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Netflix's move towards selling merchandise is a big deal

by Dissecting the Markets about a year ago in stocks
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This move will provide the company higher margins, a whole lot more profit, and diversity in revenues.

Netflix's move towards selling merchandise is a big deal
Photo by Alexander Shatov on Unsplash

Netflix went from being a disruptor of mail-in DVDs to movie theaters to essentially, becoming the new standard of entertainment and entertainment consumption.

They pioneered binge-watching by releasing a season of a show in its entirety instead of feeding audiences with one episode every couple of days.

They've given many phenomenal storytellers a platform to convey their stories to audiences worldwide when other entertainment companies like HBO and AMC Networks found their ideas to be silly.

After years of focusing on producing original content and removing non-original content from its platform, Netflix is confident that the fanbases that have been created from its original series can be monetized further.

At the end of the day, the cost of producing a piece of content varies within a range since Netflix is strict about production budgets. Since Netflix doesn't release much of its movies into movie theaters (and isn't big on them despite buying the Egyptian Theater and the Paris Theatre), the only purpose of continuing to pump more original content onto its platform is to keep subscribers engaged in the platform.

The more subscribers Netflix has, the cost of content per subscriber decreases. In the US and other developed countries, the subscription rates are high. However, in places like India where disposable income is less, Netflix subscription prices are less. With the content of content being the same all over the world, it sometimes comes to the point where a nation of subscribers has to subsidize content being produced in another content and being made for an entirely different audience.

While the model has been working well so far for Netflix, it's not sustainable. Content producers are seeing limited earnings since their budgets are fixed and are guaranteed a small profit. Content piracy is becoming more common. Subscriber growth can become limited as people share their Netflix passwords with their friends and family.

Because of this, Netflix is venturing into the merchandise business.

When you look on Instagram, Twitter, Facebook, etc. you'll find various fanbases for some of Netflix's most popular shows like Money Heist, 13 Reasons Why, Stranger Things, etc.

While popular shows might have high play rates, Netflix isn't making money every time someone watches that show since users are only paying a monthly payment and have access to all content on Netflix's platform.

Meanwhile, traditional movie producers would see the big bucks from having their movies featured at the box office and traditional show producers would see higher earnings if their shows became more popular (thanks to advertising dollars).

Also, traditional content creators have been selling merch from their most popular franchises and have been seeing higher earnings from it.

Netflix has been missing out on the big bucks that non-Netflix producers have been making. Venturing into selling merchandise is their way of getting profits like what they're getting.

Additionally, opening a merchandise store will allow Netflix to collect more data on its audience. The more sales a certain franchise's merchandise store has, Netflix will find that franchise to be more popular and will probably order another season of that show to be produced.

In other words, merchandise sales will allow Netflix to measure the popularity and intensity of its franchises' fanbases like never before.

All Netflix users can keep repeating the seasons of their favorite shows. But not all Netflix users will go as far as to buy a t-shirt of their favorite Netflix show.

Finally, consider the diversity of revenues that Netflix will have once it starts selling merchandise. Rather than having to rely solely on subscriptions for earnings, Netflix can start relying less on subscribers for revenue and can start relying more on upselling their subscribers (and their friends, with whom they share a Netflix account).

Overall, Netflix's move into merchandise is a bullish catalyst for its business. If Netflix can succeed in selling more merchandise to its fans, then the company will see its earnings surge and will see its success as a sign to venture into more things (like theme parks or games) to boost fan engagement in their popular franchises.

Netflix could very well be taking its next step in becoming the Disney of the modern age.

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About the author

Dissecting the Markets

My views on markets, investment strategies, perspectives on events, etc. usually differ from the mainstream consensus.

*All views expressed in my articles are my own and should be considered opinionated

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