Industry overview

As I write on Monday morning, the AI trade is trying to claw its way back after last week’s brutal selloff. But whether this is a fool’s gold rally or the start of a real bull run into the end of the year, one thing is true: AI itself is quietly eroding the business models of some of the market’s best-known companies. It’s critical that you and I recognize how this is happening and prepare our portfolios — not just for a week of volatility but for permanent existential risk.

For an example that’s playing out right now, let’s rewind 26 years…

In September 2000, the founders of a money-losing DVD-by-mail startup flew to Dallas to pitch the CEO of the biggest name in home video on an acquisition. The startup was Netflix (NFLX). The CEO was Blockbuster’s John Antioco. And the asking price was $50 million.

Netflix co-founder Marc Randolph, who showed up in shorts, a tie-dyed T-shirt and flip-flops, later described the moment the number landed. As he put it in his memoir, “John Antioco was struggling not to laugh.”

Blockbuster turned down the deal, and 10 years later, it filed for bankruptcy. It’s become the business world’s favorite cautionary tale about a dominant company that failed to see the next wave coming. Netflix may be staring down its own Blockbuster moment — though for a very different reason.

The streaming giant stumbles

Last Wednesday, Netflix management told employees it will lay off roughly 6% of its workforce, or about 1,000 people, mostly in product, tech, legal and HR. A few weeks ago, co-CEO Ted Sarandos told a Bloomberg conference that the company was “not growing as fast as I want” — even as viewing time rose 2% in the first half of the year.

Wall Street has noticed. In June 2025, NFLX stock hit a record high. But as I write on Monday, it trades under $70, down nearly half from that peak.

But this selloff is less about an upstart company challenging the industry king, and more about a technology that could flatten the industry itself. Netflix sees AI coming. In fact, it’s embracing it. Last year, Netflix confirmed that The Eternaut featured the first generative AI footage in the final cut of a Netflix original. The scene showed a building collapsing in Buenos Aires. Sarandos told analysts the sequence was finished 10 times faster than it would have been with traditional visual effects, and that the cost “would just not have been feasible for a show in that budget.”

But look at the flip side of that — the same tool that lets Netflix make an expensive scene for less also lets anyone else make one. For two decades, Netflix’s moat rested on a simple fact: great video is expensive and slow to make. AI is changing that.

“Nothing is happening at all” — until it is

Tom Yeung, lead analyst for our global macro expert Eric Fry in Fry’s Investment Report, has been tracking this shift since March, when Netflix traded near $100 and investors weren’t worried about its long-term prospects. Here’s how Tom described AI video quality at the time: a recently generated viral clip of Jackie Chan fighting Jet Li “had more bugs than a picnic in July,” and anyone watching carefully would notice the kung fu actors reaching straight through objects.

Then the situation changed, gradually at first and then all at once. Two of those developments came from China. First, in April, regulators approved the world’s first theatrical release of a feature-length AI film by a major mainstream studio — Sanxingdui: Future Memories opens in Chinese theaters this Friday. Then in August, a Chinese company began releasing episodes of an AI-generated TV show, The Sequel to Journey to the West, which drew 280 million views across its first five episodes and ranked No. 1 among some provincial channels.

The economics behind all this are startling. According to Chinese state broadcaster CCTV, the cost of producing one minute of an AI short drama fell from 5,000 yuan (about $700) to a few hundred yuan in the first half of this year. One Chinese director said a wedding scene that would have cost him about $9,000 to shoot cost about $210 with AI.

Circling back to Netflix, here’s Tom with the fallout: shares of Netflix have since fallen below $70, and one analyst even dared put a “Sell” rating on the stock — its first since the start of the year. “After all, Netflix is now facing some real competition.” Credit to Tom — Wall Street’s first bearish call last month arrived after the stock had already fallen about 30% from Tom’s March warning.

In fairness to Netflix

Before we write Netflix’s obituary, a real bull case remains. Netflix has more than 300 million subscribers, and its advertising revenue is on track to roughly double this year to about $3 billion. Management’s 2026 revenue guidance is $51 billion to $51.4 billion. Plus, live sports and events, which AI can’t fake, are a growing part of the mix.

These tailwinds mean investors trying to understand whether AI will hurt or help Netflix should ask a sharper question: what is Netflix’s core asset as a company? And does AI make that asset more or less scarce? If it’s the content, Netflix’s dominance looks shaky as a wave of cheap content is coming. Notably, CNBC reports that Netflix’s biggest threat has been YouTube, which is a distribution platform. That’s a hint that in a world of abundant video, the scarce asset is the platform where viewers gather.

