No company is taking more risks than Netflix (NASDAQ: NFLX), the video-streaming service is running up huge losses in a plan to take over the world. Actually the plan is to create a worldwide video distribution network, but it entails massive risks and questionable returns.
The gamble that Netflix is taking is huge according to its financial numbers. Netflix lost $850.65 million (€757.92 million) from its operations during the first quarter of 2016, statistics supplied by ycharts.com indicate. That number is over eight times the company’s net income; reported on March 31, 2016, which was $126.6 million (€112.8 million).
The streaming service ran up the massive losses by expanding to 130 new countries in January. The plan is to create the first global network for video content delivery, Wired reported. The effort has not delivered much cash; Netflix reported a free cash flow of -$237.02 million (€211.18 million) on March 31, but it is attracting new subscribers.
Netflix adds Subscribers at a Terrible Cost
Netflix’s subscriber base grew by 6.74 million users during the first quarter of 2016, data supplied by Statista indicates. Netflix had 74.76 million subscribers at the end of fourth quarter 2015 and 81.5 million subscribers at the end of first quarter 2016. The company added around 6.74 million subscribers and lost $850.65 million, which does not sound very impressive.
The expansion has not generated that much additional revenue either, Netflix reported revenues of $6.78 billion (€6.04 billion) in December 2015 and $7.164 billion (€6.38 billion) in March 2016, an increase of around $380 million (€338.58 million). That was not much more than the increase for third quarter 2015 which was $339 million (€302.04 million), before the company launched its global conquest bid. For the record Netflix reported revenues of $6.441 billion (€5.74 billion) in second quarter and $6.78 billion (€6.04 billion) in the third quarter.
If these figures are any indication, the cost of expansion seems to outweigh the number of new viewers the service is attracting. The real telling numbers will be in the level of long-term growth.
Amazon has Netflix Running Scared
Part of the reason for the expansion has been the success of Amazon’s (NASDAQ: AMZN) video streaming service. Investors.com reported that Amazon had more video subscribers in the United States at the end of 2015 (54 million) than Netflix (44.7 million).
Amazon uses streaming video as a loss leader to get people to buy its Prime service for $99 (€88.21) month. Prime subscribers receive free two-day shipping on merchandise from Amazon’s fulfillment centers and Kindle e-books, in addition to video.
To make matters worse for Netflix, Amazon just launched its own video subscription service in the United States; that will cost $8.99 (€8.01) a month – $1 less than Netflix which costs $9.99 (€8.90) a month – , Daily Variety reported. It sounds as if Netflix is scared to death of Amazon, and is expanding to new markets to head off the Everything Store’s foray into video.
A major problem is that Amazon’s resources dwarf those of Netflix. Amazon reported revenues of $107.01 billion (€95.34 billion) on December 31, 2015. It also reported having $19.81 billion (€17.65 billion) in the bank, and generating $11.92 billion (€10.35 billion) in cash from operations at the end of 2015.
Both Amazon and Netflix are burning cash to develop massive video delivery systems; but Amazon has money to burn, Netflix does not. Amazon can afford to dump money into streaming video and content for a long time, Netflix cannot. Unless Netflix can start generating massive new amounts of revenue, it looks like it has lost the streaming video war.
Sorry Netflix, Google has already conquered the Video World
What is more interesting is that neither Netflix, nor Amazon is a major player in streaming video when Alphabet’s (NASDAQ: GOOGL) gets added to the mix. Statistics Brain reported that YouTube had 1.3 billion users on April 23, 2016. Since around 70% of those viewers are outside the United States, it is clear that Alphabet (NASDAQ: GOOG) has conquered the world with YouTube.
The YouTube numbers show us why Netflix and Amazon are so determined to expand their streaming video reach. According to Statistics Brain, YouTube receives 900 million unique visitors a month. Those visitors watch 3.25 billion hours of video a month and one billion videos a day.
If you want to Cash in on Netflix invest in Disney
If either Netflix or Amazon could capture even a fraction of that traffic, they could attract massive numbers of new customers.
The real question we need to ask is: could they make money from those customers. That remains to be seen because almost all of the programming on Amazon and Netflix is produced by other companies such as Disney (NYSE: DIS).
The Wired story about Netflix’s “world conquest” exposed this dilemma; it profiled the second-season premiere of the series Daredevil. Daredevil chronicles the adventures of a superhero owned by Disney; and it is produced by a Disney subsidiary – Marvel.
This means that investors who want to cash in on streaming video should buy Disney and not Netflix stock. Disney reported revenues of $54.32 billion (€48.4 billion), a profit margin of 18.89% and a net income of $9.08 billion (€8.09 billion) on December 31, 2015. Netflix reported a profit margin of 1.41% on March 31, 2016. Disney investors received a dividend of 71¢ (€0.63) a share, while Netflix paid no dividend.
Netflix is operating a content distribution system for other companies such as Disney, and that system is currently operating at a loss. This is obviously a great deal for Disney; but it might not last, particularly if Netflix cannot make its global expansion pay.
Therefore a strong probability for Netflix’s future is collapse and acquisition by a larger company such as Disney. Netflix might not conquer the world but it could be building up the infrastructure that a larger and better-financed company could use to achieve that goal.