Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 489

Why Netflix is winning the streaming wars

"The mechanisms for the monetization of content are in disarray." - US Cable-TV veteran James Dolan

Streaming is disrupting the way TV is consumed and further changes are imminent - it is likely that all TV will be streamed within ten years. The chart below shows how Netflix only succeeded when total subscribers exceeded 175 million across the world, generating a US$5 billion turnaround to record funds from operations (excluding DVD profit) of over US$2 billion in 2020.

Netflix subscribers vs profitability

Source: Company Reports, Morgan Stanley

Netflix, irrespective of the naysayers, remains the only game in town when it comes to profitably running a streaming service. The company is not in losses, either cash or accounting, and will generate around US$11 of earnings per share this year. This is after expensing US$14 billion on movies and TV, likely the same next year. This content spending and library represent a moat which will be hard to breach. Its decision to move into advertising looks set to further underwrite profit growth.

Why Murdoch got out of movies and TV, and why Disney is struggling

Having seen Netflix succeed, permanently disrupting the business model, traditional media companies such as Disney, Paramount and Warner Bros Discovery followed. All are facing crises.

Entertainment is a scale business, so when no less an operator than Rupert Murdoch realised his film and TV business was sub-scale, he abruptly sold the company, 20th Century Fox. Murdoch had seen this film before: while attempting to build his News Corporation into a company worth US$50 billion, Google and Facebook managed to create businesses that were 10 times more valuable in a fraction of the time - at the direct expense of Murdoch’s News Corp/Fox.

Murdoch made the smartest business decision of his life and sold. Disney bought.

The merged Disney Fox last month filed a US$1.5 billion quarterly loss in its streaming service despite being over the magic 175 million subscribers, implying that something is very wrong with its cost structure. The reported results were so bad that the company fired its chief executive Bob Chapek and brought back the previous CEO Bob Iger.

As we noted of Disney’s move into its own streaming service in 2019, to generate meaningful subscriber additions and hit scale the company would first have to remove its own content from rival cable and streaming platforms. This removal would hit hard the 41% of total revenues (US$24.5 billion in 2018 out of US$59.4 billion) and 42% of total operating income (US$6.6 billion of US$15.7 billion) the company generated from these businesses at the time.

In our 2019 article we said:

“Streaming will ultimately disrupt and supplant traditional free-to-air channel viewing globally, with the emergence of four or five players, like Disney+ and HBO, along with Netflix and maybe Apple, as the new majors. But [the] buyers who pushed the Disney stock price up 30% in the three-month lead-up to the announcement won’t be the same as those who will be around to stomach the five years of grinding and significant losses the company will have to absorb, all with little clarity on the final success of the venture. For Disney, this may be a fairy tale ending, but the plot calls for some very dark times first.”

This cable-streaming balancing act is being attempted by many other large legacy players, mostly without real success. Warner Bros Discovery (owner of HBO/CNN/Time Warner and maker of Game of Thrones) which last year changed hands for the second time in two years, is also struggling to get its streaming service into the black. So is Paramount, Peacock and even AMC, a cable TV major in the US which has been around for over 50 years (and is the maker of Breaking Bad and Mad Men, among many achievements).

Below is an extract from a memo to AMC employees by its chairman explaining the problem:

“Our industry has been under pressure from growing subscriber losses primarily due to cord cutting. At the same time we have seen the rise of direct to consumer streaming apps including our own AMC+. It was our belief that cord cutting losses would be offset by gains in streaming. This has not been the case."

And then this stunning admission: “The mechanisms for the monetization of content are in disarray.”

Legacy players are racking up significant streaming losses

Source: Company Reports, LightShed Partners

Disruption, incentives and cost structures

Incentives and optimised cost structures are crucial in any business, and they help explain much of the success Netflix has had in streaming to date. The company does not have to decide whether or not content goes to cable, movie theatres or streaming (or in what order). It also doesn’t have to make that choice while being held hostage by its capital structure - legacy players have a lot of debt and require linear network profits to service it.

Netflix will continue to benefit from the shift to streaming, especially as cord-cutting accelerates, and from other growth drivers like its password sharing and advertising initiatives. This will be revenue growth on top of its already profitable streaming model.

Meanwhile its competitors are still searching for a cost structure that works in streaming at the same time they experience structural declines in some of their largest and most profitable business segments (linear TV).

We don't believe the dark times are over for these legacy media players just yet.

 

Alex Pollak is Chief Investment Officer and Co-Founder of Loftus Peak. This article is for general information only and does not consider the circumstances of any individual. Loftus Peak Global Disruption Fund (ASX:LPGD) is available to investors on the ASX as an active Exchange Traded Managed Fund.

 

RELATED ARTICLES

An important Foxtel announcement...

Disney blinks in the TV streaming wars

Thematic ETFs: is the juice worth the squeeze?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.