Is Scale Everything?

On the August 6^th Investor Call, Bob Iger, Disney’s CEO, conveyed that the firm is in discussions with distribution partners such as Apple, Amazon, and Google to supplement its direct-to-consumer streaming offerings “to achieve scale relatively quickly.”  Without a doubt, Disney will ramp up quickly and present a formidable competitive threat to the market leader, Netflix. 

For Netflix, scale is also important.  With high fixed costs for content licensing and creation, Netflix “needs” more subscribers to spread out those costs.  For five of the past eight years (2011-2018), the annual growth in Netflix’s global subscriber count outpaced the increase in content expenditure lowering the per unit (subscriber) cost of content.

Period Ending	Streaming Content Obligations (000)	Global Paid Subscribers (000)	Content Cost/Sub ($)
12/31/2018	$     19,285,875	139,259	$ 138.49
12/31/2017	$     17,694,642	110,644	$ 159.92
12/31/2016	$     14,479,487	89,090	$ 162.53
12/31/2015	$     10,902,231	70,839	$ 153.90
12/31/2014	$       9,451,112	54,476	$ 173.49
12/31/2013	$       7,252,161	44,350	$ 163.52
12/31/2012	$       5,633,685	33,267	$ 169.35
12/31/2011	$       3,907,198	21,600	$ 180.89

SSoSource: Netflix's 10K reports.

But, Netflix has some exposure to “new” competitors like Disney, NBC Universal, WarnerMedia and ViacomCBS that release content across multiple distribution channels like the box office.  The cost savings these firms get from economies of scope, that is creating, acquiring, and marketing content and distributing it over multiple platforms will add to Netflix’s vulnerability to competitive threats and may slow its growth.  Let’s see how Netflix responds.

https://www.thewaltdisneycompany.com/wp-content/uploads/2019/07/q3-fy19-earnings-transcript.pdf