Can Netflix compete with the real world?

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The streaming wars took a wild turn last week. Netflix’s earnings report disappointed investors. CNN + dropped out of the game completely, just a month after launch. The result has been a wave of brutal sales, making Netflix the worst performing member of the S&P 500 this year to date.

Here’s the data point that probably wiped out billions of dollars of value: A decade of seemingly perpetual growth stalled with the loss of about 200,000 subscribers. However, you need to grab a magnifying glass to see them, because in the end, it’s only a 0.09% drop.

Had it been an increase rather than a decrease, the move would far more likely have been reported as “static” rather than a devastating dive. So why has the market flipped so much beyond a rounding error? John Authers explains that it is probably a combination of the human aversion to loss of any kind and low confidence in valuations. With the notion that Netflix offered infinite growth has been deleted, so has its valuation premium also been deleted.

To be fair, Netflix also expects things to get worse next quarter:

So why are people dropping their Netflix subscriptions?

This can be a product issue in part. “Netflix has stopped differentiating itself meaningfully from its competitors over the past two years,” former Hulu director Alex Kruglov told Roy Bahat, head of Bloomberg Beta, in a recent Twitter Spaces. “Big competitors like Disney +, HBO Max, Apple and Amazon are releasing phenomenally good shows, so having a separate place that has really great shows is no longer a Netflix differentiation. Having a lot of things is no longer a differentiator – Amazon “And when it comes to user experience, everyone basically looks exactly the same.”

Just before the Netflix news came, market research firm Kantar found that more than 1.5 million people in the UK canceled memberships for streaming services during the first quarter of 2022. About a third of these cancellations can be traced back to the cost of – living crisis. With inflation forcing the prices of everything from food to energy up, streaming is increasingly an insurmountable luxury for many.

In contrast, consumer giants P&G and Nestle have had a good quarter, despite Nestle raising prices the most in about 15 years. After all, while bingeing season 5 of “Selling Sunset” is optional, people need to eat and wash their hair. Still, Andrea Felsted writes that Netflix’s experience warns: Even though people are still buying beer and baby wipes now, there’s a risk that smart spices will be the first thing to come out of the shopping basket if things tighten even more. A recent survey showed that most consumers plan to cut back on dining, entertainment and premium groceries. A quarter will save on streaming services.

Netflix hopes to strike back in people’s lives by breaking its own taboo and adding a cheaper, ad-supported subscription option. Trung Phan believes there is a better way: Netflix could create more value by getting into apps. Theoretically, anyone could create a Netflix-branded fitness app. Netflix could promote the app to users watching fitness-related content. It could extend this model across verticals to create an entire app ecosystem, which some would call a “content fortress.” Meanwhile, David Wainer suggests it comes down to his aversion to live sports. By preferring to make sports-related content, such as the hit Formula 1 documentary “Drive to Survive,” Netflix hands over the victory in the segment to Disney, which owns ESPN.

Netflix is ‚Äč‚Äčalso continuing its push for video games, acquiring three game developers in just six months. Video games are a far more lucrative part of the entertainment industry, so it’s easy to see the appeal:

The news no doubt puts others in the streaming game on edge. CNN + did not survive the week, and shares of Spotify, Disney and Paramount – to name just a few – also fell. But there is at least one app that hopes to avoid falling into the trap of the same forces. Deezer, a rival to music streaming for Spotify, is to be bought by a blank check company worth $ 1.2 billion. This valuation appears to have more than doubled last year’s revenue, slightly above Spotify’s current stock market valuation. Is it a little too optimistic? Lionel Laurent writes that while there are points in Deezer’s favor, it will also have to overcome another challenge that the industry faces: the decline in attention.

So far, video streaming seems to have built on the Covid bump, but consulting firm MiDIA has seen total attention paid to entertainment time. With Covid fears waning and people exploring the world again, the real world may begin to compete more effectively for our time – and money – again. Now I’m stepping outside … after just one more episode.

More inflationary reading

In Japan, Gearoid Reidy and Daniel Moss say that inflation smells a lot like fried chicken.

There is always a silver lining. Conor Sen believes that inflation is helping to facilitate a transition to a new status quo in apartments and offices.

This is many millennials’ first experience with inflation. Allison Schrager lays out how it’s going to feel.

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