Netflix has done a great job of putting money back into original content: Analyst

Constellation Research Principal Analyst and Founder R "Ray" Wang joined Yahoo Finance Live to break down if Netflix will be able to keep their large share of the streaming space.

Video Transcript


- And we just got the Netflix numbers. And we're going to break these down with R "Ray" Wang. He's Constellation Research principal analyst and founder. And Ray, thank you for joining us. What is your take on this, crossing subscribers of 200 million? Are they going to be able to maintain their, I'm going to say domination, although I don't think that's right, of streaming?

R "RAY" WANG: You know, it is a very competitive market. You are right. They have actually shown, over the last 14 years, that this works. Right? They've been able to not only attract people to come, they've been able to retain them. And this is when you bring content, when you bring technology and the network together, that's what you're able to get in this digital giant. So they've done a good job. And they're still showing growth in AMEA. They're still showing growth in APAC. And of course they did well in North America UCAN, as they call it.

- Ray, after the tremendous growth that we saw throughout 2020 and really the fourth quarter capping it off year for Netflix, how much more upside do you see for the company in the near term?

R "RAY" WANG: So we still see upside. And part of the reason is content production. This is now a war for content. And if you have a content library like Disney or like Peacock, it gets very interesting, or HBO Max. But Netflix has done a great job of reinvesting its sub dollars and putting it back into original content. And original content as much cheaper, as you can imagine. And of course, the original content that they've been doing has been winning rave reviews. We're seeing more time and attention on Netflix shows than on other shows.

And so you see things pop out with 73 million, like "Lupin." You see things like "Bridgerton," like 63 million in terms of people viewing. And "The Queen's Gambit," I think was, like, 62 million, right? And so these are huge numbers that are popping up everywhere. And that means people are not only re-subscribing, right? That's the whole point of the subscription revenue model is they're also staying to watch. And that's the big thing-- and doing it without ad dollars.

- Well, then, and that's the thing. I mean, you just brought up "Bridgerton." The world is falling apart. We have riots in the Capitol. And the first thing people ask you, have you seen "Bridgerton?" Can they keep paying top dollar, though, to compete against the AT&Ts or the Disney Plus?

R "RAY" WANG: So that is the question. And we already saw it with "The Office" departure. But the question was really was Netflix what made "The Office" rerun work, or is it really the series? And I think a lot of it is Netflix. It's the base of users. But, you know, Disney is moving really fast. They're going to cross 100 million in the next quarter, in terms of subscribers. And that's a very interesting inflection point, given the fact that Apple TV, everybody else is going after this space.

- Ray, I want to bring a Netflix said about being free cash flow positive. They're saying that they're very close to being free cash flow positive, considering stock buybacks here at this point, expects to break even on cash flow this year. When you take a look at commentary like that, I think the question going into this report was whether or not the company was on a path to sustainable free cash flow. What do you make of their comments there? And what's your view on where they stand?

R "RAY" WANG: Yeah. So where [INAUDIBLE], Reed, and Spencer have been focused on right now was trying to drive down the content creation costs, but invest enough content so that there'd be enough. Especially given how production is right now in Hollywood and in other venues, it's really hard to get that local production out there. So despite the pandemic and being able to forecast free cash flow positive, that is the good news. I mean, that is really good news on their end, because what that shows is that they've been able to control their costs, but they also know exactly how much content to get out there and what content to bet on. And they've done really good on betting on content, as we talked about earlier. And being able to get the right content to folks helps a ton.

I mean, you know, "Cobra Kai," a whole bunch of other areas, I mean, you're seeing people really reinvest in terms of new original programming. And there's only so much you can get out of some of the older programming, as Disney is going to find out. It's can we not only keep our subscribers here, but it is an and strategy. You're going to have Netflix. You're going to have Amazon. And then going to have something else, whether it be Disney, whether it be discovery, whether it be, you know, Peacock, where it's going to be something more niche. But we know that you can only handle somewhere between three or four total content providers and subscription services at the same time before people lose interest. There's just so much time that you have.

- And you just said before people lose interest. Let me talk about subscription price creep. Because as the price of these services starts to creep up, look, when you have blockbusters like Netflix, I don't imagine they worry too much about it. But is it a threat in the future?

R "RAY" WANG: It's not a threat. We're going to see that subscription prices are going to go up a little bit over time as more content is out there. You know, Netflix has gone through two or three price increases with very little customer resistance. And if you think about from a streaming service perspective versus cable versus what else you might be paying for, most people feel that it's worth it to keep one major streaming service.

The question is when you're number two or number three, can you capture the attention? You might keep me for buy one month, you know, get one month free. You might get me interested in getting free for the first set of content up until like 60 days. You might have a partnership with like a telco provider or cable provider to actually push that subscription service. All those gimmicks come into play to acquiring customers, but if you don't have content, you will not retain customers. And if you don't have content, you can't justify a price increase.

- Ray, who would you say is the biggest threat to Netflix at this point? We've named a bunch of their competitors. But just overall speaking, I guess, who do you think Netflix needs to be the most worried about?

R "RAY" WANG: Short term, Disney Plus. Long term, Amazon, because Amazon has the massive reach and network, but Amazon's Prime membership is still smaller than Netflix's total membership. So that's why those two are the ones I would watch.

- I'm just sitting here thinking how much I've enjoyed "Bridgerton." And I'm so proud of the fact that I guessed who Mrs. Whistledown was in the first episode, thank you very much. R "Ray" Wang, thank you so much, Constellation Research principal analyst and founder. All the best to you. And no, I'm not going to do any spoilers.