Disney is getting ready to launch its streaming service this year, and Netflix will have a significant competitor on its hands. However, the company believes they’ll be able to weather the storm.
Netflix understands that it’s business model relies heavily on the licenses of studio programming. It recognized the possibilities that one day these major studios will decide not to renew the consent of their programs.
In the past few years, Netflix has been in a rush to add in original content for its subscribers. Furthermore, to pay for the new material, the company had to issue bonds to investors and spent tremendous amounts of cash flows from operations. Back in October of last year, Netflix had spent a total of $6.9 billion on new programming.
In August of 2016, Disney acquired a majority stake in the streaming technology businesses BAMTech. The acquisition was intended to develop its streaming service, once the company ends its existing distribution agreement with Netflix in 2019.
Will Subscribers Jump Ship?
After Disney made the necessary acquisitions to begin developing their streaming service in early 2018, Netflix responded by mass producing more original content. Netflix understands that a large portion of their shows will be removed from their library.
According to MarketWatch about 14%, roughly 8.7 million Netflix subscribers are considering dropping the streaming service for the coming Disney+.
“About 14% of Netflix Inc. subscribers, equal to 8.7 million people, are considering dropping the streaming service in favor of the coming $6.99-a-month offering from Disney Co., at a cost to Netflix of about $117 million in lost revenue a month, a new survey has found.”MarketWatch
Let’s consider that in 2018 Netflix had a net profit of $1.23 billion. If they lose 8.7 million subscribers, losing a total $117 million a month, the company will experience a net loss. However, the company believes they’ll be able to retain their subscribers due to their original programs.
The question is, how well are the Netflix Original shows performing? According to Nielsen ratings, subscribers spend most of their time viewing programs that were TV reruns such as the Office and Friends. Out of the top ten, most watched shows on Netflix; eight of them were reruns of original TV programming.
Moreover, Netflix doesn’t see this as a problem; they’re proud of the numerous original programs they provide for subscribers. However, if the viewers are watching programs that will likely be removed, Netflix will have a problem.
Netflix Is Doing Fine For Now
The company barely generates profits and if subscribers numbers fall, profits will too. Moreover, with negative operating cash flows, Netflix could run into some serious issues trying to remain in operation. It’s hard to make market adjustments when a company has a history of negative cash flows. Usually, negative cash flows are a sign of too much debt relative to company profits.
Netflix as of right now is burning through tons of money, and although their subscriber count is high, with the recent rise in prices and the upcoming Disney+, the company could see their subscribers base fall. However, for now, things are going pretty well as the number of subscribers is rising, but we’ll see if this trend continues to remain in 2020.