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etflix’s recommendation algorithm is also helping it to gain subscribers and to keep them watching. In 2016, 80 percent of views on Netflix were driven by its recommendation algorithm. Netflix believes that the algorithm adds value by helping viewers choose what to watch rather than leaving them paralysed with choice. Netflix has also grown because of its strategy to increase original content. In 2016, 58 percent of users said they watched Netflix because of its original content. In 2019, Netflix released 371 original TV shows or movies. This is almost a third of all original content released by the entire US TV industry in 2019. The content is also good. As of 2019, Netflix has won 94 Emmys (Prime-Time and Daytime) and 6 Academy Awards. In addition to its impact on ratings and subscribers, Netflix’s increase in original content also hurts traditional TV because it decreases the licensing revenue they used to enjoy from Netflix. Of the $12bn that Netflix spent on content in 2018, only 15 percent was spent on external content. Besides increased spending power, Netflix has been able to increase content because of the advantages of streaming over linear TV for the TV company. Netflix is not restricted to showing only one show in primetime. Instead, Netflix subscribers can all watch their favourite show in primetime (or at their optimal time). This maximises the viewers for each show, which enables Netflix to produce more shows. Netflix’s AI algorithms also allows it to better predict what shows subscribers want in the future. This also increases the potential viewers for each show. This has allowed Netflix to dispense with costly pilots to test audiences. Instead, Netflix commissions whole projects from the start. This also helps draw creative talent away from traditional TV. The main weakness of Netflix compared to traditional TV and telcos is that Netflix has no physical infrastructure for delivering its content to subscribers. Netflix sees this as a strength. As its CEO, Reed Hastings puts it, Netflix is “… just focused on streaming and customer pleasure”. However, it does leave Netflix vulnerable to cutthroat actions from Internet Service Providers. In 2017, the Federal Communications Commission repealed regulations from the Obama administration that prevented ISPs from blocking or slowing the speeds of any given website or web service. This is known as “net neutrality” or “common carriage”. In 2014, Netflix was forced to pay Comcast and Verizon for access and full speed. Netflix could find itself in similar situations going forward. To overcome this weakness, Netflix has struck deals with cable TV operators like Comcast and AT&T to include Netflix as part of its service bundles.
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"Google has also moved into the broadband space, building fibre optic networks in 16 major US cities, although they have not expanded to any new cities since 2016." Netflix is banking on its size. With its large number of subscribers, it is betting that cable and broadband operators cannot afford to block it or slow down its download speed for users. Who wants to be the provider who does not allow their customers to use Netflix? Many financial commentators argue that the Netflix’s business model is unsustainable. Netflix is spending billions on content generation but has yet to turn a positive cashflow. Netflix has been betting on subscriber growth, and the future returns and savings from generating its own content. Netflix has been funding this strategy through debt. It has close to $15bn in long term bonds. So far investors remain optimistic despite the debt. Netflix has a PE ratio of over 80. AT&T currently has a PE ratio around 16, Comcast: 17, Disney: 13, and ViacomCBS: 5. Some analysts predict that Netflix will have positive cashflow within five years, mostly led by growth in international subscribers. Amazon, Google (YouTube), Apple and Facebook also pose a similar future threat for traditional TV media. They all provide streaming services: Amazon Prime Video, YouTube Premium, Apple TV+, and Facebook Watch. Facebook, Google, and YouTube already enjoy significant advertising revenue. All four companies also produce original content. Google has also moved into the broadband space, building fibre optic networks in 16 major US cities, although they have not expanded to any new cities since 2016. Another interesting new entrant is Tubi. Launched in 2014, it is a free streaming service that makes its money through advertising. Advertisers bid for commercial breaks in real-time. Its content deals include NBC, Paramount, and MGM. Investors include former vice chairman of Lionsgate, Mark Amin. Some traditional TV companies have also moved into streaming i.e. Disney+, Hulu (Disney and Comcast), HBO Now (AT&T), and CBS All Access. Despite increasing competition in streaming, Netflix enjoys first-mover advantage and has the largest numbers of subscribers and viewers in the US. This advantage is likely to erode over time and will be particularly tested by the recent entry of Disney+. Netflix’s also enjoys an advantage internationally. It launched to over 190 countries in 2016 and CFI.co | Capital Finance International
now has over 90 million subscribers outside the US. It is also producing original content in many of those countries. Access to international growth will provide it with extra revenue as competition in the US intensifies. AT&T was a leading cable and broadband provider before the acquisition of Time Warner, and this has increased with the acquisition of Charter Communications from Time Warner. More importantly, AT&T now has gained lots of new content including: Warner Bros., HBO, CNN, the Cartoon Network, and Turner Sports. CBS’s merger with Viacom increases the new company’s overall size but it also helps it to compete with Netflix and the new players in terms of content. Viacom owns Paramount Pictures, Comedy Central, MTV, BET networks, and Nickelodeon. CBS owns CBS and Showtime. The merger is actually a re-merger with the companies splitting in 2006 after Viacom had bought CBS in 1999. Viacom started as a syndication division of CBS Network in 1952. Comcast is already one of the leading vertically integrated TV companies int he US. It is one of the top cable and broadband providers in the US and owns content from NBC and Universal Pictures. Its acquisition of Sky provides it with an avenue of overseas growth, taking some pressure off its US business. Disney’s acquisition of 21st Century Fox increased its content. Like Netflix, it is in the content game not the infrastructure game. Disney gained 20th Century Fox Studio’s giant back catalogue but also the movie rights to several Marvel characters not currently owned by Marvel Studios (acquired by Disney in 2009) e.g. the X-Men and Fantastic Four. Disney launched its own streaming service in November 2019, Disney+. Its acquisition of 21st Century Fox also increased its stake in the Hulu streaming service from 30 percent to a controlling share of 60 percent. Of the remaining traditional US TV companies many now look like future acquisition targets, particularly because of their content. This includes AMC, Discovery and Starz (owned by Lionsgate). So far Netflix itself has stayed out of the M&A space. It remains focused on generating its own original content. Given its capitalisation, Netflix is more likely to be an acquirer rather than a target going forward. The first wave of consolidation that occurred after the 1996 Telecommunications Act was driven by the removal of the cross-media barriers between telecommunication companies and media companies. With the growth of the internet, many companies were also looking to the future. Some of the bigger examples include the merger of Time Warner Cable and Turner (1996), the Viacom purchase of CBS (1999), and Time Warner merger with AOL (2000). i