Netflix missed earnings recently, but in my opinion, they missed something bigger. They missed building a moat.

Whenever you stumble upon a castle, you have to start building a moat around it.

Netflix’s castle was its early entrance to streaming. They recognised it, did interesting deals with media companies to get more content (pay for Friends, The Office, Seinfeld etc,) and get users to adopt the new way.

But as the adoption of streaming grew, it was also clear the technology behind streaming is easier to replicate. Thanks to Azure, AWS & GCP. Even Netflix is built on AWS. A combination of cloud technology adoption increased internet speeds, and companies like Roku & Hulu’s success were clear signals.

At this point in time, there were a couple of years when Netflix adopted its strategy is going to be about spending the highest to create original content. That was a good strategy and also a reflection of the fact that Netflix is now mainly a media company and not a tech company.

Even during these last five years when they essentially were spending gigantic sums on content, I never understood why they didn’t do other things.

Some of these other things include:

Buying an old movie studio (like MGM by Amazon), my understanding was, yes you could spend US$20 billion to create original content, but you can save time to get a good catalogue for cheap by leveraging Netflix’s equity. And their equity was soaring. It’s just good capital allocation.
Get into audio streaming.
Get into merch (they did recently).
Experiment with audio streaming products, and user-generated content products like YouTube. These might sound ridiculous but hear me out. When Google stumbled upon success with search they protected it with Maps, YouTube, Chrome and more. Most of their experiments failed but some succeeded and that’s what matters.

They do seem to do new things like gaming, which I think could be potentially huge for them. Especially when you consider their DNA in creating new code. But doing this on a high ride is usually easier and tougher when your equity gets crushed and your employees start leaving.

Also Read: How I used a platform strategy to help family entertainment centres survive a post-COVID-19 world

But again Netflix has been in such a situation before and came. In fact, their current situation is not nearly as bad as they had seen before. They still have the most important streaming product with great revenue.

But some things should change

Netflix should not spend so much on new content, they should acquire large and cheap catalogues. It’s tough now that everyone has a streaming service. But worth a try. More money doesn’t mean more creativity. Look at HBO Max. Find great content curators, and take interesting bets.
They should explore more experimental products/apps.
Consider acquisitions to compete against YouTube, Spotify and AMC.
Consider theatrical releases via own theatres (yes acquire them if possible) or just using the status quo. Hit series on Netflix could also premiere in theatres, honestly will avoid future churn.

There are many interesting ideas, but the bottom line is that “when you stumble upon a castle, build a moat around it”.

Finally, I will leave you with this picture of how Disney built a moat around its castle.

This post first appeared on the author’s blog.

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