AT&T's discovery: Beating Netflix is hard

Netflix became what it is today because it has been sticking to its lane.

A building with a big Netflix sign over the door

Netflix's success ultimately boils down to one thing: It has stuck to its lane.

Photo: Netflix

Monday's news that AT&T is spinning out WarnerMedia to merge it with Discovery has been hailed as a response to cord cutting, and an attempt to take on Netflix. Both may be true, but the deal also shows why it is so hard to take on Netflix in the first place, and why the newly-merged media giant may still struggle to keep up.

Discovery President and CEO David Zaslav, who will lead the new company if and when the merger gets the go-ahead from regulators, tried to sell the deal as something that benefits everyone: "Consumers with more diverse choices, talent and storytellers with more resources and compelling pathways to larger audiences, and shareholders with a globally scaled growth company committed to a strong balance sheet that is better positioned to compete with the world's largest streamers," he was quoted saying in the joint announcement.

Despite's Disney's rapid ascent, "the world's largest streamers" is still very much a euphemism for Netflix. So it may be worth pausing for a second to ask the question: How did Netflix become so powerful, and why has it been so hard for other companies to catch up?

Netflix's success ultimately boils down to one thing: It has stuck to its lane. The company started out as a video subscription service all the way back in 1997, using the most efficient delivery technology available at the time: the U.S. Postal Service. Netflix's DVD subscriptions became a huge success, generating enough cash to help it launch the next iteration of its business — the streaming service we all know and use today.

Since those early days, Netflix has stuck to the same script: build, grow, iterate. The company began streaming licensed content, and then used the money made with everyone's obsession with "Friends" to build its own original slate. It grew its domestic streaming business to tens of millions of subscribers, and then used those proceeds to expand internationally. And right now, it is investing money made in North America and Western Europe to accelerate growth in Asia.

Along the way, Netflix said no a lot:

  • In its early days, the company developed its own streaming hardware in-house. However, executives decided against building a Netflix box, recognizing that it would be a distraction that would make it harder to launch on competing consumer electronics devices. Netflix spun out its hardware team, which then became Roku.
  • In 2011, Netflix decided to spin out its DVD subscription business into a separate company called Qwikster that was also going to offer video game subscriptions. The plan was quickly killed. Netflix instead doubled down on streaming, effectively putting its DVD business into maintenance mode.
  • Throughout the years, a number of analysts have suggested that Netflix should launch ads on its service. The service has stayed ad-free for the past 14 years, and executives have time and again proclaimed that they have no plan whatsoever to change that.
  • Other things that Netflix hasn't done include livestreaming (with the exception of early Starz content), producing its own VR videos, buying sports rights, paid downloads, major tech and media M&As, news programming and more.

While Netflix has successfully stuck to its lane, the same cannot be said for AT&T. Instead, the telco always did too much, and with impeccably bad timing. It spent $48.5 billion on DirecTV, a satellite-based TV service, just as TV was transitioning online.

It hatched an expensive plan to transition those satellite TV subscribers to an internet-based pay TV service just as consumers were voting with their feet against big TV bundles. And it spent $85 billion on Time Warner, betting on bundling content with delivery, despite the fact that the media world was rapidly moving towards an unbundled future.

Spinning out WarnerMedia is a step in the right direction for AT&T, and merging it with Discovery does better align the company's assets for this new streaming world. However, competing with Netflix still won't be easy for the newly-merged company.

Warner/Discover's Achilles' heel will be its linear TV networks, with viewers jumping ship for streaming, and advertisers getting ready to cut the cord as well. However, unlike with Netflix's DVD business, there's less of a clear path for a graceful wind-down.

TLC and Animal Planet content may ultimately get rolled up into HBO Max, or whatever the company's streaming bundle will be called after the merger. The current incarnation of CNN, on the other hand, lives and dies with cable. News programming doesn't have the longevity to work in a subscription environment, and is too expensive to produce for purely ad-supported services.

If Warner/Discovery truly wants to compete with Netflix, it needs to first find its lane. That will likely be a painful process, with both companies already talking about "at least $3 billion in expected cost synergies," a.k.a. job cuts. It may also involve further spin-offs, but it certainly won't be as easy as Monday's announcement made it out to be.

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