Streaming wars are over and Netflix won 

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Disney’s decision to license more TV shows to Netflix this year marks a turning point in the expensive battle for supremacy in online streaming. Under pressure to stem losses, entertainment companies are opting to sell more of their content to Netflix. By waiting out its rivals, Netflix has eclipsed them. 

It has done this through a vast, debt-fuelled expansion followed by concerted cost cutting. When entertainment companies first competed in streaming they began by hoarding their most popular TV shows and films. The loss of shows like Friends put pressure on Netflix to build up its own back catalogue. It expanded into reality TV, romcoms and international series while handing over large sums of money to well-known showrunners such as Shonda Rhimes and Ryan Murphy. By 2021, annual content spend in cash terms exceeded $17bn.

The price Netflix paid for all that content was falling margins and a heavy debt load that exceeds $14bn. While the pandemic added millions of new subscribers, competition and subscription fatigue led to a subsequent dip in 2022. Netflix’s operating margin dropped sharply from 21 per cent to 18 per cent. The company’s market cap traded below Disney’s. 

By focusing on operating margins, Netflix has staged a comeback. It has cracked down on password sharing, promoted an advertising-supported subscription tier and raised prices.


But the real change has come from cost cutting, aided by a writers’ strike in Hollywood that halted productions. While revenue rose 6.6 per cent in 2023, net income rose 20 per cent. Not only has the operating margin recovered but chief financial officer Spencer Neumann is predicting a margin of up to 24 per cent this year — a new high for the company. 

Compare Netflix with Disney and Netflix comes out ahead, as its market cap now indicates. Disney’s direct-to-consumer unit, which includes streaming service Disney+, is still reporting large operating losses. Activist investor Nelson Peltz says Disney’s streaming service should target “Netflix-like margins” of 15 to 20 per cent. This might be achieved by cutting back on content spend and licensing more content — two moves that would further serve Netflix. Dearth of new content elsewhere may explain why Netflix is still adding new subscribers.

For Netflix, this may still be a partial victory. Streaming remains an expensive business with low revenue per subscriber. YouTube is more popular than any streaming service and much of its content is created for free by users. Its revenue is mainly advertising, with subscriptions a bonus. The business is part of Google’s Services business, which boasts an operating margin of 35 per cent.

Compare Netflix with YouTube instead of Disney and the model looks altogether less appealing. 

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore



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