of their membership,” Klein said — something that’s plagued Hulu, as viewers ditch their subscription once they’ve binged on the service’s marquee shows like “The Handmaid’s Tale” and “Castle Rock.” But the sheer volume of content Netflix produces — and its ability to roll it out throughout the year — may mitigate the dangers of fickle subscribers.