As 2019 comes to a close, it is safe to say that Netflix has successfully disrupted the entertainment landscape and dominated the TV and film industries. On Monday, the company received 34 Golden Globe nominations, 17 in film categories, and 17 in television categories. Streaming services completely shut out the four major networks—Fox, ABC, NBC, and CBS—for the first time in history.

Netflix has many achievements to flex from the past decade. In the first few years, Netflix became available on mobile devices and launched in countries all over the globe. In 2013, it released its first slate of original shows, including House of Cards, Arrested Development, and Orange Is the New Black. After the success of these shows, the company raced to produce as many pieces of original content as possible.

Netflix’s first feature film, Beasts of No Nation, made its debut in 2016, along with television show Stranger Things that would soon become a critically acclaimed global phenomenon. In 2017, the platform reached 100 million subscribers worldwide, putting the company far ahead of its competitors, Amazon Prime (100 million) and Hulu (25 million). 

In the past two years, Netflix has been able to boast statistics such the 64 million Netflix households that watched the third season of Stranger Things in its first month, or the 26 million that have viewed Martin Scorsese’s film, The Irishman during its first week on the platform.

With industry award domination and over 150 million subscribers worldwide, Netflix has become a strong force to compete with in entertainment production and distribution. However, the company has run into a problem in recent years that could shake its core business model: the competition of the streaming wars.

The Business Model

Netflix has grown into the behemoth it is today through the following cycle: gaining subscribers and, therefore, revenue, spending the capital on new content, and in turn attracting new subscribers. Netflix drew in its original subscriber base by licensing content from Hollywood’s film studios and television networks. It was a win/win situation: Netflix received content to attract paying subscribers, and studios and networks gained revenue from films and shows that had passed their lucrative windowing period or were no longer on the air. Shows such as Friends and The Office are highly popular on the platform. 

When it comes to original content, Netflix does not bring in enough revenue to cover its production expenses. So, it has burned cash and turned to the debt market for support; at the end of 2018, the company had $10.4 billion in long-term debt. The company sees that investment in content now will bring profitability in the long run when it saturates the worldwide market. This year alone, Netflix spent about $15 billion on original content. 

However, the recent launches and announcements of new streaming platforms such as Disney+, HBO Max, and Apple TV+ have shaken subscribers’ and investors’ faith in the company. 

The Streaming Wars

When their licensing content to Netflix, legacy media companies had no idea that they were feeding a beast that would end up being a major competitor. When they came to feel the effects of streaming and its impact on cable cutting, many companies stopped in their tracks to put a substantial amount of time and investment into the streaming trend.  

Since early 2018, Disney, NBCUniversal, and Warner Media have launched or announced their own streaming services. On top of that, tech companies such as Apple and Facebook have started their own SVOD services. A new mobile-centric player, Quibi, will also enter the market in spring 2020. The rapid crowding of the SVOD market is termed “The Streaming Wars”; American households are only willing to pay for 3-4 subscription services, and some platforms are bound to become shut out of the market.

The competition of the streaming wars creates three main problems for Netflix: 

1. Licensed content from other media companies is being pulled from the platform, which may drive subscribers to other platforms where their favorite content is available.
2. The must be able to spend and rely on its original content for years to come. This means that Netflix will most likely continue to accumulate more and more debt. 
3. Competitors are undercutting Netflix’s current pricing model of $12.99 per month; Disney+ costs $6.99 per month, while Apple TV+ is on the market for $4.99 per month. This issue may cause subscribers to jump ship if Netflix content becomes less desirable than that of another platform. 

The Stock Market Story

Netflix’s stock reflects the issues that the company has faced and may indicate what is ahead. Investors have already begun to worry about the repercussions of the problems explained above, and since the start of the streaming wars, Netflix has lost a bit of its edge in the stock market. 

As of 1:00 pm EST today, Netflix’s (NFLX) stock is worth $296.21 per share. 

However, about a year and a half ago, in July 2018, the stock closed at an all-time high of $418.97. What happened?

