What did Netflix really miss? Netflix missed earnings recently, but in my opinion, they missed something big. They missed building a moat.
Whenever you stumble upon a castle, you have to start building a moat around it.
Netflix’s castle was its early entrance to streaming. They recognized it, did interesting deals with media companies to get more content (pay for Friends, The Office, Seinfeld, etc.), and accelerated user adoption to the new way.
But as the adoption of streaming grew, it was also clear the technology behind streaming is easy to replicate. Thanks to Azure, AWS and GCP.
Even Netflix streaming product is built on AWS. A combination of cloud technology adoption, increased internet speeds, and success of companies like Roku and Hulu were clear signals.
At this point, there were a couple of years when Netflix adopted its strategy to spend the highest to create original content. That was a good strategy and also a reflection of the fact that Netflix is now mainly a media company and not a tech company.
During these last 5 years when they were spending gigantic sums on content, I never understood why they didn’t do other smart things. These are not mutually exclusive options.
Some of these other things include:
- Buying an old movie studio (like MGM by Amazon): My understanding was, yes you could spend $20B to create original content, but you can save time to get a good catalog for cheap by leveraging Netflix’s equity. And their equity was soaring. It is just good capital allocation.
- Get into Audio streaming
- Get into merch (they did recently)
- Moonshots: Experiment with audio streaming products, and user-generated content products like YouTube. This might sound ridiculous but hear me out. When Google stumbled upon success with Search they protected it with Maps, YouTube, Chrome, and more. Most of their experiments failed but some succeeded and that’s what matters.
They seem to do new things like gaming, which I think could be potentially huge for them. Especially when you consider their DNA in creating new code. Doing this on a high ride is usually easier and gets tough when your equity is getting crushed and your employees start leaving.
But again Netflix has been in a similar situation before and came back stronger than ever. Their current situation is not nearly as bad as they had seen before. They still have the most important streaming product with great revenue and their original content catalog is bigger than ever.
But some things should change.
- Netflix should not spend so much on new content, they should acquire large and cheap catalogs. It’s tough now that everyone has a streaming service. But worth a try. More money doesn’t mean more creativity. Look at HBO Max. Find great content curators, and take interesting bets.
- They should explore more experimental products/apps.
- Consider acquisitions to compete against YouTube, Spotify, and AMC. This will allow Netflix to create bundles which can be sold for a premium. Disney is doing that with their bundle of ESPN and Hulu. Its a great value for customers.
- Consider theatrical releases via own theaters (yes acquire them if possible) or just using the status quo. Hit series on Netflix could also premiere in theaters, honestly will avoid future churn.
There are many interesting ideas, but the bottom line is**“when you stumble upon a castle, build a moat around it”.**
Finally, I will leave you with this picture of how Disney built a moat around its castle.