Netflix has had a record-breaking decade – but its hot streak may not last

Blockbusters such as The Irishman come at a cost. Photo / Supplied

Netflix, unlike many of its rivals, appears to have little to fall back on if times do get tough.

There are bad trades, and then there are those that go down in history.

In 2010, the New York hedge fund manager Whitney Tilson revealed that he had taken out a major short-selling position against Netflix.

Tilson told investors that Netflix's move from a DVD-by-post business into a video streaming service pitted it against much better financed competitors such as YouTube, and that it would struggle to convince enough households to pay a monthly fee for the company's "weak content".

Tilson had a good record, having made millions betting against Lehman Brothers and his move was seen as so serious that Netflix's chief executive Reed Hastings was prompted to intervene, issuing a rare public rebuttal.

But Tilson's thesis proved to be spectacularly wrong.

Last week, an analysis found that Netflix has been the single best-performing Wall Street stock of the 2010s, with shares climbing by 3,767 per cent in the last decade. To put it another way, a £25,000 ($50,500) investment then would be worth close to a million ($2 million) today.

While the company has been bundled among the "FAANGs" - the group of now-dominant tech giants that also includes Facebook, Amazon, Apple and Google's Alphabet - Netflix's returns in the last 10 years have exceeded those of the rest put together.

The company's rise has been inextricably linked to changing viewing habits, enabled by technology. Consumers had already become used to getting their news and music on demand, and were ready for a similar shift in video, rather than have their habits dictated by the TV schedule. The rise of internet-connected televisions, tablets, and faster broadband meant internet video could be pumped into a living room.

Netflix was not the architect of this change, but saw it before most others, at a time when internet video was grainy and short.

Traditional media giants' response to the same shift was sluggish. Netflix was able to sign multi-year content deals with providers such as Disney, which saw licensing its back catalogue to the company as a source of easy money, rather than any sort of competitive threat.

But as Netflix's record-breaking decade comes to an end, there are signs that its hot streak may be running out.

Established broadcasters and media companies no longer have any illusions about the competitive threat that Netflix presents, or about streaming's future. Disney has pulled its material from Netflix and put it on its own streaming service. In the US, AT&T's WarnerMedia and Comcast's NBC have done the same, saving popular shows such as Friends and The Office for their own upcoming offerings. Belatedly, the BBC and ITV launched a joint streaming business, BritBox, last month.

Hastings was prescient enough to see this, and has built Netflix into a giant factory for original content that has gone from a few binge-worthy shows to an empire: last week the company secured a record 34 Golden Globe nominations for titles including the Scorsese blockbuster The Irishman.

But this has come at tremendous cost. Netflix plans to spend around $15b ($22.7b) on original content this year, almost all of its annual revenue. Last year it burned through $3b ($4.5b) in cash, and is expected to eclipse that this year. This has seen it raise huge quantities of debt: $4.4b ($6.6b) in 2019 alone.

Other numbers look healthier. By the end of this year it expects to have 166m subscribers, up from 139m a year earlier. But with the US and UK close to saturation, many of these new users are likely to be less profitable: target markets such as India require heavy discounts.

Meanwhile, a glut of streaming competition means the advantage that Netflix once had over alternatives - that it was more convenient than broadcast TV - no longer applies. As well as Disney, Amazon and Apple are using streaming as a way to promote other parts of their businesses. Netflix is forced to spend more heavily for a finite pool of Hollywood talent.

This leaves it in a spiral: raise more debt to fund more spending on original programming to attract the users needed to keep raising debt. Spend to grow; grow to spend.

Investors are now asking when this cycle will be broken. Executives have suggested that cash burn will peak this year, but any number of events - a jolt in the debt markets, a disappointing slate of programming, or a sudden squeeze in production costs - could change this delicate balance.

Netflix, unlike many of its rivals, also appears to have little to fall back on if times do get tough. While a few titles such as Stranger Things and The Crown are guaranteed winners, Netflix has preferred to stick to a pattern of repeatedly searching for new hits, cancelling shows even when they prove popular. Disney, in comparison, can squeeze seemingly-infinite riches from the Marvel and Star Wars franchises.

Given its astonishing stock market performance of the last decade, betting against Netflix seems foolish. But its prospects remain hazy. Breaking tradition, this year it has been the worst performing of the five FAANGs, and a decade after Tilson's ill-advised bet, short sellers are circling the company once again.

Netflix may have had a blisteringly successful decade, there are still plenty of unknowns about the next.