Let's get something out of the way right up front.
No, streaming is not dying as a medium.
It is evolving.
At the end of the last season of "Netflix's Terrible, Horrible, No Good, Very Bad Day"- the series, the streamer was rocked by bad earnings. And in this season's premiere, it got even worse. I don't need to get into the specifics but it took some big subscriber losses that shook the company to its core.
The usually more jovial Reed Hastings didn't show up in a Squid Game track suit or make a lot of jokes to lighten the mood this time per his usual approach to their earnings call. He was more reserved and looking to give off the air of self-reflection. Hastings and Ted Sarandos had to sell its investors the silver lining of this black cloud and they took a very un-Netflix (NASDAQ:NASDAQ:NFLX) like approach.
Hastings noted he wanted to get back into investors' "good graces." That means all of sudden the topics that were taboo to these calls in the past were no longer off limits. Things like password sharing and an ad-tier option were right there front and center.
Yes, both of those will help right the ship down the road, but neither is a magic bullet, neither is a perfect solution and both are still far away from being implemented. The larger problem is Netflix's massive spending which has always been an issue.
But that's also the point, most of this is a Netflix issue, not a streaming industry issue.
Remember everyone thought the sky was falling after the last earnings report and then one-by-one every other streamer reported some level of stability or gains. And just like that Netflix went from being the center of the universe to the outlier.
Before we write off streaming and move towards whatever "next" is…maybe we wait a quarter and see how the other big guns report out. For example, Apple (NASDAQ:AAPL) is coming off big Emmy and Oscar wins, a new MLB deal and a number of big-name content partnerships. Plus Discovery and WarnerMedia's (NYSE:WBD) new marriage is barely a week old and the final AT&T (NYSE:T) earnings report including them just came out showing gains for HBO Max. And that's not even discussing offerings from the other big names in the space.
The truth is the lack of an ad-option and a blank check for content for the past few years are both problems inherently Netflix-specific, as is a stubbornly steadfast dedication to an "all-at-once" approach. Going weekly has been a big help for Netflix's rivals but it still seems to be a bridge too far for the company.
Maybe that will change now, after all, opting for an ad-tier approach was something Hastings and team were always against citing "complexities" that took away the simplicity of the service. Now with Netflix being the most expensive streamer and the stock in freefall he doesn't have a choice but to change gears. They need to get more subscribers and going cheaper is one of their only real options.
Here's the other problem - and the bigger one that gets more glaring after each report. Netflix is not diversified across other sectors so all its eggs are in one basket. That's why when Disney (NYSE:DIS) hits a streaming roadblock they can point to their booming parks business or when Apple TV+ was struggling in the beginning, Tim Cook could remind everyone of the success of its hardware lines.
In a rare misstep, the streamer got into other areas (like the consumer products and gaming spaces) late in the game and we won't see the fruits of that labor for a while - but note they will come.
It's easy to kick Netflix when it's down, but it won't do any good for investors. Hastings and Sarandos knew the ship was sinking and have been working on patching the holes for a while. The problem is that eventually the holes got so big they were visible externally and fear set in.
They just couldn't hide it anymore.
Although Hasting and Sarandos know what they have to do - and that's why I'm not concerned about the long-run viability of the company. It's not that the pair were clueless about the situation, they were just subscribing to the "if it isn't broke, don't fix it" adage for too long.
Now part of that was because COVID lockdowns drove their bottom line up significantly, but we are now going back to where we were pre-pandemic. We knew the bubble was going to burst but just wasn't sure when it would happen.
For now though, yes Netflix is in for a world of hurt this year and investors looking at the short-term are not going to get any relief. Even something as simple as cracking down on password-sharing is going to do more harm than good for the time being. Those people impacted aren't simply going to go buy Netflix subs, they are going to use passwords from friends who have other services.
And it's unlikely that Netflix is going to get "help from above" again. If you recall what boosted Netflix out of its last earnings funk was an influx of shares from an outside angel investor - that was great, but it was a one-time fix and just a day after this earnings bomb, that same investor pulled out completely, taking a big loss.
Still, if streaming is making you fearful then by all means cash out, but if you are making that decision based solely on Netflix you are making a short-sided one.
Streaming is evolving and with that growth comes growing pains. You'll see belt-tightening, you'll see price adjustments, you'll see some tough decisions being made, but you'll also see new innovations in the space.
All of the major streamers are fine-tuning their products to make them expansive. Peacock effectively bought out the WWE Network (to great success), HBO Max and Discovery+ will eventually merge into one and I'll be shocked if we don't see Disney+ and Hulu fold into each other in the next year or two.
This is not dog-eat-dog it's dog-meet-dog -these are complementary products teaming up for the bigger goal.
What investors have to keep in mind is that the various moves we are seeing are not being done without careful thought. These are not necessarily reactive decisions, they are being done more because they see them as value-added propositions. In a way, it's a taking a page out of Apple's playbook- which is again why I don't think you will see them just go out and buy Disney or something similar as always rumored.
It was just reported that streaming is at an all-time high driven by the success of Netflix's Bridgerton and Disney+'s Turning Red. Streaming itself is not the problem, it's the structural back-end decisions by the various streamers that are causing the headaches for shareholders.
These issues will work themselves out, but not if we remain laser-focused on subscriber count … in many cases, there is more to it than that. Netflix is in the position it's in because it is solely a streaming company, but its flaws are being projected on others where streaming is just a component of the company.
Putting Disney and Apple and the like in the same boat isn't fair to investors, all it is doing is creating a false narrative. Streaming will be fine and so will Netflix for that matter, but it won't be tomorrow and if we continue to bang the doom-and-gloom drum around the medium it won't be anytime soon, and in that case, nobody wins.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.