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The Economist April 25th 2020 Business 59
Schumpeter Minting it
Netflix will remain a blockbuster hit beyond the covid era
o understand netflix, forget the mullet-haired Joe Exotic shows has stalled in the pandemic, Netflix played down fears that
Tand his antics in “Tiger King”. Think instead of the bearded El people will binge through its catalogue. Its producers and anima-
Profesor and the other rogues who populate “Money Heist”, the tors are busily editing series in their bedrooms and kitchens. The
streaming firm’s exhilarating Spanish-language crime drama firm is confident that the pandemic will not affect its planned re-
about stealing €2.4bn ($2.6bn) from the national mint in Madrid. leases this year. It also offered a response to those who say that its
Like the hijackers, Netflix is taking advantage of the lockdown in model of borrowing heavily to finance film-making is unsustain-
many countries to print money. Like El Profesor, the company’s able. It generated free cashflow in the quarter for the first time
goateed boss, Reed Hastings, is usually a step ahead of everyone. since 2014, and said it would burn $1bn of cash or less this year,
And like the heist’s perpetrators, it has always had one golden rule: down from $3.3bn in 2019. This helps explain why junk-rated Net-
stick to the plan. So far it has pulled it off. As one analyst puts it, flix now borrows at similar interest rates to a-rated Disney.
Netflix is as much a household essential in the covid-19 age as Clo- Of course, no good plotline is without setbacks. Netflix ac-
rox. Its market value, at more than $190bn, has for the time being knowledges that subscriptions may simply have been accelerated
risen above Disney’s. Yet, as usual with Netflix (and with “Money by lockdown. If so, they may slow again when restrictions are
Heist”), just when you think you can breathe easily, trouble starts. eased. Cash burn could then tick up. The company needs money to
Netflix’s story has had a Tinseltown quality to it since its found- bankroll new content but has yet to lay to rest a long-standing con-
ing in 1997. Even in its early, dvd-dispatching days Netflix won its cern that its rising international revenues will not offset slowing
subscribers’ hearts and minds—and so their wallets—with plenti- subscriber growth in America, its biggest market. In the first quar-
ful content and great customer service. In contrast to Blockbuster, ter its foreign revenues were crushed by the surging dollar. At the
it had a “long tail” of tens of thousands of dvds for all tastes. It same time Netflix faces new competition, both at home and
made recommendations to viewers based on their previous abroad. Disney+, launched last November, has attracted 50m sub-
choices. It also had a clear-cut vision. scribers globally. Mr Hastings admits he has never seen an incum-
Mr Hastings believed from the start that films would eventually bent learn new tricks so quickly.
be downloaded from the internet. But instead of taking on the me- Look beyond covid-19 and the worry is not just that Netflix sub-
dia incumbents, be they tv networks or film studios, he side- scribers will flee to other streamers. It is that as other big media
stepped them with novel approaches to distribution and film- companies shift to streaming, they will refuse to sell it new shows
making. In the process, he has built Netflix’s brand, customer base (as Disney has done as it launched Disney+) or license it old stuff
and ability to fund growth. Now the firm has gone global, in a way (as happened this year with “Friends”, bought by WarnerMedia in
none of its media rivals has matched. Ben Thompson of Strate- 2019). That would force Netflix to spend ever more to keep up.
chery, an online newsletter, explains that Netflix moved from
dvds to streaming rights to original content, each time building on Running and streaming
a user base acquired in the previous step. This “ladder strategy” en- Yet this ignores the devastating impact of the pandemic on media
abled the firm to clamber into many of the world’s homes just in conglomerates in general. WarnerMedia (owned by at&t, a tele-
time to provide distraction during a global pandemic. coms giant) has just announced it will launch hboMax, its stream-
On April 21st it became clear just how sturdy the ladder is. As it ing service, on May 27th. But lockdown restrictions mean it must
reported its first-quarter earnings, Netflix said subscriber num- forgo the razzle-dazzle reunion of “Friends” cast members. Be-
bers had soared by 15.8m in the first three months of the year, more cause of the pandemic, nbcUniversal (which is part of Comcast, a
than double its previous forecast. They now total 183m. Most of the cable operator) has staggered the start of its Peacock streaming ser-
growth came from Europe and Asia. Though production of new vice, giving Netflix more time to consolidate its lead. On April 22nd
at&t reported falling revenues at WarnerMedia owing to a melt-
down in advertising. Both it and Comcast are weighed down by
debts. A recession may convince their dwindling base of lucrative
cable subscribers to cut the cord in favour of streaming, further de-
pressing revenues. Disney is likely to be the first of the covid-
stricken media titans to get back on its feet when lockdowns end.
But right now it is ailing. Its theme parks, the biggest source of its
profits, are shut in America and Europe. Its espn sports tv network
has almost no live competitions to broadcast. And like everyone in
show business apart from Netflix, it relies on advertising.
That sets the stage for an endgame to the “streaming wars” that
will unfold sooner than anyone might have imagined. Rather than
starving Netflix of content, some of its rivals will struggle to sur-
vive. Their debt-laden parents may be forced once more to license
shows to Netflix. Disney, its most formidable nemesis, will lack
the financial muscle to kill it off completely. Amazon and Apple,
whose streaming services have nothing like the depth of Netflix or
Disney+, have bags of cash to shake up the contest. Meanwhile,
Netflix will try to entrench its global lead, not least by banging out
more international smash hits like “Money Heist”. When El Profe-
sor declares, prophetically, “We are the Resistance”, he could be
channelling Mr Hastings. 7
