Streaming is the rage these days and a lot of investors have jumped onboard. I have my doubts about the long-term profitability of the industry.
Just because I like a product doesn’t mean I’ll like the company. Great products often come from companies that are unlikely to become great companies. Ride services such as Uber and Lyft are in this boat. For a great investment, the revenue stream has to be rich enough to significantly cover and exceed their cost structure.
Netflix was hot when they had the market to themselves. But as Michael Porter would say, there has to be a sustainable competitive advantage and reasonably high barriers to entry. The competitive advantage that Netflix had was that they were first in the industry. With technology these days and the number of companies who have entered the business, barriers to entry are not as high as many would think. Next thing might be high school kids establishing streaming services from their parents’ garages. You may laugh but that is what IBM did. Then, Michael Dell, Steve Jobs and Bill Gates started up in their garages’ and ate IBM’s lunch.
The competition in the streaming space is rampant. The costs are rising rapidly because they need to create content. Often, we refer to Netflix’s lineup as junk or B movies. In the rush to fill the time with content, many providers are paying top dollar to churn out “filler”. So, there is pressure from the cost side in these streaming business.
Furthermore, companies are discovering that customers are not “bottomless pits” of revenue streams. Streaming was originally the answer for cable prices that had risen inexorably for thirty years. But it is becoming clear that getting several streaming services can cost way more. Add in that most streaming providers are steadily raising their prices and they have real trouble. With the return of inflation, customers are going to have to decide between eating and entertainment. Personally, I would rather eat!
Everyone in the investment community loved the idea of “subscription services” which provide a steady and on-going revenue stream. They ignored the fact that subscribers could drop them quickly and this can create havoc because downsizing cost structures is difficult at best. You can put your employees on a regular, variable schedule. Although some CEO’s would like to have variable employment schedules, it’s highly unlikely that any employee would embrace this concept (The CEO’s would do this as long as it wasn’t them who has a variable schedule!)
So in the streaming business, there is pressure on the revenue stream from competition and economic cycles. There is also pressure on the cost side from creating content and employment. The bottom line is that the bottom line will shrink over time.
Be smart, be well-read, be aware and be successful.