• Falling Short on Projections

Netflix’s stock price took a deep dive in after-hours trading when it reported its Q2 earnings in July 2018. The company had projected a gain of 6.2 million subscribers, but it ended up falling short, drawing 5.15 million instead. Some investors became worried, while others saw it as a single quarter blip. 

• Negative Cash Flow

The stock fell again after Q3 earnings reported a negative cash flow moving in the wrong direction. Free cash flow in the third quarter for 2018 was -$859 million, compared to 2017, which saw -$465 million. CEO Reed Hastings explained that the gap between positive net income and cash flow deficit was necessary to create original content, which is the primary driver of capital. 

• The Content Competition Begins

Another factor that likely hurt Netflix’s stock price in Q3 was the announcement of The Walt Disney Company’s upcoming streaming service. The beginning of the competition signaled that Netflix might, in the near future, lose market share. After closing at $374.13 in September, share prices fell to $301.78 at the end of October—a 19% drop in the stock. 

• Subscriber Losses

The share price made its way back up to the $385 range during the first two quarters of 2019 and took 12% fall after the second-quarter earnings were announced. Netflix reported a loss of 126,000 U.S. subscribers, the first time since it had a negative subscriber gain since 2011. 

In September 2019, several analysts provided negative commentary that spooked investors. Share prices suffered a 5% drop but have slowly made their way back to the $300 mark since. 

Netflix’s stock story shows mixed opinions on whether or not it will see growth and be a relatively safe investment for the future. 

The pros of investing include potential subscriber growth, expanding operating margins, and international expansion and strategy, management team, and strong original content. 

The cons include subscriber deceleration, valuation, increasing competition, losing licensed content, and content costs. 

At the bottom line, Netflix’s substantial growth has driven its valuation to high levels. Its debt to equity ratio of 1.81 would put it in a more vulnerable position if the company were ever to hit a rough financial patch. 

For investors looking to take a safe bet with a pipeline into the streaming space, investing in Disney may be the right choice. But for investors looking to take a chance on a streaming juggernaut may rather bet on Netflix.

Looking Ahead

Many analysts recommend selling a Netflix stock at the moment, in anticipation of subscriber losses. Netflix stock has lost its luster in the equity market as the company’s growth has slowed. How can it take a leadership role once more?

Netflix executives have said that they will not sell advertising on the platform to generate more revenue. However, Wall Street disagrees with this decision. Needham analyst Laura Martin recently downgraded Netflix’s stock to “underperform” but offered a solution including advertising. She claims that an option costing $5-7 per month, featuring six to eight minutes of advertising an hour, will help fend off competition. As other services are undercutting Netflix’s pricing model, a low-cost option may be a smart idea. 

If Netflix sticks to its no-ad policy, it’s going to have to get creative. Perhaps it will begin to create mobile-centric content, following the soon-to-be-launched platform, Quibi. Maybe it will start to offer exclusive experiences, licensed merchandise, or build a theme park to diversify its revenue streams. 

Either way, Netflix started out as the little DVD rental service that could, and if it can ride the waves of industry change as it has in the past decade, Netflix could indeed come out on top. 

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Walking around Los Angeles, it is not uncommon to find Millennials sporting Supreme hoodies, Antisocial Social Club hats, and Air Jordan sneakers. Upscale streetwear brands are highly popular amongst athletes, celebrities, and “hypebeasts”—people that collect clothing, shoes, and accessories for the sole purpose of impressing others—all over town. Streetwear brands generally cater to skateboarding, hip hop, and youth cultures, which all have a strong presence in the L.A. area. 

Being a hypebeast is much more than purchasing a hoodie or a nice pair of shoes from Champs at the local mall. Behind the individuals wearing expensive streetwear items is an entire culture of hype across the internet, entrepreneurship, and product resale, all fueled by one common factor: the business of scarcity. 

Streetwear brands upended the traditional supply and demand model to become the success that they are. These companies ensure that there is not enough supply to meet demand, making their products exclusive, more desirable, and therefore, more expensive. 

