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Is Netflix Necessary?

Nice to have — but a requirement anymore? Photo: Thomas Trutschel/Photothek via Getty Images

That’s the question Tara Lachapelle of Bloomberg News was asking even before the company’s weak report on second-quarter subscriber growth. By 2021, Netflix will have lost its two most-watched shows in the U.S., Friends and The Office. Friends will instead be available through a soon-to-launch Netflix rival owned by WarnerMedia, a division of AT&T; NBCUniversal, which owns The Office, has its own plans to launch a streaming service.

Lachapelle’s conclusion is that Netflix may soon be “nice to have but not a requirement.” An irony is that Netflix is at risk from the same trends that initially made Netflix such a popular and lucrative product.

Going all the way back to its time as a DVDs-in-the-mail business, Netflix prospered by being the go-to way to watch old content. You had cable for watching what’s on TV right now, and you had Netflix for watching things not currently broadcast. Then, as a growing minority of households gave up cable and satellite service, they started leaning even more heavily on Netflix for day-to-day entertainment. And Netflix began making major investments in original content.

The problem with Netflix’s old-content business is it’s just a middleman. Netflix has been the way that a show like Friends gets from WarnerMedia’s archives to your screen, but it doesn’t have to be; and as streaming services become more central to even more households’ viewing experience, the content companies are realizing they can start their own services, cut out the Netflix middleman, and keep more profit for themselves.

Lachapelle notes this situation is likely to be negative for consumers in the medium term, who will face the choice of paying for multiple streaming services or giving up access to many of the shows they enjoy. The service offerings are likely to break down along the lines of which studios own what content, but that doesn’t seem likely to lead to rational product bundles, as nobody is really a WarnerMedia or NBCUniversal “fan.” Even Disney’s somewhat-more-coherent content library is going to be both under- and overinclusive for most subscribers to the soon-to-launch Disney+ service.

But it’s easy to see how a more fragmented offering could mean more profits for the industry: Most consumers would pay about what they pay for Netflix now, but for a more narrow bundle of movies and shows, while some would decide they need to subscribe to multiple services, even at a high cost.

Netflix’s main strategy to stay necessary is though its offerings of original content, which can’t be yanked away by a rival studio. But that’s a really expensive business, and Netflix will have to show, in a way it has not to date, how much of its original content is generating a return on investment by driving subscriptions and viewership.

Netflix’s traditional movie studio rivals have been complaining for years that Netflix (and Amazon) have been driving a “bubble” in content production, paying insane prices and inflating the cost for everyone to make movies and television shows. A key question for them is whether Netflix has been using its profitable old-content middleman business to cross-subsidize an unsustainable original-content business. By yanking away their old content, the studios don’t just have an opportunity to keep some of Netflix’s profits for themselves; they can also test their hypothesis that Netflix wouldn’t be such a bothersome competitor in the original-content business if it didn’t have other profits to rely on.

Is Netflix Necessary?