Legacy media has discontinued Netflix with streaming offerings, now it risks a similar fate

Reed Hastings, co-CEO of Netflix, attends the Milken Institute Global Conference on October 18, 2021 in Beverly Hills, California.

Patrick T Fallon | AFP | Getty Images

We have to live in the Upside Down. Legacy media has been discontinued Netflix.

Netflix announced on Tuesday is considering adding an advertising-based tier at a lower price to its service. The decision has placed the world’s largest video streaming service in a particular position: following the example of legacy media.

Comcast Other DisneyHulu is the founding father of ad-supported streaming. In the last few years Discovery of Warner Brosprimary streaming services (HBO Max and Discovery +), NBCUniversal’s Peacock and Supreme GlobalParamount +’s launched with ad-based tiers at a lower price point than their ad-free products. Disney said Disney + last month wants to offer an ad-supported product.

The legacy media industry has spent the past four years reviewing their businesses to compete with Netflix. All legacy media decided that Netflix’s streaming-only model was the future of entertainment consumption. The companies saw Netflix trading in skyrocketing multiples, leading to a hike in the share price, regardless of how much it spent on content.

The result was a pack of Huge companies shift focus to compete directly with Netflix instead of protecting the pay TV bundle, it has long been the jewel of the industry.

In the world of streaming, Netflix looks like the incumbent, grappling with saturation and an aging core service. This may not be good news for entertainment companies looking to gain market share.

The optimistic goal for legacy media companies has been to get the same kind of trading multiples as Netflix – a “win all” scenario. But, at least for now, it looks like entertainment rivals have taken down Netflix, which it recognized during its own first quarter earnings update that growing competition has led to its slowdown in growth.

Shares of Netflix fell more than 35% in Wednesday morning trading, dragging its market cap below $ 100 billion for the first time since 2018.

When a company trades on subscriber earnings, such as Netflix, it is inevitable that the music will eventually stop. No business can sustain membership growth forever. Saturation comes into play.

This appears to have happened for Netflix, which lost subscribers for the time in more than 10 years during the first quarter and expects a further loss of 2 million subscribers during the second quarter.

The situation is so dire, on the surface, that Netflix CFO Spencer Neumann stepped in just before the end of the company’s earnings conference call on Tuesday to reassure investors that Netflix will still be active in terms of subscribers for the full year.a significant conclusion considering that most analysts expected Netflix to add nearly 20 million net subscribers to this in 2022.

“There will be additional paid net growth,” Neumann said. “I just want to make sure it’s understood.”

And now?

A declining Netflix is ​​not good for Hollywood, which benefited not only from the streamer’s willingness to spend, but also from the subsequent arms race by competitors.

A version of Netflix that has to cut down on spending because it no longer has a rising market value forces the entire industry to understand what’s going to happen. If Netflix is ​​embracing ads after years of resistance, will the company enter live sports soon?

Co-CEO Ted Sarandos said he didn’t see a profitable path in the sport on Tuesday’s conference call, but Netflix appears to be making a habit of changing long-held beliefs. Netflix ignored password sharing for many years and now that too is changing.

If Netflix looks and behaves like all other entertainment companies, it too is preparing to be discontinued. It’s unclear that video games, which the company has repeatedly touted as an area of ​​innovation, will be enough to separate Netflix from the pack.

The industry now looks a lot more upset than it did a year ago, when “trading like Netflix” was actually a goal. There is rampant speculation streaming wars will lead to more consolidationbut it is not clear that regulators would allow such arrangements to take place.

Media companies could have mobilized to secure the pay-TV bundle, but they risked ceding the future to Netflix and other giant tech companies. Whether that decision was right or not, that ship has sailed.

And following Netflix streaming didn’t lead to the multiple expansion that legacy companies were hoping for. With the fall of Netflix, so too do its newly defined colleagues. Paramount Global fell more than 7% on Wednesday. Warner Bros. Discovery fell more than 5%. Disney fell 4.5%.

Legacy media may have shrunk Netflix to some degree. But in doing so, it created an existential crisis for the entire entertainment industry. What do we do now?

WATCH: Netflix didn’t monetize 500 million viewers, says Jim Cramer

Disclosure: Comcast is the owner of NBCUniversal, CNBC’s parent company.

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