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Why Netflix isn't worried about the streaming wars

Wendy Lee, Los Angeles Times on

Published in Business News

SANTA CRUZ, Calif. -- At a downtown coffee shop in 1997, Marc Randolph and Reed Hastings wondered: Could you mail a DVD and have it arrive unbroken?

To test the idea, the friends dropped off a disc at the post office across the street and mailed it to Reed's home nearby. To their surprise, the disc arrived undamaged, an experiment that soon led to the birth of a scrappy start-up now known as Netflix.

Netflix, a name that combines the internet and movies, was once such an improbable idea that Randolph's wife thought, "that will never work," inspiring the title of his recently released book.

The company not only worked, it worked beyond their wildest dreams. It would eventually revolutionize TV, herald the era of binge-watching and upend Hollywood's long-established order. Netflix poured vast sums into original TV series and films and became the undisputed king of streaming, with more than 151 million subscribers in nearly 200 countries.

Now the Los Gatos company faces an existential challenge from a new crop of rivals who are determined to beat it at its own game. Next month, Apple and Disney will launch their streaming platforms, followed by WarnerMedia and NBCUniversal next year.

Investors have grown skittish about the looming competition. Netflix shares, which closed Tuesday at $270.72, have fallen nearly 30% since the company reported that it lost 126,000 subscribers in the U.S. during the second quarter, its biggest decline since 2011. While revenue rose 26% to $4.9 billion the second quarter compared with a year ago, net income dropped 30% to $270.65 million during the same period, according to a filing.

 

Netflix's domestic business is slowing at a time when legacy media companies are determined to seize control of lucrative shows that have helped fuel Netflix's success and lure subscribers to their own services.

"Netflix is in a much more difficult situation than it's ever been," said Brahm Eiley, president of the Convergence Research Group, a Victoria, B.C., firm that tracks the streaming industry. "It's a lot more competitive. It's choppy waters."

Though few think Netflix will relinquish its dominance, its market share is expected to decline sharply in the U.S. Last year, Netflix took in 47% of subscription revenues for streaming platforms in the U.S., according to the Convergence Research Group. In 2022, Netflix's market share will decline to 34%, Convergence said.

To be sure, Netflix has faced challenges before, first with the transition from mail-order-delivery to streaming in 2007, and later its successful foray into original programming with such hits as "Orange Is the New Black" and "House of Cards."

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