We have seen this movie before. Founder CEO hands the reins to a successor. The company stumbles. Founder returns as CEO. We expect this scenario to play out over the next 24 months at Netflix. Founder Reed Hastings will return after Ted Sarandos has had a brief opportunity to right the ship.
It is game over for Netflix (NFLX, see our related articles below). Netflix’s downfall was not difficult to predict back in 2019. Customers pay for hit content. It makes no difference whether we are talking about feature length films, episodic television or video games. Customers go where the hits are. Streaming is a content delivery mechanism. It is not a competitive differentiator. Hit content intellectual property (“IP”), is a competitive differentiator. Once Disney (DIS) decided to enter the streaming wars it was game over for Netflix as Disney has the strongest IP portfolio in the business given assets such as Marvel, Fox, Pixar, Lucasfilm and legacy Disney animated characters.
The mistake Netflix made was not using its inflated currency to acquire hit IP across movies, episodic TV and gaming. It tried to build its content IP in-house. The in-house approach is fine, but given that Netflix was building its IP portfolio from a beginning position of zero it needed to augment its in-house strategy with M&A. In fact, were I king for a day at Netflix our approach to building our content IP would have been 80% M&A, 20% in-house. Speed is essential when you are starting from the zero position and M&A is far quicker than an organic build strategy. Netflix’s approach unfortunately has cost the company valuable time and opportunity cost. Assets such as Bethesda Games, Activision and MGM Studios were all recently acquired (by Microsoft, MSFT and Amazon, AMZN). The remaining assets across gaming and traditional content are quite large and as luck would have it Netflix is valued at a fraction of its former value. Our advice to Netflix is to focus on profitability and to identify the best content IP on the market today that can be acquired without risking the company. WarnerBros Discovery (WBD), would be a big pill to swallow, but has plenty of IP that can be leveraged by expanding the portfolio across traditional programming and video games (think the Batman franchise). Surely there are a number of gaming production houses on a smaller scale that Netflix could acquire. This would be the equivalent of acquiring an independent movie studio in the 1990s. Podcast networks come to mind. Licensing sports content and acquiring sports networks (globally) also makes sense, E-Sports in particular.
It is highly unlikely that Disney will remain an independent company. We believe that once FTC leadership changes hands (2024?), the large Technology platform companies will accelerate M&A. Apple (AAPL), and Amazon seem to be the logical would-be-acquirers (Google does not seem to want to dip its toe into movie and TV content outside of YouTube). Had Apple founder & CEO Steve Jobs not died in 2011, we believe he and former Disney CEO Bob Iger would have struck a deal for Apple to acquire Disney. Recall that Jobs previously sold Pixar to Disney in 2006 (Jobs was Pixar’s largest shareholder, Iger was Disney COO at the time and convinced then Disney CEO Michael Eisner to do the deal. Iger negotiated the deal with Jobs).
- The Death of Netflix
- Netflix & Video Games Can’t Happen Soon Enough
- YouTube vs. Netflix
- Netflix Should Acquire Video Game Companies
- Netflix Loses In A Disney Fox Deal
- Further Media Consolidation Is Coming
- Co-CEO Arrangements Are A Mixed Bag