What Netflix Really Missed? Not Earnings

Netflix missed earnings recently, but in my opinion they missed something bigger. They missed building a moat.

When ever you stumble upon a castle, you have to start building a moat around it.

Netflix’s castle was it’s early entrance to streaming. They recognized it, did interesting deals with media companies to get more content (pay for Friends, The Office, Seinfeld etc,) and get users adopt the new way.

But as the adoption for streaming grew, it was also clear the technology behind streaming is easier to replicate. Thanks to Azure, AWS & GCP. Even Netflix is built on AWS. A combination of cloud technology adoption, increased internet speeds, and companies like Roku & Hulu’s success were clear signals.

At this point in time, there were couple of years where Netflix adopted their strategy is going to be about spending highest to create original content. That was good strategy and also reflection of the fact that Netflix is now mainly a media company and not a tech company.

Even during these last 5 years where they essentially were spending gigantic sums on content, I never understood why they didn’t do other things.

Some of these other things include:

  • Buying an old movie studio (like MGM by Amazon), my understanding was, yes you could spend $20B to create original content, but you can save time to get a good catalogue for cheap by leveraging Netflix’s equity. And their equity was soaring. Its just good capital allocation.
  • Get into Audio streaming
  • Get into merch (they did recently)
  • Experiment with Audio streaming product, user generated content product like YouTube. These might sound ridiculous but here me out. When Google stumbled upon success with search they protected it with Maps, YouTube, Chrome and more. Most of their experiments failed but some succeeded and that’s what matters.

They do seem to do new things like gaming, which I think could be potentially huge for them. Specially when you consider their DNA in creating new code. But doing this on a high ride is usually easier and tougher when your equity gets crushed and your employees start leaving.

But again Netflix has been in such situation before and came. In fact their current situation is not nearly as bad as they had seen before. They still have the most important streaming product with great revenue.

But somethings should change.

  • Netflix should not spend so much on new content, they should aquire large and cheap catalogues. It’s tough now that every one has a straeming service. But worth a try. More money doesn’t mean more creativity. Look at HBO Max. Find great content curators, take interesting bets.
  • They should explore more experimental products/apps.
  • Consider acquisitions to compete against YouTube, Spotify and AMC.
  • Consider theatrical releases via own theatres (yes acquire them if possible) or just using status quo. Hit series on Netflix could also premiere in theatres, honestly will avoid future churn.

There are many interesting ideas, but the bottom line is “when you stumble upon a castle, build a moat around it”.

Finally I will leave you with this picture of how Disney built a moat around its castle.