January 2, 2015    4 minute read

Netflix and the New Year

   January 2, 2015    4 minute read

Netflix and the New Year

As 2014 has just left us, Netflix executives may well be toasting another year of market-leading success. The world’s most popular on-demand video service now boasts around 53 million paying subscribers worldwide. Culturally, the streaming website and app have penetrated the mainstream imagination. Netflix has become ubiquitous to such an extent that new television remotes now boast “Netflix buttons” that stream media through TV screens. With global revenues expected to have grown by 25% this year, on top of the 21% it grew in 2013, executives and shareholders would be forgiven for thinking that Netflix’s outlook for next year was rosy. As it happens, the forecast may not be as positive as one might assume.

Rising expenditure

Given its rapid rise to the mainstream, it is easy to forget that Netflix, in its current guise, remains a young company. The company’s expenditure is substantial, with its technical and production obligations rising to just below $9 billion in the third quarter of 2014. In a sign of its commitment to premium-quality original content, Netflix spent $90 million on producing the first season of Marco Polo – which has been poorly received by critics and viewers.

With high production budgets also allocated to new seasons of other flagship original shows like House of Cards and Orange Is the New Black, production outlay shows little sign of slowing. This may well prove detrimental to margins in the next calendar year, with its international operating bill not getting any leaner.

Strong competition

Perhaps Netflix’s biggest threat lies in growing competitor strength. In the US, competitors like Hulu and Amazon Prime Instant Video are continuing to eat into Netflix’s market share, which has gradually been eroded down from 75% in 2011 to less than two thirds of the US streaming market last year.

Netflix’s current valuation partly hinges on its projected customer base for the future. But the notion of several users sharing one account across several devices cannot be discounted, making some analysts worried that its share price could dovetail in 2015. As mentioned, Netflix has around 53 million subscribers globally.

Analysts estimate a similar number are subscribed to Amazon Prime, albeit with around half that figure making regular use of the Instant Video facet of their subscription. As Netflix’s biggest challenger worldwide, Amazon has looked for innovative ways to try to dethrone their rivals. Their decision to offer higher-quality 4K television-streaming at no extra cost may cause the more tech-savvy Netflix users to defect. Amazon’s ability to offer users the option to watch videos offline – something that Netflix bosses do not envisage at all – is also massively appealing to customers.

Rumours that Amazon may decouple its Instant Video service from its Prime delivery subscription, currently priced at $99 a year, could see it emerge as a serious threat to Netflix in the coming months. If Amazon were to introduce an advertisement-supported service and thus offer cut-price – or even free – service to customers, it could prove to be a game changer. Whilst one of Netflix’s key selling points is totally ad-free streaming, something, which endears it to viewers, customers, may be swayed by a new, substantially less costly service from Amazon at the expense of ad-free videos. Netflix may be confident that their currently superior content will help maintain customer loyalty, but with Amazon itself spending competitively to improve the variety and quality of its content, exemplified by the critically-acclaimed Transparent, who knows what the market could look like this time next year?

Cause for optimism

Around the world, however, there are more reasons to be cheerful for Netflix C-suite Executives. Despite expensive operating costs, Netflix’s international subscriber presence grew by nearly three-quarters from Q3 in 2013 to the same period in 2014. In Britain, Netflix has fast become a household name. One competitor, Tesco’s entertainment streaming service Blinkbox, recently reported losses of £18.5 million, and executives have now started takeover negotiations with TalkTalk. With long-overdue launches in Australia and New Zealand planned for March, an expansionist policy may yet prove to be Netflix’s saviour in the long-term. Operating costs expected to break even in 2015.

Looking ahead 

As Netflix and Amazon jostle for market dominance, and with more traditional services like HBO refusing to fizzle out (HBO revenue rose 10% in Q4 of 2014), competition in the relatively young online-streaming industry will be fiercer than ever in 2015. With all parties having differing objectives and business models, it is difficult to predict who will come out on top. But as more competition will ensure better quality and more diverse online selection, one thing is certain; the consumer will be the real winner.

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