Netflix is finding itself in the uncomfortable position of dealing with a rare decline in subscribers while bracing for new competition and the result could force the streaming giant to take a step it has long been unaccustomed to: cost-cutting.
For years, Netflix shelled out hundreds of millions to sign top talent like Shonda Rhimes, Ryan Murphy and Janet Mock to produce original content for its platform, sending its debt soaring to $10 billion while free cash plummets.
Most recently, the company is in talks with Eddie Murphy and reportedly offering the comedian $70 million for a series of stand-up specials.
Meanwhile, the Los Gatos, California-based firm continues to quickly turn out a slew of other television shows, movies and documentaries, part of what experts say is a strategy that relied on the quantity of original programming in a bid to draw new users and maintain existing customers.
For years that plan worked. Subscribers surged to 152 million internationally. But earlier this month, Netflix reported a rare 126,000 loss in domestic customers and fell well short of expectations for global growth.
Now, investors, analysts and industry experts are predicting that the firm will need to curb its wild spending habits and potentially explore other cost-cutting measures, like pilot-testing programs before ordering full series, a major shift as deep-pocketed competitors like Disney and AT&T prepare to launch their own streaming platforms.
“It’s not just about for eyeballs, [Netflix] realizes it’s a battle for content and that means it’s a battle for showrunners, it’s battle for the people who really have a track record on making great shows,” Gene Del Vecchio, a marketing professor at USC Marshall School of Business, told FOX Business. “They are going to have to put a greater emphasis on quality over quantity to get their production costs down.”
A Netflix spokesman said there's been "no change to our content budgets, nor any big shifts in the sorts of projects we’re investing in, or the way we greenlight them."
And while second-quarter growth failed to meet expectations -- Netflix still topped revenue and profit predictions -- the firm anticipates 7 million new additions in the coming months.
“We grow through that we believe by making these early investments in original programming and getting our consumers and our members much more attuned to the expectation that we’re going to create their next favorite show, not that we’re going to be the place where you can get anything every time,” Chief Content Officer Ted Sarandos recently told reporters and investors.
Netflix still has the distinction of being the first major streaming site to go to market and its millions of users give it an edge against the looming competition.
But if the firm is forced to cut costs on content it could be at large disadvantage, particularly as Netflix prepares for the loss of top-watched shows like “The Office” and “Friends,” which are poised to soon be offered exclusively on streaming sites from NBCUniversal and AT&T’s WarnerMedia, respectively.
Trying to replace those hits, while also competing against a powerhouse lineup from Disney that includes television series based on franchises like “The Avengers,” is a costly endeavor, according to PwC’s Mark McCaffrey.
“The bigger players continue to increase the amount they are willing to spend on original content because it is so competitive, because it is a differentiator within the platform and because competition for it is just becoming extraordinary,” he said in a recent interview.
For Netflix, executives envision a future where consumers subscribe to multiple platforms. CEO Reed Hastings said the looming battle was not “a zero-sum competition” and suggested that many Netflix employees are also HBO customers.
Still, while prices remain competitive experts say the companies will almost surely need to raise monthly costs to offset the price of developing content, raising questions of how many different services customers purchase each month.