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Now the hard part: Why Netflix's toughest days are still ahead

Analysis: As rivals launch their own streaming services and take back rights to popular shows, Netflix is facing increasing pressure to create stronger original content.
A man watches Netflix on a device in a restaurant
A man watches Netflix on a device in a restaurant.Netflix

Netflix is about to come to terms with an age-old truth of show business: Content is king, and no company has a monopoly on great content.

For nearly a decade, Netflix has experienced rapid subscriber growth thanks in large part to its revolutionary distribution model, which gave consumers direct access to a vast library of licensed content — and, over time, original movies and shows — through the internet for a small monthly fee.

But now that growth may be stalling. As rivals across Hollywood and Silicon Valley launch their own streaming services and take back rights to many of the most popular shows, Netflix is facing increasing pressure to create stronger original content to retain customers, several Hollywood executives told NBC News.

"Right now, it’s an arms race for programming," said Barry Diller, the chairman of InterActiveCorp and a veteran Hollywood executive.

While the idea that Netflix would one day need to compete primarily on the strength of its own content has percolated in business and tech circles for several years, this reality was driven home on Wednesday when Netflix announced that it added 2.7 million subscribers in the second quarter of 2019, far fewer than the 5 million subscribers expected by Wall Street analysts.

To make matters worse, the breakdown of Netflix’s subscribers showed that it had lost 130,000 subscribers in the U.S., its first decline in eight years.

Hastings attributed the shortfall to the second-quarter programming lineup and a recent price hike for subscriptions. While the company continues to spend on a wide variety of content, it did not have any true breakout hits, and its most anticipated show — the third season of “Stranger Things” — came out a few days after the quarter ended.

Friends is leaving Netflix

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With new competitors on the way, Netflix needs every quarter to be strong enough to justify its price — and to consistently add new subscribers to justify investor expectations that it will continue to grow.

"Netflix just hit a big speed bump on its march to global domination," said one veteran television executive, who asked not to be identified to avoid jeopardizing business relationships. "There are many bigger and more dangerous bumps ahead."

The subscriber shortcoming is also notable because Netflix does not yet have any serious challengers to its position as the go-to streaming platform.Disney, AT&T, Comcast and Apple haven't yet launched their rival streaming services. When they do, Netflix will face increased competition for Hollywood talent to produce new shows while losing rights to some of the most popular old ones, such as "Friends" (to AT&T) and "The Office" (to Comcast).

Comcast owns NBCUniversal, the parent company of NBC News.

With more competition and a diminished library, Netflix will need to create more original hits. It will also need to release those hits on a more regular basis to retain customers who can unsubscribe and resubscribe at will.

"Ease of unsubscribing will matter as people subscribe to more than one service and hits will give at least a short-term boost," Diller said.

The propensity for consumers to subscribe and unsubscribe is known in the media industry as “churn,” and it’s something HBO experienced firsthand recently after the end of “Game of Thrones.”

The good news for Netflix in the U.S. is that many of its biggest original content bets haven't started to pay off yet. The company's biggest showrunners ⁠— Ryan Murphy, Shonda Rhimes, Kenya Barris — are still at work on their new offerings. Murphy's first, "The Politician," debuts Sept. 27.

The bad news it that there's no way to guarantee that even the best showrunners will deliver hits.

"Big hits have no formula or process and usually aren’t distributed evenly," Diller says.

Distribution is essential, of course. Jeffrey Katzenberg, the Hollywood mogul who is launching Quibi, a premium, short-form mobile video service, said that the technical challenges of streaming video do provide some barriers to entry that can help Netflix.

"You can have great content, but if you don’t have the ability to access and serve your customers in a convenient and an attractive price/value proposition, you won’t be competitive,” Katzenberg said.

That said, Netflix and its competitors can constantly try to out-scale and out-innovate one other on the distribution side or enhance their data-collection ability to better know and cater to their customers. But when it comes to the content — the stuff people actually watch or play or listen to — there is no guaranteed formula for success.

Media companies with deep pockets — or, in Netflix's case, debt — can spend heavily on talent, creators and production value in order to increase their chances of creating great content. But no matter how much they spend, it's still a gamble.

"The danger is, spending the money without having what's underneath," Casey Bloys, the programming chief at HBO, which is now owned by AT&T's WarnerMedia, told NBC News earlier this year. "You can't just throw money at something because people have to have something to invest in.”

Netflix's original content bets may pay off, or they may not. But if they don't, and Netflix doesn't have a vast licensed content library to fall back on, more and more customers may find themselves unsubscribing from Netflix — and staying unsubscribed.