In recent years, Netflix has been an unassailable story of growth with a business model and stock price its entertainment industry rivals could only dream of.
But mounting competition from major tech, media and telecom companies, rising prices for top-tier talent and slowing subscriber gains have coalesced to put the streaming giant in a tough spot.
“They’ll lose 10 million subscribers in 2020 if they don’t have an alternative to the standard price of $13 per month,” said Laura Martin, a managing director at the equity research firm Needham & Co.
That decline may already have begun. In July, Netflix reported that it had lost 100,000 U.S. subscribers in the second-quarter of 2019 after predicting a gain of 300,000. The company is scheduled to announce its third-quarter subscriber numbers on Wednesday, a report that will be closely watched on Wall Street and in Hollywood.
If Netflix cannot maintain its once-overwhelming momentum, it could be forced to re-evaluate how it spends its money. There are signs of that Netflix is retooling, with Bloomberg reporting Tuesday that the streaming giant is pulling back on expensive comedy specials after shelling out as much as $20 million for exclusives from Dave Chapelle and Amy Schumer.
Netflix CEO Reed Hastings has teased that his company will be forced to adapt.
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“It’s a whole new world starting November,” Hastings said at a Royal Television Society event in the U.K. last month. “We said that eventually all these companies will go direct-to-consumer. We’ve been preparing for this for a long time because we’ve known it’s been coming.”
With 151 million subscribers, Netflix has built one of the biggest subscription businesses on the planet after borrowing billions of dollars to fund a smorgasbord of content to keep consumers from canceling their accounts. The company is now regarded by investors as belonging alongside the tech heavyweights Facebook, Amazon and Google, with Netflix making up the “N” in the buzzy “FANG” stocks.
But Netflix’s slowing momentum has weighed on its stock, which had until recently been one of Wall Street’s strongest performers.
Concerns about growth came to a head in July, when Netflix’s subscriber decline led its stock price to plummet 10 percent. Shares are now down 30 percent since then, and a growing number of investors are betting that the stock price will continue to fall.
Netflix said at the time that it is hoping to sign 7 million subscribers in the third quarter, and its fourth-quarter subscriber projections will be the focus of scrutiny by investors and rivals.
To hit those numbers and fuel continued growth, Netflix has to keep spending on content and talent — a tougher prospect now that it is competing head on with companies like Disney and Apple, both of which are nearing the launch of their own Netflix-style subscription services. Netflix, meanwhile, has piled up more than $14 billion in debt, causing some alarm on Wall Street.
Michael Pachter, an analyst at the wealth management firm Wedbush Securities, has been one of Netflix’s biggest skeptics. He told NBC News he remains unconvinced that Netflix will be able to hold off its rivals — even comparing the company to WeWork, the office rental company that has recently run into financial trouble.
Pachter said he sees Netflix’s spending as creating “tremendous value for its subscribers” but being a problem for the stock price.
“I think they have an unsustainable business model,” Pacheter said. “WeWork had the same argument: ‘We’re building something to last.’ But getting to profitability risks cutting their share price.”
The competitive environment has gotten tougher not just for talent but also for popular library content. In the coming years, Netflix will lose the rights to “The Office” and “Friends,” after having spent an estimated $500 million to snag the rights to “Seinfeld,” and $200 million to sign “Game of Thrones” creators David Benioff and D.B. Weiss.
Netflix will also face new competition for viewers’ time from both Apple’s new streaming service, launching Nov. 1, and from Disney+ later this month. Both services are cheaper than Netflix’s most popular tier, which is $13 per month.
Courtney Williams, head of partnerships for New Zealand-based Parrot Analytics, which tracks global demand for TV, said that Netflix shows remain popular but that “the super growth has already slowed.”
“Demand is a leading indicator for subscription growth,” Williams said. “And we’ve seen that it’s beginning to plateau.”