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Netflix's Problem Isn't Membership. It's What Disney Has That It Doesn’t

The streaming leader spends a lot more money than Disney, with much less to show for it.

Netflix (NFLX) - Get Netflix, Inc. Report growth has slowed. That's sort of inevitable when you reach nearly 222 million global paid subscribers. 

More people will, of course, sign up for the popular streaming service, but the Los Gatos, Calif., company's subscriber base is almost twice as large as Walt Disney's (DIS) - Get Walt Disney Company Report Disney+ and almost double the size of the U.S. cable market at its peak.

The streaming leader has not stopped growing, but that growth has slowed, which the company acknowledged in its fourth-quarter letter to shareholders.

For Q1’22, we forecast paid net adds of 2.5m vs. 4.0m in the year-ago quarter. Our guidance reflects a more back-end weighted content slate in Q1’22 (for example, "Bridgerton S2" and our new original film "The Adam Project" will both be launching in March). In addition, while retention and engagement remain healthy, acquisition growth has not yet re-accelerated to pre-Covid levels. We think this may be due to several factors including the ongoing Covid overhang and macro-economic hardship in several parts of the world like LATAM.

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Growth gets harder when a company hits Netflix's size, but adding members isn't the only financial lever the company can pull. 

It can raise prices, which it's doing in the U.S. and Canada by $1 to $2. That's an increase of $1 to $2 for 74 million members -- $74 million to $148 million a month, or $888 million to $1,78 billion a year.

Netflix can make more money by raising prices and adding subscribers, albeit at a slower pace. And neither of those things is actually the company's big problem (even though the stock market responded to its Q4 results as if it is). 

Instead, when you compare Netflix and Disney, the top streaming company has a major content and spending problem.    

Netflix produces a lot of shows that aren't hits.

Netflix Spends More Than Disney+ on Original Content

Disney owns Star Wars, Marvel, Pixar, and its own classic characters as well as its own deep library of animation favorites. The company even owns Indiana Jones and a variety of other properties that it hasn't even bothered to use on its streaming service.

It's hard to imagine that Netflix, which basically throws shows at the wall to see what sticks, would pass on using a name-brand franchise like Indiana Jones. Disney can do that, however, because it has such a deep library of intellectual property. 

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Essentially, the third or fourth most-popular "Star Wars" show based on minor characters from that universe garners more interest than all but the top-tier Netflix content.

That gives Disney a huge advantage as every show it puts on its streaming service essentially becomes a hit. Not all hits are at the same level -- "The Mandalorian" likely brings in more viewers than "The Mighty Ducks." But each swing the Mouse House takes has a solid chance to be a hit.

Disney releases a handful of Disney+ exclusive shows and movies every month, which it reinforces by adding content from its deep film and television catalog. The company plans to spend $8 billion on content for its streaming services in 2022, but that number includes sports rights for ESPN+.

Netflix will spend about $17 billion on new shows, comedy specials, and movies for its streaming service in 2022.

Disney will spend about $23 billion on movies, TV shows, and other content in 2022, according to its annual report. That number jumps to $33 billion when you factor in sports rights.

The Disney numbers include ABC, ESPN, its various cable networks, and its theatrical release films. Much of that content will eventually make its way to Disney+ (with the exception of live sports) without being an added cost for the streaming service.

Netflix expects to spend more than $17 billion on content in 2022, up 25% from 2021 and up 57% from 2020, according to a Financial Times report.

Netflix Makes Too Many Shows and Movies

Disney makes a handful of shows every quarter and many, if not most, feel like events. The company almost never has a project that's not based on well-known IP, and when it doesn't, it's offering something like "Get Back," a documentary on the Beatles from the director Peter Jackson.

Basically, every Disney+ show not only serves the company's audience but also brings in new paying subscribers. You may not be a "Star Wars" or Marvel fan, but something like the film version of "Hamilton" or "Get Back" pulls you in (and, once you're there, the deep archive probably keeps you). 

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Netflix has been releasing roughly 100 to 125 new shows, movies, and comedy specials each quarter. How many of those actually become hits -- maybe one or two each quarter? The streaming company will tout viewership for many of its shows, but if it's only watched by subscribers and doesn't spark conversation or become part of the national pop-culture discussion, is it really a hit?

Not owning high-interest IP forces Netflix to make a lot of shows and movies in hopes of having a hit. If the company wants to turn its business around, all it has to do is cut its content spending while raising its level of hits to flops (or shows subscribers watch that do nothing to bring in new people).

That's a bit like saying "all the Detroit Lions need is much better football players and they'll win a Super Bowl." It sounds easy, but no company aside from Disney has mastered the formula or owns anywhere close to the right content to pump out a steady stream of hits.