An economic downturn would only make Netflix stronger, analysts say

Reed hastings netflixKen Ishii/GettyNetflix CEO Reed Hastings

Netflix will only become stronger if the market tanks, according to analysts at MKM Partners.

In a note on Wednesday, the analysts wrote that a US recession would boost Netflix’s prospects because it would accelerate “cord-cutting”, the phenomenon involving ditching cable subscriptions for cheaper streaming services.

“While more limited, an $8-10 per month video service [like Netflix] is more attractive than a $100 per month service [like traditional cable] when spending budgets are stressed,” the analysts write. When money is tight, that big cable bill starts to look more like a luxury than a necessity. And consumers might just be tempted to cut the cord and ditch their cable bill altogether.

But that’s not the only factor that could cause Netflix to rise in an economic downturn, according to MKM. They note that cable companies are reliant on advertising dollars, which tend to dry up in a recession. Netflix is not. This means that cable will have less money to spend acquiring new shows, putting Netflix in a relatively better position to snag the best content.

In Australia, cable provider Foxtel has been reshaping its product mix and dropping its prices to fight back against the arrival of cheap streaming services such as Netflix and Stan.

What the analysts don’t mention, however, is that a recession could hurt Netflix’s subscriber growth more generally. Netflix is already starting to see flagging subscriber growth in the US, and those who are not yet Netflix customers might be reluctant to sign up for yet another entertainment bill. New subscribers who don’t fall into the “cord-cutter” category could be harder to come by when the market is bad.

Netflix’s prospects in a recession, then, might hinge on how many people see disposing of their cable bill as a viable option. And that, in turn, might depend on how well Netflix uses the $6 billion it plans to spend on content in 2016.

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