I was reading recently about the entry of content companies into online streaming, foremost among them being Disney. Amongst other things, that implies key erstwhile Netflix content partners will now become competitors, forcing Netflix to either pay a premium for licensing content from other players or to spend a lot more on developing original content.

However, here’s the rub – Netflix has already been spending a lot on original content.chartoftheday_14731_netflix_cash_spending_on_streaming_content_n

As the statista chart above shows, that spending has been increasing steadily and will now need to grow even faster to replace the content deals that are no longer available.

Although they’ve been showing a profit in recent times, there still isn’t a cash profit and part of what drives their better net income numbers is how they account for some of their longer term investments and amortize them over time.

Companies like Disney with a huge library of pre-existing content that has already paid for itself have a massive advantage over Netflix – they just need to set up the streaming business, which is not the challenge here.

There are parallels to Uber here – Uber just set up an app and a way of making ride hail more convenient. They didn’t actually own any cars or employ any drivers. They didn’t really change the economics of the industry.

Netflix has created a new way to monetize content, but unfortunately it isn’t powerful enough to allow for the costs of massive original content production. It works well with a large library of pre-existing content and allows a small percentage of original content production, which is perfect for companies that have been in the content business for decades. Unfortunately, that may not work for Netflix.

Time and time again we see these charts showing how the biggest “new-age” businesses don’t own much of the assets that are core to the actual consumer experience. I think what we’re seeing now is that most of them are just a glorified “pipe” – and at the end of the day, if you don’t own what’s flowing through the pipe, it’s unlikely you’ll have a profitable business. If you can get an IPO and get out quick, good for you, but if not…