Why Media Titans Would Be Wise Not to Overlook Netflix
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- Janeiro 13º, 2016
Imagine you run a global media conglomerate. Say you’re Robert A. Iger, the chief executive of Disney, or Brian L. Roberts, of Comcast, or perhaps you’re slightly lower down on the ladder of behemoths — the boss of Twenty-First Century Fox or Time Warner, perhaps. In any case, you own a lot of valuable stuff: movie studios, broadcast and cable TV networks, perhaps a broadband infrastructure, maybe some theme parks with roller coasters and a few impressive castles.
So here’s a question for you, my media-mogul friend. How worried are you about Netflix? And more to the point: Are you worried enough?
It’s possible you’re not. Yes, Netflix has grown substantially over the last few years, now claiming more than 70 million subscribers who pay about $8 to $10 a month for access to a large library of movies and TV shows. Last year the streaming service’s stock was the best performing of the Standard & Poor’s 500-stock index, rising 140 percent.
And its prospects keep looking brighter: Last week, Reed Hastings, Netflix’s goateed chief executive, announced he would make his movies and TV shows instantly available to almost every country in the world (the big exception, for now, is China). The move nearly doubled Netflix’s potential market — the service is now accessible to more than 540 million households worldwide with broadband Internet access.
Yet Netflix is still a tiny frigate in the global sea of the content business, and surely it’s no threat to the mightiest fleets in the industry. Your castles are safe, right?
Well, here’s a scarier proposition for you and your fellow media executives to ponder while roasting marshmallows by the fire at Davos next week. What if Netflix is the Amazon of the entertainment industry — the embodiment of a slow, expensive, high-risk effort to consume the entirety of your business?
The good news for the Davos set is that there are lots of reasons that Netflix’s strategy won’t work. The bad news: So far, it just keeps working.
On paper, Mr. Hastings’s plan to take on the traditional TV industry has long sounded slightly nutty, as delusional as Jeff Bezos’s strategy at Amazon to overrun retailing once seemed. Netflix’s plan is certainly high risk — it is spending billions to create and license content, it is fighting determined media incumbents across the globe, and it owns none of the pipes leading into people’s homes. (Among Netflix’s many competitors is , which has its own growing and well-regarded original-content division.)
Netflix’s audacious strategy arouses strong feelings among folks on Wall Street. The company, based in Silicon Valley, is now valued at $50 billion, but many analysts rapturously say its efforts to reinvent TV could be worth several times more. Others find the ardor for Netflix to be nearly physically repulsive.
“I’ve covered stocks for more than 15 years, and it’s amazing how bad my idiot competitors are on this,” said Michael Pachter of Wedbush Securities, who believes Netflix is highly overvalued. “It’s like they drink the Kool-Aid and they’re done.”
The reason opinion is split is that, like Amazon before it, Netflix’s business is so daring that it seems like it shouldn’t work — and yet the company keeps surprising everyone. Observers and rivals were expecting Netflix to go global over the course of the next couple of years, not to open up just about everywhere on a single day. But the rest of the industry always seems to be a step or two behind in realizing the scope of Mr. Hastings’s ambition.
A capacity for surprise is the first and most obvious similarity between Netflix and Amazon. There are lots of others.
Consider that like Mr. Bezos’s retail machine, Netflix has been given leeway by investors to spend huge sums to build a globe-spanning video jukebox available to anyone. For Amazon, the investment was in warehouses; for Netflix, the money is being plowed into original content. During a speech at the International CES trade show last week, Ted Sarandos, Netflix’s chief content officer, said the company would produce 600 hours of original programming in 2016, about double what it created last year, and on par with most major TV networks.
In a recent note to investors, Nat Schindler, an analyst at Bank of America Merrill Lynch, counted all the new shows Netflix is offering this year. He tallied 31 TV series, 10 feature films, 30 children’s shows, 12 documentaries and 10 stand-up comedy specials.
“To put it into perspective, you would have to watch Netflix for 25 days straight to consume all of its new original content next year,” Mr. Schindler wrote.
But Netflix isn’t an ordinary TV producer. Like Amazon, it is amassing a cache of intelligence on what customers want, and it’s using that data to create content that appeals to a wide range of demographics globally. In his CES speech, Mr. Sarandos argued that Netflix’s business model and its data allowed it to produce shows that wouldn’t have existed in traditional TV.
“To make a baseball analogy, linear TV only scores with home runs,” Mr. Sarandos said. “We score with home runs, too, but we also score with singles and doubles and triples.”
And finally, Netflix, like Amazon, is a flywheel that keeps spinning faster: As it gets more subscribers, it gets more data and more money to fund more content, which in turn helps it bring in more customers, and on and on, ever faster. Netflix barely ekes out a profit now, but the bulls say that as the flywheel spins, it will eventually begin earning enormous sums.
They argue that Netflix will gain enough power in the content business to demand favorable pricing on content. Analysts also expect Netflix to begin raising its subscription fees, which are currently the most attractive in the media business. Customers streamed 12 billion hours of Netflix video during the last three months of 2015, the company says. That means customers paid around 14 cents per hour of Netflix, according to Rob Sanderson, an analyst at MKM Partners.
“Cable is between 25 and 30 cents an hour — so Netflix is basically half,” Mr. Sanderson said. “If you look at the dollars per hour of Netflix, there’s nothing even close.”
And then there is Netflix’s demonstrated ability to surprise with new ventures. Like Amazon’s expansion from books to everything, Netflix grew from delivering DVDs to streaming old-run movies to, now, producing movies and TV shows. Some expect Netflix to keep moving deeper into the industry — to build its own studio, for instance. One day, if things keep going the way they are, maybe it, too, can have theme-park castles.
There are Netflix skeptics, of course. Mr. Pachter argues that Netflix will have a difficult time lowering its content costs. As media giants realize Netflix is pulling away their best customers from cable, they will begin demanding more for licensing deals. He also predicted Netflix would have trouble raising subscription prices given increased competition from Amazon, which offers original programming as part of its Prime subscription service. (Prime costs $99 a year, about $20 less than a year of Netflix, and it includes free shipping.)
Considering these hurdles, Mr. Pachter believes Netflix can create a modestly profitable business, just not a spectacular one. “These guys aren’t going away — I just think the stock will drop to about $70 or $75,” he said, from its current price of around $115. (In an email after the interview, Mr. Pachter revised his price target to “around $60” per share.) “Otherwise, things just don’t make sense. Because really, for Netflix to win, everyone else has to lose.”
And that can’t happen. Right?
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