Netflix never diversified its business. Now it’s paying the price

Unlike its FAANG brethren—Facebook (now Meta), Amazon, Apple, and Google (now Alphabet)—Netflix never diversified its business portfolio. The streaming giant stubbornly stuck to its core product, plunging billions of dollars into developing television and movies in-house, with minimal appetite for expensive moves into other sectors.

The approach proved wildly successful for Netflix—until now.

Netflix’s first-quarter earnings report, released Tuesday evening, was a Kill Bill-level bloodbath. The company lost 200,000 net subscribers to start the year—its first quarter decline in a decade—and projected another 2 million net subscriber defections in the next three months. First-quarter year-over-year revenue growth slumped from 24% in 2021 to 10% in 2022. 

Netflix shares fell 37% in mid-day trading Wednesday on the news, putting the company on track for its sharpest single-day decline ever. Netflix’s share price is now down 69% since a November 2021 peak, while its market cap fell below $100 billion Wednesday. 

Company officials offered several explanations for the calamity: stronger competition from streaming rivals, rampant password sharing, the withdrawal from Russia following its invasion of Ukraine, slow uptake of internet-connected televisions, domestic inflation. (Not mentioned: Elon Musk’s “woke mind virus” theory.)

The company still posted $1.7 billion in net income in the first quarter, with an operating margin of 25%.

But Netflix had become overvalued after initially dominating the streaming landscape. Disney, Amazon, Apple, and WarnerMedia, among others, have made up ground by tapping into their deep libraries of intellectual property and using cash reserves to develop fresh content. In turn, Netflix’s growth slowed. (Its 222 million global subscribers still leads the pack by a wide margin.)

With its streaming service lagging a bit, Netflix has nowhere else to turn. The company hasn’t expanded into other entertainment, tech, or business spaces. A lone expectation, its nascent foray into mobile gaming, remains in infancy.

Netflix’s FAANG and streaming rivals, meanwhile, benefit from their varied business offerings. 

Apple, Amazon, and Alphabet built themselves into sprawling tech behemoths, to the point that antitrust advocates want to break them up. Meta remains entrenched in the social media sphere, but its acquisitions of Instagram, WhatsApp, and Oculus help the company weather Facebook’s slowdown in growth.

While Apple, Amazon, and Disney are playing catch-up on the streaming front, they each offer something Netflix doesn’t: a product bundle. Apple One includes television, music, gaming, and cloud storage offerings for roughly the same price as Netflix. Amazon Prime members receive Prime Video access. The Disney Bundle includes Disney+, Hulu, and ESPN+ access—all for less than Netflix.

For now, Netflix executives plan to stay the course. In Tuesday’s earnings call, they emphasized investment in content, the potential for a lower-cost plan with commercials, and improved monetization of existing viewers (including, yes, a stronger crackdown on password sharing). 

“We’ve got to compete and we’ve got to continue to improve on the core service, which is making TV series, films, and now games, that people really love,” Netflix co-CEO Ted Sarandos said. “That’s what we’re really focused on.”

That might well be Netflix’s best play. The company has a nearly 25-year track record of successfully navigating the video and streaming industries. The frothy M&A market likely makes big-dollar acquisitions untenable at this time. Any diversion of cash into other sectors risks undercutting Netflix’s content development at a moment of fierce competition.

But if that’s the best Netflix can do, it’s time to acknowledge that Netflix is no longer on par with its more valuable and diversified FAANG counterparts.

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Jacob Carpenter

NEWSWORTHY

Hunting for cash. Tesla CEO Elon Musk is exploring multiple avenues for securing the funding needed to complete his proposed $43 billion acquisition of Twitter, The New York Times reported Wednesday. While Musk ranks as the world’s wealthiest man due to his stake in Tesla, he would need to raise debt to buy Twitter outright and take it private. Musk has not yet sought equity financing for his bid. It’s not immediately clear how much Musk needs to raise to reach $43 billion, or whether Twitter’s board will accept the bid.

Sending it back? Just one year after acquiring Grubhub in a $7.3 billion deal, the online food ordering company Just Eat Takeaway.com is looking to sell the unit amid a dropoff in sales, The Wall Street Journal reported Wednesday. The Dutch company completed its purchase of Grubhub in 2021 as part of its expansion into the U.S., where online food delivery orders spiked during the pandemic. However, a 5% decline in first-quarter orders in North America prompted a re-evaluation of the acquisition. 

An old standby rises. IBM shares jumped 7% in mid-day trading Wednesday after the company beat first-quarter analyst projections and issued a strong forecast for the rest of 2022, CNBC reported. IBM’s revenue reached $14.2 billion, better than the analyst consensus estimate of $13.9 billion and up 7% year-over-year. The stock bump reflects growth in IBM’s hybrid cloud, software, and consulting units, which all posted year-over-year revenue increases ranging from 12% to 14%. 

Another place for Bored Apes. Coinbase, the U.S.’ largest cryptocurrency exchange, launched its first non-fungible token marketplace Wednesday, taking aim at a competitive sector led by OpenSea, TechCrunch reported. The Ethereum-based marketplace debuted with no transaction fees for an unspecified amount of time. Coinbase plans to set a “low single-digit fee” in the future. Publicly-traded shares of Coinbase fell 3% in mid-day trading Wednesday.

FOOD FOR THOUGHT

A labor force? One of Gen Z’s most active social media coalitions is taking aim at a new enemy: anti-union corporations. A report by Wired on Wednesday details how Gen-Z For Change, commonly known as the “progressive movement’s TikTok army,” has mobilized some of its estimated 540 million social media followers to support several unionization campaigns, including one against Amazon. While the group’s tactics have skewed a bit sophomoric to date—members helped flood union-busting companies with tens of thousands of bogus job applications—its organizers plan to launch a larger movement backing organized labor.

From the article:

Now the group is strategizing about how to target Amazon, which they see as a much more formidable opponent. “It's so massive that there are very few things you can do with equal scope that are actually going to be damaging to Amazon,” says Wiggs. 

While reputation tarnishing was part of their Starbucks strategy, Joshi doesn’t think that will work with Amazon. “Starbucks is known for being progressive. But Amazon is known for having workers pee in bottles,” she says. “I don't think it's going to be as easy as our past stuff. But we're coming for them.”

IN CASE YOU MISSED IT

Bill Ackman bet $1.1 billion on Netflix just a month ago and now he’s taking a beating. But the famed investor has doubled down before—and come out ahead, by Chris Morris

What an A.I. ‘Miracle’ says about the future of business technology, by Jeremy Kahn and Jonathan Vanian

Bitcoin rebounds above $40,000 but threats are everywhere, by Taylor Locke

Crypto scammers are feeding off the hype surrounding Moonbirds NFTs — one even appeared to hack Bernie Sanders’s son’s account, by Taylor Locke

Elon Musk’s turn as Twitter’s most influential investor has been a long time coming. Here’s how he got there, by Maxwell Adler, Dana Hull, Martine Paris, and Bloomberg

Elon Musk keeps dropping cryptic hints about a ‘tender’ offer for Twitter, by Vlad Savov and Bloomberg

BEFORE YOU GO

Sloppy editor. Take a deep breath, editors of the world. Google isn’t coming for your jobs quite yet. A Vice report Tuesday shows how the company’s new A.I.-backed Google Docs editing tool, called “assistive writing,” isn’t very good (author Samantha Cole’s exact phrase: “annoying as hell”). The program tries to help writers by recommending better words and eliminating so-called non-inclusive phrases. But the suggestions occasionally border on ridiculous (the word “landlord” gets an “inclusive warning”) and some offensive terminology goes unchecked (including the N-word).