But it goes a step further. After the release of a “hype” product, one may find it marked up 1000% or more on a resale website. And people actually buy the product for an insane price because of its exclusivity.

The brand that reigns supreme in the business of scarcity has to be, well, Supreme. 

Supreme, a streetwear brand founded in 1994 by James Jebbia, has exploited scarcity to the fullest extent. Every Thursday morning, the company “drops” a limited number of exclusive products on its website. Just about 30 seconds after the drop, online buyers have cleared the inventory. Products usually include shoes, clothing, and accessories and may be created in collaboration with another brand such as North Face, Nike, BAPE, and Off-White.

The hype around drops is generated over the internet before it happens; Supreme makes announcements about product launches via social media, and the message is shared and supercharged by celebrities, hypebeasts, and influencers alike.

Flagship stores in Los Angeles, New York City, London, Tokyo, and Osaka also release the products every Thursday, drawing hundreds of customers to line up outside of its doors.

Product purchasers can keep and wear their items, but more often than not, they take them to the resale market. Using online platforms like eBay, StockX, GOAT, and Stadium Goods, buyers have the potential to resell their merchandise for over ten times its original price, depending on the scarcity and original price of the product. 

For example: a Supreme brick (yes, an actual clay brick) is listed on Stadium Goods today for $220. An item that originally cost around 40 cents now costs hundreds of dollars because the Supreme brand was stamped on it.

Many have questioned the sustainability of Supreme’s business model. The company sells its products for much more than their intrinsic values because they are in demand, but consumers may not always hold an obsession for Supreme’s products. Streetwear brands must remain on the cutting edge of fashion and culture with the economics of hype in mind.  

SOURCES:

https://abcnews.go.com/Business/inside-supreme-economy-streetwear-phones-bots-side-hustles/story?id=59316142

https://www.bbc.com/worklife/article/20180205-the-hype-machine-streetwear-and-the-business-of-scarcity

https://www.uea.ac.uk/documents/953219/29343977/Motala%2C+Taahir+2019.pdf/96431214-038c-9191-eaa6-fdc456719e7b

https://medium.com/@adelaideeconomicsclub/hypebeast-economics-4e9d583c7ea5

https://hypebeast.com/2017/6/supreme-resell-economics-million-dollars

The economic story that the box office illustrates in a time when mega-blockbusters dominate ticket sales

In 2019, Avengers: Endgame, The Lion King, Toy Story 4, Captain Marvel, and Spider-Man: Far From Home have taken the top five spots for highest gross in the domestic box office (Box Office Mojo). 

What do these successful titles have in common, besides the fact that you could meet all of the films’ characters at a theme park somewhere? 

Well, it’s just that–all of the films are based on existing intellectual property (IP) with established fan bases. Studios are betting on these tentpole films in the box office, because they draw audiences into a theater and away from the social media, streaming services, and video games that have, in recent years, made it much more difficult to attract eyeballs to cinemas.

Beyond garnering attention, mega-blockbuster films bring in multiple sources of revenue for a studio, making its parent company look favorable to Wall Street investors. When a viewer gets hooked on Avengers and its cinematic universe (because how could one not?), that person is likely to be back for the next film, coming out in a year or so. Furthermore, being an Avengers fan will make a $129.00 Disneyland ticket seem much more attractive. Here, one can experience a superhero meet and greet, and soon, the Avengers Campus: a space at the park explicitly dedicated to the Marvel universe. Oh, and of course, you’ve got to buy your child an Iron Man costume for Halloween. 

From just the movie ticket, theme park pass, and merchandise purchases made by one family, Disney is making several hundred dollars in revenue. Conglomerates like Disney seem to be doing all the right things to adapt to the rapidly changing marketplace, taking advantage of revenue streams left and right. However, studios that do not control lucrative IP are being struck hard by the age of mega-blockbusters. 

This year, Warner Brothers has released seven small and mid-tier budgeted films that bombed at the box office, including The Good Liar, Motherless Brooklyn, and Blinded by the Light. About five to ten years ago, the studio could have deployed star power, marketing dollars, and a suitable opening weekend date to mitigate the risk of a box office flop. But nowadays, it is almost impossible to find a weekend not taken by something popular, such as the newest Pixar film, or to beat negative ratings on sites like Rotten Tomatoes before the film has even been released. If there is an excuse not to make the trek out to the theater, people will take it. If it’s not something from the Star Wars franchise or a beloved animated film, is it worth the time and money?

Despite having several of its films bomb at the box office, Warner Brothers is doing alright with the $1 billion in worldwide ticket sales made by The Joker. And moving forward, the studio is not ridding itself of mid-budget films. Instead of having a wide release in theaters, a film such as The Good Liar will likely be released on the WarnerMedia streaming service, HBO Max. 

Box office sales are indicating a shift in consumer habits surrounding entertainment; people are choosing to spend their own scarce resources—their money and attention—in places other than the box office. There is a plethora of content available to society right at home and for a low price via social media, video games, and online streaming platforms. People have always had to choose how to spend their money on entertainment, but now more than ever, it’s also about where consumers choose to spend their time. 

The box office illustrates a landscape where the stakes are much higher for studios; audiences are less likely to spend their time and money on a mid-budget film that may or not be good. They can watch an Oscar-nominated film at home on Netflix instead. 

To adapt to the entertainment landscape in 2019, studios are learning from the box office that it’s now a game of “go big or go home.”

Summer of 1894 marked the first official celebration of Labor Day in the United States; President Grover Cleveland signed a bill creating a national holiday across the country when reconciliation with the labor movement became a top political priority.  

Since the original Labor Day, the U.S. labor market has been affected by economic upturns and downturns, governmental policies, changes in cultural values, and countless other factors. One significant statistic from the labor market, the unemployment rate, gives the percentage of unemployed workers in the total labor force. The rate reveals how many people are out of work or seeking a job, which affects the American economy as a whole. When one becomes unemployed, an individual or family loses its wages. In turn, the national economy loses the consumption of goods and services that the individual or family would be spending with earned wages. The purchasing power of the unemployed consumer declines and eventually puts other workers out of a job. The fact that unemployment affects purchasing power makes it an economic indicator: a means to gauge future trends in the economy. A low unemployment rate indicates a strong economy usually tied with high consumer spending; a high unemployment rate usually occurs during a time of economic downtown and causes low consumer spending.

During the year of the first Labor Day, the unemployment rate was 7.73%. The Panic of 1893 has just occurred due to international crop failures and other shocks that weakened the economy. Four million people were unemployed during what became a major depression in the business cycle. The unemployment rate confirmed the pattern of economic downtown in several sectors of the economy at the time.

Last month, July numbers showed a present-day unemployment rate of 3.7%, one-tenth of a point up from the record low rate of 3.6% reported in April. The rate has not hit that low of a percentage since December of 1969, indicating a robust labor market in the current U.S. economy. Consumer spending is high, building good business, and in turn, generating more jobs.

The unemployment rate, a trailing indicator, confirms the growth that the American economy is experiencing in the present day. Workers earning wages stimulate economic growth with spending.

The unemployment rate rose one-tenth of a percent between the first and second quarter of 2019. However, the small fraction of growth is not alarming on a month to month basis. If the unemployment rate were to rise 0.5% over a short period of time, there may be reason to worry about economic downturn.

125 years after the first official Labor Day and Panic of 1893, the U.S. sees a robust economy confirmed by a low unemployment rate. Although other indicators such as an inverted yield curve and slowing global growth may suggest an imminent recession, the unemployment rate confirms economic growth and stability in the present day.

Sources:

https://www.investopedia.com/news/history-labor-day/

https://ig.ft.com/sites/numbers/economies/us/

https://www.forbes.com/sites/simonmoore/2019/08/20/what-key-recession-indicators-are-telling-us-today/#6ee71bd12156