feralde franzen marjatte

[Tarja Rabito]

Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation.

Video streamer Netflix (NFLX -0.56%) saw its profits plunge in the fourth quarter. Net income was just $134 million, down 67% from the third quarter and 28% year over year. The company blamed the timing of new shows. Netflix's original content gets depreciated on an accelerated basis, meaning more of the costs are booked up front.

But other costs rose as well, most notably marketing. Netflix poured $730.4 million into marketing during the fourth quarter, a 57% jump compared to the prior-year period. That's a much larger increase than the 27% revenue growth and the 26% paid subscriber growth reported by the company.

Netflix now has 58.5 million paid subscribers in the U.S., along with another 2 million users on a free trial. That's less than half the total number of households, but the company is clearly running out of runway in its home market. Netflix added 1.53 million paid U.S. subscribers in the fourth quarter, but its customer acquisition costs are through the roof.

Winning a new U.S. customer now costs Netflix more than four times what it cost a few years ago in terms of marketing spend. One factor is that the company is simply running out of households that don't have a subscription or don't use the account of a friend or family member. Another factor could be increased churn. Netflix doesn't disclose how many users drop the service, so there's no way to tell.

International marketing spending also jumped, but that increase was more in line with subscriber growth. Netflix spent $417.6 million on international marketing, up 63% year over year. But it paid less than $60 in marketing for each new paid subscriber.

This increased difficulty winning U.S. customers comes before a fresh batch of competitors arrive. Disney plans to launch a streaming service this year; AT&T will expand its streaming offerings by the end of the year; Apple is rumored to be close to rolling out a streaming service of its own. These new services will join other Netflix competitors like Hulu, Amazon.com's Prime Video, and a slew of skinny TV bundles like Philo and Hulu's Live TV offering. Winning customers is only going to get harder and more expensive for Netflix.

Not all of the increase in Netflix's marketing spending was due to escalating customer acquisition costs. Netflix reclassified certain personnel costs in the fourth quarter, moving that spending from general and administrative to cost of revenues and marketing. That change didn't affect the bottom line, since it's just shifting numbers around. But it was one factor behind the increase in marketing spend.

Under the new classification system, general and administrative expenses were reduced by $199 million in the fourth quarter compared to the old classification system. About $83 million of that was shifted to marketing, with $30 million added to U.S. marketing spending and $53 million going to international marketing spending.

These numbers aren't big enough to change the trends. U.S. customer acquisition costs are still rising rapidly, even under the old classification system. Excluding these accounting changes, U.S. marketing costs would have risen by 34% year over year, and the U.S. customer acquisition cost would have been $184.

Despite a price increase announced earlier this month, Netflix still expects to burn around $3 billion in cash this year. Content spending is the main driver of this cash burn, but high marketing spending will also play a role. Winning new customers requires not only escalating content spend, but escalating marketing spend as well.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green owns shares of AT&T. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

LTV stands for customer lifetime value and represents the revenue a customer brings you throughout the entirety of your relationship. Consider Netflix where an average subscriber stays on board for 25 months. Netflix says the lifetime value of its customer averages $291.25 (see source).

A poor understanding of LTV:CAC can put companies in complicated situations or lead to missed opportunities. Because of this, CEOs need to understand how the LTV:CAC ratio influences the health of their business.

As I alluded to above, the customer lifetime value represents the revenue you can collect from each customer, while the acquisition costs determine how much it costs to acquire the customer. The relation between the two defines how profitable your business is.

Consider a monthly revenue of $100 and that your customers spend consistently throughout the year with you. This model is a simple and flexible one, and it tends to work well with online businesses and marketplaces.

The second method focuses on the frequency that you experience customers dropping from your product. This method works best with subscription models. Continuing the previous example, suppose your churn rate is 10 percent every month.

Acquiring customers is more of an art than a process. Great product managers understand what drives costs up or down and also can double down on the winners and cut the losers. Not all channels will lead to sustainable conversions.

LinkedIn and 3rd parties use essential and non-essential cookies to provide, secure, analyze and improve our Services, and to show you relevant ads (including professional and job ads) on and off LinkedIn. Learn more in our Cookie Policy.

I've written a few posts in the past talking about the consolidation happening in the media industry and Netflix's user experience advantage over Amazon Prime. Since then, there has been a lot of changes in the media landscape. But, what has remained constant is the continuous growth of both Netflix's user base and the mindshare it has captured in the industry.

In the last few months, Disney has completed the acquisition of Twenty-First Century Fox, and AT&T won the case against Trump administration and completed the acquisition of Time Warner. Now, both are working on launching their own direct-to-customer SVOD (Subscription Video On Demand) services to challenge Netflix. In fact, Disney just announced the launch of its service towards the end of 2019.

Netflix has remained unchallenged for a long time as it built a direct-to-consumer service over the Internet, whereas the existing TV networks reached out to customers through cable companies and didn't own the customer relationship. Also, these TV networks fed into Netflix's success by licensing their content to Netflix to earn additional income. But, does the future of Netflix looks cloudy in the face of formidable competition that is shaping up on the horizon:

The reason is the structural changes happening in the linear TV industry. Currently, these media companies generate revenue from 1) affiliate fees per subscriber they get from cable companies who are responsible for distributing TV to the end consumers 2) brand advertising spend from big conglomerates 3) licensing content to other networks including Netflix.

Because of the Internet, people are spending more and more of their free time on other sources of entertainment. On the one hand, the younger generations aren't signing up for linear TV bundle, on the other, the older generations are also cutting the expensive cords and using the Internet to consume content. Therefore, affiliate fees revenue for these TV networks is declining, and the acceleration has accelerated significantly.

The advertising business of these networks is also at risk as the companies that spend the most on TV advertising are themselves experiencing a secular decline. Companies from CPG to big-box retailers to automobiles, all big spenders on TV advertising, are getting disrupted by Internet or other technological changes. This post by Ben Thompson beautifully explains the phenomenon in detail and worth the read.

Therefore, in the face of existential threat looming large over their head, these companies are changing their business model by launching their own direct-to-consumer offerings, and this will compete directly with Netflix.

Disney is going to launch its service with the combined strength of both Disney and Fox IP and is now a majority stakeholder in Hulu too. ATT has acquired Time Warner and plans to create a direct-to-customer SVOD service around its most prized asset, HBO. Comcast bought Sky TV last year which has a significant presence in European markets and is working on its own service too by leveraging NBCUniversal assets.

So, what are the chances of Netflix's success when such formidable competition is knocking on the door, and that too a competition on whose IP, Netflix has built a business with 150 million subscribers across the world?

Will the direct-to-consumer offerings from these companies be able to reach the scale Netflix has reached? Will Netflix remain relevant in the face of this new competition? To answer these questions, we need to study Netflix's moats and understand how these moats came about.

Have you ever thought about canceling Netflix or switch to a different streaming service? If yes, is the reason, because you're not getting enough value out of it? I've thought about it multiple times. But the reason is never the value I get out of my money. Every single time it is is the guilt trip I go on after wasting too many hours binge-watching.

90f70e40cf