Spotlight on the Netflix Bloodbath: Lessons Learned from Discovery International (Part 1)

Netflix’s market cap crashed to $100 Bn this week,

That’s around one third of its peak valuation of $300+ Bn!

The rout was precipitated by the company’s announcement that it had lost just 200,000 subscribers over the quarter.

Questioning the Streaming Model?

Industry analysts and media business journalists circled around three causes of Netflix’s subscriber slowdown:

  • Covid recovery: Consumers are getting off their sofas and cutting their time spent viewing the streamers.
  • Increased competition from well-heeled streamers like Disney+ and HBO Max.
  • The rise of free, advertiser-supported AVOD services that provide enough viewing satisfaction for consumers to limit their paid subscriptions.

De-globalization

These factors are all very relevant, but there is a bigger story in play.

Netflix and the streamers promised global services that would compete in more than 200 countries and territories.

The streamers’ total addressable market (TAM) was defined most expansively as the global footprint of streaming-capable internet subscribers as captured in this chart from my Netflix 2022 study:

The global strategy and an ambitious TAM seemed to be validated by the remarkably successful rollout of Disney+.

  • Disney+ hit 10 million subs on Day 1
  • Passed 50 million in a year
  • And hit 100 million in just 16 months

However, the globalization dream has been hammered by recent events:

  • Netflix lost 3 million Russian subscribers and access to a potential market of 144 million.
  • Threatened and actual secondary U.S. sanctions against Russia’s allies and sympathizers will limit growth in other markets.

Meanwhile, China, the world’s #2 economy and most populous market has also been closed to the U.S. streamers for reasons that combine Chinese protectionism, Trump-Era sanctions, and the recent escalating U.S.-led moves to define and isolate China as the West’s #1 strategic enemy.

Risk

The increasingly hard split of the international community marks the end of the vision of an American-led ‘flat Earth’ where Disney+ and Netflix could aim for worldwide market shares  – and financial returns — that are comparable to their domestic successes.

The point here is not that Russia’s 3 million subs are decisive, but that their loss signals a de-globalization process that brings uncertainty and therefore risk into strategies that rely on open and stable international markets.

Discovery & the Global Originals Strategy

A powerful lesson for the global streamers is embedded in the rollout of Discovery’s international channels in the late ‘Eighties through ‘Aughts.

Discovery Channel launched first in the UK and Europe with a programming strategy that mixed local originals with series and specials imported from the U.S. network.

Management soon found that Discovery UK’s audience and ad revenues did not support the planned spend on local content. And without a strong mix of compelling local programs, Discovery was locked into reaching smaller UK audiences than in the U.S.

That vicious cycle was even more pronounced outside Discovery’s English-speaking markets, and its experience was more or less replicated for A&E, Nat Geo, History and other U.S. networks when they launched international affiliates.

My view is that Netflix and its competitors are likely to hit a similar wall.

Netflix plans to spend $20+/- Billion on programs next year.  Is that enough to create such a deep offer that it attracts and retains international subscribers with the same success that Netflix has achieved in the U.S., but in markets with viewing cultures as diverse as Germany, France, Canada, South Korea, India and more?

In short, $20 Bn is not such a huge number when it addresses a dozen major languages and many more distinct cultures found in 200+ territories.

Don’t Forget Netflix’s Strengths!

Netflix is being evaluated harshly today by investors who bought in to the optimistic expectations that surrounded its rise into a global behemoth.

However, Netflix remains dominant in the streaming market, as measured by its subscriber count and share of viewing.

It wins awards. It has successfully launched in territory after territory, establishing studios in several of them, even if greenlight decisions remain concentrated in LA.

Most important, Netflix remains a huge buyer of both scripted and unscripted / documentary programs.

That’s the big takeaway for readers of Documentary Business!

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