Netflix may need to rethink how it’s currently operating.
Needham and Co. analyst Laura Martin downgraded Netflix (NFLX) to Underperform leading shares to drop 3.2% Tuesday afternoon. Martin said rising competition from new streaming services could cause the streaming giant to lose 4 million U.S. subscribers in 2020.
“People churn more. People turn off Netflix while they watch ‘The Mandalorian’ on Disney+ (DIS), or while they watch ‘The Morning Show’ on Apple (AAPL), and then they go back to Netflix,” Martin told Yahoo Finance’s On the Move, “But all you need is about three months more churn by 30% of their people, and you lose 4 million subs worth of revenue in the U.S.”
Martin said Netflix’s subscription price is problematic. While its competitors including Disney+, CBS All Access (CBS), Apple TV+, Hulu (with ads) and ESPN+ are all $6.99 and under, Netflix’s price point remains $12.99 for a standard subscription. While Netflix have long said there will be no ads, Martin pointed out that the company “could generate $6 per month in advertising” from six minutes of ads and hour, therefore they could price its service lower.
“Unless you get your customer acquisition costs lower by having a lower entry point for consumers, that you're not going to be able to convert them into a $13 service when there's lots of choices out there at the $5 to $7 price point,” Martin reiterated. “If they don't add advertising, which they have long said they never will do, they will lose 4 million subs.”
This leaves the streaming giant with little options to fight back, but Martin thinks “it would be super helpful if Netflix was willing to sell itself.” The only problem—it’s $128.5 billion market cap.
“How many people can buy $130 billion market cap company at a 30% premium? You really limit the number of buyers,” Martin said. “Comcast has been getting sort of grief for years because it didn't buy Netflix when it was a $20 billion dollar company...it would be pretty hard for one of those cable companies that could have bought it five, seven, 10 years ago to buy it now at such a huge valuation. They would look like they missed it.”
Another opportunity for Netflix is to bundle, Martin noted.
“What you're seeing with these new competitors is they're bundling. Disney is free to Verizon Unlimited customers. Apple TV [is bundling]... you get it free if you buy a new iPhone” she said. “It would be really useful to Netflix if it had a bundle that would sort of lower its average price.”
Brooke DiPalma is a producer for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma.