Netflix is starting the year with 52 weapons

Netflix has announced its 2021 strategy, saying it plans to release a new movie every week. Some will be Netflix originals, some acquisitions. That’s a lot of movie premieres, and with basic subscriptions starting at $9 a month, some are wondering whether it’s an overly ambitious strategy for the streaming giant.

Why is Netflix doing it?

The competition in streaming has heated up intensely in the last month, when “Wonder Woman 1984” debuted online, paving the way for every other Warner Media film to premier on HBO MAX this year. This also came on the eve of the big success of The Mandalorian on Disney+. 

Bottom line, with people around the world still stuck at home and other platforms getting blockbuster deals, Netflix can't afford not to up the ante. So it countered with a weapon - or rather fifty two - and promised to premier a movie every week.

Is this streaming stretched too far?

I think it’s a brilliant move. Netflix has the cash and the ability. It's already a big movie studio with budgets that are often higher than other studios. Most importantly, this announcement is just a marketing gimmick and an easily achievable goal for Netflix. Since 2018, the streaming giant has been making over 60 movies a year - big-name actors and directors, drama, action, comedy etc. Amazon Studios is a distant second at 26 films in 2020. So Netflix is committing to releasing less films than it has been doing for a few years now. However, this will have the effect of putting a lot more pressure on the competition, which don’t have as deep pockets and thus hurt them. HBO MAX and its parent company AT&T are struggling with debt while Disney is reeling from the closure of its parks.

Is this strategy sustainable?

Netflix is spending ~$19B a year on content and it’s funding them primarily through debt. It has a ton of debt right now and it has reached market saturation in the US. Know anyone without an account? I thought so. Is Netflix's strategy of obtaining debt sustainable? And can it keep spending at this rate?

The short answer is this: the strategy is very risky for others but not for Netflix for two reasons. First, in 2020, Netflix added subscribers at a pace where cash from subscriptions will be enough to cover content costs so it doesn't need to raise any more debt. Second,  the company always has the get-out-of-jail card of selling stocks to pay debt and strengthen its balance sheet. That’s exactly what Tesla did twice in 2020. AT&T and Disney don't have that luxury. Were they to do it, their stock prices would tumble and their investors would face high dilution. I'll borrow an analogy that Professor Galloway used for Amazon and retail to illustrate this point. Netflix is going underwater with the world’s largest submarine and largest oxygen tank, forcing the competition to follow it and match its offerings. The difference is the competition (HBO MAX, Disney, Hulu etc.) have just the air in their lungs and are drowning. So yes, the strategy is sustainable for Netflix. Netflix will surface and will be able to jack-up its prices as it did this year without worrying about losing customers to the competition. 

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.