In the pre-streaming era, cable companies wielded enormous pricing power over consumers by building regional monopolies with few substitutes. Today, Netflix, Disney, and others are attempting to capture the same profit pool that was once controlled by those cable providers. To do so, scale is crucial.
But achieving scale isn’t as easy as loading up an app with as many good shows and movies as possible. Content is expensive, and the formula for profitability is simple: number of subscribers multiplied by average revenue per user minus content costs. Disney overspent on content during the pandemic years in a race to add subscribers. Because of this, the frenzied spending on content has abated. According to Harding Loevner analysts Uday Cheruvu, CFA, and Igor Tishin, PhD, Netflix has shown that to achieve scale and remain profitable, a service needs to offer a sufficient breadth and depth of content so that every person in a household finds the service useful and there is no incentive to cancel—but not so much that it becomes too costly to produce. Watch the videos above for highlights from their discussion at the Harding Loevner 2024 Investor Forum. ∎