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Analysts question Netflix strategy as costs and competition grow


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Analysts question Netflix strategy as costs and competition grow

Netflix Inc. has had a challenging 2019 so far, with below-guidance subscriber growth, controversial show cancellations, and the loss of popular content such as "Friends" to rival services. This, and its growing list of competitors, has made analysts question the company's strategy.

The streamer could better balance its competing aims of attracting mass viewership through big-budget originals with retaining shows with niche appeal and third-party content, analysts said.

Netflix is promoting its originals over other content, as they enjoy a "higher return on investment and give them bragging rights," Michael Pachter, managing director of equity research at Wedbush Securities, said.

This approach, which sees the most valuable real estate on Netflix's home page given to its own content, means the user experience — namely personalization of the service — is compromised, analysts said.

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"Bad content like [Netflix release and action film] 'Bright' hurts them. Poorly targeted content — pushing comedies on documentary watchers — hurts them. Their decision to pull the plug on niche shows like [the animated series] 'Tuca & Bertie' hurts them. But their growing debt load is forcing them to actually make economic decisions regarding content," Pachter said.

Netflix in April announced that it is raising $2 billion in debt to fund content acquisition, production and other purposes including "potential acquisitions and strategic transactions." This follows a $2 billion raise announced in October.

Pushing blockbuster originals such as "Orange is the New Black" and "Stranger Things 3" could also be at the expense of lower-budget and smaller shows with dedicated fans. This goes against one of Netflix's biggest selling points as a video-on-demand, or VOD, provider, according to Tony Gunnarsson, an analyst at Ovum.

"In a perverse way we are returning to the linear TV model," Gunnarsson said. "Instead of TV networks giving you shows you don't watch, you have Netflix placing its biggest originals on the prime rows of its home page. Anything beyond that, you have to search for."

Netflix and other SVODs have adopted this approach in part to manage their bloated libraries, Gunnarsson said. In the process, they have irrevocably altered viewing habits, he said. It could also be making some content harder to discover for users, according to Pachter.

A 2018 Kagan survey on VOD viewing habits revealed that one-third of participants found something to watch by scrolling through the titles on a platform's home page — much like "channel flipping." A further 26% selected from curated lists based on their viewing history. Kagan is a research division within S&P Global Market Intelligence.

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Netflix's curation of recommendations and algorithm will face comparison with upcoming VOD services including Walt Disney Co.'s aggressively priced Disney+, AT&T Inc.'s HBO Max and Comcast Corp.'s NBCUniversal spinoff, the analyst said.

The new launches will benefit from the tech lessons and prior OTT mistakes learned by their parents across their large pay TV and on-demand footprints, Gunnarsson said.

"The SVODs that are coming are likely to be much more technologically advanced [than the parent company services]," Gunnarsson said.

Those that wish to take on Netflix will have to match, and even supersede, its tech spending power, Gunnarsson said.

The company's tech costs have been increasing alongside its content budget and catalog, with the former topping a billion dollars in 2018 and on track to climb even higher this year.

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