It’s fitting that Netflix’s best-known series is House of Cards, since some financial analysts see the streaming company’s future prospects as teetering on the brink of collapse.
A recent Goldman Sachs report tracking 841 hedge funds in the first quarter of this year found that many had short positions in Netflix. As of the end of last month, the value of that short interest was pegged at US$3.4 billion, or about 9 per cent of the company’s publicly available shares.
Netflix stock has historically been volatile but the past year has been particularly unkind. Shares are trading around $97 each on the Nasdaq, or not far off their 52-week low of $95.75. That’s despite the company’s blockbuster announcement back in January that it was expanding to an additional 130 countries.
If the hedge funds are to be believed, the stock is going to go much lower, and soon. Their cynicism is understandable, given that Netflix is facing storm clouds on all fronts despite its continued expansion.
For one thing, competitive pressures are escalating in almost every country as local media companies enter the streaming market or improve their existing offerings.
Content providers, meanwhile, are asking for more money to license their shows and films, forcing Netflix to spend billions making its own. Customers are starting to chafe at the price increases that such spending inevitably entails.
Put it all together and it means Netflix will soon have to start thinking about its next act. Reed Hastings, the chief executive, says he isn’t looking beyond streaming video just yet but the reality is he may not have a choice for much longer.
It’s purely speculative but there are at least three ways that Netflix could diversify that would make strategic sense.
Theatres: The company touched off controversy last year by licensing first-run films with plans to stream them at the same time as they appeared in theatres. Theatre chains didn’t take kindly to the move and boycotted the films, including Beasts of No Nation and Crouching Tiger, Hidden Dragon: Sword of Destiny.
Netflix could take a step into vertical integration by acquiring a large theatre chain – for example, AMC or Regal Entertainment in the United States.
Such a deal would add a lucrative new revenue stream and also pave the way for Netflix to influence how movies are distributed and shown.
Owning theatres would give the company a leg up in negotiating with Hollywood studios and give it an advantage that competitors such as Amazon would be hard-pressed to duplicate.
As the old saying goes, if you can’t beat ’em, you can always buy ’em.
Ticketing: Few movie-goers have heard of Atom Tickets, but that may soon change. The start-up based in Santa Monica, California, has an app that lets theatre customers pre-order film tickets, snacks and drinks – but it’s also testing the ability to sell seats at variable prices depending on demand.
Big-name investors including Disney, Lionsgate and Fox are intrigued by the potentially disruptive idea and have pumped $50 million into the firm so far. Regal and Carmike Cinemas, two of the biggest US theatre chains, are also on board as test partners.
Atom Tickets is offering the sort of Uber-like digital disruption that could fit in well with a data-driven company such as Netflix and again give it a hard-to-emulate competitive differentiator.
Games and Virtual Reality: If there’s one really good future-looking acquisition Netflix could make, it’s Valve Corporation. The privately held company based in Bellevue, Washington state, is well diversified itself, with video game software development, the Steam online game distribution platform and a virtual reality partnership with mobile phone maker HTC on the go.
Netflix could use Valve to delve into streaming video games – an endeavour not too dissimilar to its core business – and as a springboard into VR.
Valve and HTC are co-developing the Vive headset, which is quickly becoming an early leader in the emerging field.
With VR expected to be a $30 billion business by 2020, it’s a segment of entertainment Netflix can’t afford to ignore.
The biggest hurdle to acquiring Valve, however, would be its founder, Gabe Newell, who has famously said he’d rather see his company “disintegrate” than sell out.
Valve’s struggling VR partner, HTC, however, could be another matter entirely.
Whichever way Netflix goes – or doesn’t go – the mounting pressures mean it isn’t likely to stay just a streaming company for much longer.
Peter Nowak is a veteran technology writer and the author of Humans 3.0: The Upgrading of the Species