Digital Disruption Strategy: Netflix stock? Sell Sell Sell!

From humble beginnings, Netflix has grown into THE media streaming service. The incumbent is becoming so popular that an estimated 37% of the world’s internet users use Netflix. With 182m paid users (69m in the US), Netflix is sitting pretty at the top of the tree in subscription-based streaming revenue. But for how long?

So far, Netflix has successfully competed with Amazon Prime, and largely dominated Roku and Hulu. However, with AppleTV+ and Disney+ now hot on its heels, how will Netflix diversify and disrupt itself? How will it protect itself?

It’s impossible to ignore Apple’s global access to users. (1.4 billion active devices, 900 million of which are iPhones, 169m in the US) They own a far more advanced and mature ecosystem. iTunes, iOS devices, AppleTV and Apple Music (6m users from Beats alone!) provides an already mature customer base who trust the Apple brand, who have almost immovable loyalty and are seeking a single-sign-on experience where one login allows them access and synergy across their entire lifestyle, including a growing IOT landscape.

Netflix do have some opportunity to defend their market share, quickly. The buzz and positivity around AppleTV+ is yet to really make a dent in Netflix’s fame. They can increase advertising, but that is an expensive endeavour, when in reality Apple’s existing advertising across its other products and services is impregnable, and is solely focused on building Brand equity to a point where specific targeting of products is almost irrelevant — the Brand love is there anyway, most will dip their toes into AppleTV+.

Netflix certainly has market share and the head start in talent, marketing, brand and model. But they do not have Apple’s platform ecosystem. They cannot bundle their product into billions of other products already in use like Apple can. Or like Amazon has with Amazon Prime. They are a product business who, as and when they try to diversify, will be shut down by most potential partners in favour of Apple, or Amazon, especially by the content producers they happily gazumped in the 2000’s. The ecosystem businesses (Apple, Amazon, Google) will eventually gain access to a far larger user base and device capability. As well as deeper pockets. Will Netflix be forced into a corner while they continue to give up all of their secrets?

Another possible protection strategy for Netflix is their ability to produce and serve culturally localised content. Something they are now getting fantastic feedback for and are growing because of it.

Not all is lost. Apple, even with a $6 billion content budget, hoards of fanatical celebrities and an innate Jobs’esque ambition is barely a part of the streaming conversation since its launch in November 2019.

One major unknown is the post-covid economy. Netflix’s growth in markets such as Latin America and APAC, India and Malaysia was significant in 2019 — up to 15m users in the first nine months. These territories, along with Indonesia are far more Android loyal than they are Apple. Cost has a part to play in this, and a global recession will only exacerbate this.

Apple’s real opportunity — outside of spending power on talent and content, and user and device access — is its developing algorithm. Netflix have not allowed users to overtly customise their algorithm and therefore content preferences. It’s all behind the scenes and more often than not is clunky at best. Click on one murder documentary and all of a sudden then next 6 months of your Netflix experience is overtly morbid and depressing.

I think it comes down to whether the limitations of Apple’s content, (which might be short-lived), can be compensated for by the strength of the Apple platform and ecosystem.

I believe that for the next 3–5 years, Netflix will hold on. And may peak as investors see Apple and Disney struggle. But given time, Apple must take advantage of their already dominating route to market. If I was Netflix, I’d sell now. If I was an investor (I’m not!), I’d sell in 2 years.