Two ways AI breaks a moat

Netflix’s challenge — that something which once made it valuable is becoming abundant — points to two tests we can run on every stock we own. The scarcity test: pricing power follows scarcity. When AI turns a scarce thing into an abundant thing, the pricing power goes with it. The logic applies to any business whose core product is expensive, skilled human output. So, does AI make the products of the companies you own more or less scarce?

The friction test: in our Sept. 29 Digest, we looked at how AI agents like Meta’s Muse are removing the friction that kept customers loyal — banks paying 0.1% on checking, insurers, wireless carriers. Scarcity and friction are two different mechanisms with one shared outcome: margins that looked permanent can vanish. So, does AI make it easier for customers to find better or cheaper alternatives to the products a company sells? If the answer is “yes” to either of these two tests, be careful.

When to act: Eric Fry’s rule

The problem for investors is that by the time disruption is obvious, it’s usually priced in. Eric — our macro investing expert — has a rule for exactly this kind of situation: “Panic early. That’s the only near-certain defense against adversity in the financial markets.” As he puts it, once you catch a whiff of smoke from a distant wildfire, you don’t hang around until embers are landing on your roof. Successful panicking begins by saying “no” to obvious risks. Only then can you catch the upside. Panicking early doesn’t mean dumping every stock that AI touches. It does mean assessing the risk honestly.

Coming full circle

This brings us back to Netflix, which reports earnings tomorrow. If you own the stock, this will be a live test of what Netflix’s core asset really is. Watch engagement and the ad business: strong engagement and a growing ad business would suggest the subscriber relationship is the scarce asset. Either way, let’s not miss the wider point: Netflix beat Blockbuster by making video easy to get. The next disruption is making video easy to make.

Now, before we wrap up today, a quick related note. If you’re tempted to trade Netflix’s earnings, you don’t necessarily have to commit to a direction. I learned that from veteran trader Jonathan Rose, editor of Advanced Notice. Under the right circumstances, it can be very lucrative. For example, this approach paid off for Jonathan’s subscribers last week with FMC Corp. (FMC), which plunged more than 36% after a guidance cut — subscribers took profits on the put side, “more than 200% on our total position.”

We’ll keep tracking Netflix here in the Digest.

Have a good evening,

Jeff Remsburg

Industry overview based on InvestorPlace

What it means for investors

For investors, Netflix is a live test of whether a moat built on expensive content survives when AI makes content cheap. The stock has already fallen by nearly half from its June 2025 record high to under $70, and Wall Street’s first “Sell” rating of the year arrived only after a roughly 30% drop from March — a reminder that by the time disruption is obvious, it is often priced in. Run the two tests on every stock you own: does AI make its products more or less scarce, and does AI make it easier for customers to switch? The bull case is real — more than 300 million subscribers, ad revenue roughly doubling to about $3 billion, and 2026 revenue guidance of $51 billion to $51.4 billion — and tomorrow’s earnings will show whether engagement and ads, rather than content itself, are the scarce asset. Eric Fry’s rule is to panic early: say no to obvious risks first, then look for upside.

What it means for employees

This story has a direct employee angle: Netflix told staff it will lay off roughly 6% of its workforce, about 1,000 people, mostly in product, tech, legal and HR, even as co-CEO Ted Sarandos says the company is “not growing as fast as I want.” Beyond Netflix, AI video tools are changing creative work itself — a scene that once needed a big visual-effects crew can now be finished 10 times faster, as The Eternaut showed, and a wedding scene that cost about $9,000 to shoot can cost about $210 with AI. For people who work in media and entertainment, the skills that stay valuable are the ones AI cannot fake: live events, judgment, taste and the subscriber relationship. For everyone else, the lesson is the same one Netflix is learning — work built on output that AI can now produce cheaply is work worth rethinking.

What it means for customers

For customers, the change cuts both ways. Cheaper AI production means more shows and movies to watch — Chinese AI dramas are already drawing hundreds of millions of views — but it also means more low-quality content to sort through, and the advantage shifts to the platform where viewers gather, which is why YouTube, a distribution platform, is flagged as Netflix’s biggest threat. Subscribers should also expect advertising to matter more: Netflix’s ad revenue is on track to roughly double to about $3 billion this year, so more ads are part of the trade-off for the service’s growth. The bright spot is live sports and events, which AI cannot fake and which are a growing part of the mix.

Note: Investment calculations and projections are for illustrative purposes only. Market conditions change frequently. Consult a qualified financial advisor before making investment decisions.