The Rise and Fall of Netflix
“Fall, what fall?”
They have 214 million subs as of the 3rd qtr. 2021, up from 209 million subs end of 2nd qtr. and a huge lead on Disney Plus. Per July 2021 investor reports, Disney Plus’ 118 million is way, way behind. Stable international growth, a massive base in the US, and with cable going away, the sky’s the limit.
All of which is true, so is losing 400k subs and missing their target by almost 2 million subs for the 2nd qtr of 2021 in the US (by far the most important) market.
Hollywood Reporter Oct 19th, 2021
The Asia-Pacific region proved to be the largest contributor to Netflix’s subscriber growth, with the region accounting for more than half, or 2.2 million, of the quarter’s net subscriber adds, according to a shareholder letter released on Tuesday. Europe, the Middle East and Africa contributed 1.8 million subscribers for the quarter. In Latin America, Netflix added around 300,000, while U.S./Canada accounted for roughly 70,000 new paid subscribers, bouncing back from last quarter’s loss of around 400,000 subscribers.
Sounds solid, what happened the quarter before?
Hollywood Reporter July 2021
In terms of revenue, Netflix delivered $7.3 billion, as compared to $7.16 billion in Q1. With lower marketing and content spend, the company’s margins have never been higher. Indeed, its average revenue per user (ARPU) in the U.S. and Canada hit $14.54 in the quarter, far higher than any other streaming service. However, in the Latin America and Asia-Pacific regions, ARPU remains under $10.
What does that mean?
While they are not focusing on (entertainment executives privately say, “giving up”) the more lucrative market for their product, instead, focusing on the smaller emerging markets. In what has to be considered “smart”, Netflix is trying to get a head start as they fear they will get destroyed by the brand power of Disney internationally.
But I’m getting ahead of myself.
John Wooden once said, “Luck is when opportunity meets preparation”. So, I suppose calling Netflix “luckiest company on the planet” just says they are a step ahead.
When Blockbuster decided internet streaming was a goofy boondoggle, Netflix famously went all in.
I remember someone giving me a Firestick and trying to make it work around the time HOUSE OF CARDS dropped. I couldn’t really get it to work.
The next week a friend who lived in New Jersey who was a TV exec in New York called raving about HOUSE OF CARDS and how he binged the entire series that weekend.
“Binged”? Never heard of that. So I asked my friend why he spent 10 hours locked in his house watching TV all weekend. He was an active type and this made little sense.
The weekend of February 9th, 2013 a blizzard hit the entire eastern seaboard. I guess the storm spared the electrical grid and the internet.
With nothing to do everyone I knew and most of the 50 or so million people stuck inside watched the new Netflix series and loved it. Largest media hub on earth + stuck in the house +good show = Lots of positive visibility.
Opportunity meets preparation.
They both failed and succeeded as they tried all sorts of things big and small. Binge-watching became a thing and they grew very quickly. They saved advertising costs (most tv advertising is “on air” on your own network, which they didnt have)by using a ‘pick up almost every series’ for 2nd season strategy. When they launched season one of a new series, they got both the new show and brand awareness without paying for ads. It helped grow the brand. Small thing, but very effective.
Of course, they had no competition. They were the only competent company technologically that had any programming. Hulu had all the first run shows two weeks after they aired, but if you remember, Crackle, Hulu and basically everything else but Major League Baseball (oddly enough) was a streaming mess of buffering and random quality. Most other interweb content providers looked about as good as silent movies did.
Netflix figured out streaming’s gremlins before anyone else. Credit where credit is due, but having every Studio’s best legacy programming because they had no legitimate competition for ten years didn’t hurt. How important were FRIENDS, ARRESTED DEVELOPMENT, and all the other ‘comfort food television’ licensed by Netflix in helping 50 million people cut the cord in the last 6 years?
And that leads to another coin toss that paid off.
When Disney, Warner Brother and Universal realized they needed their own streaming services, they publically said, “no” to Netflix building their subscribers on the backs of the content they own.
If memory serves, Netflix knew they were losing approx half their views with about 18 months’ notice. But how in the hell do you replace a lifetime of familiarity?
Well, you throw $11 billion at it.
At the time, FOX, DISNEY, UNI and WB didn’t spend $10 Billion a year collectively on new content. It was an insane reaction to a very serious problem. You can’t oversee that much production. It’s impossible. So what do they do?
They don’t oversee it. They throw money at people and let people go make what they want. Which, not surprisingly, was met with mixed results.
They gave (the GLEE, NIP/TUCK, AMERICAN HORROR STORY creator) Ryan Murphy $300 million to bring his talents to Netflix. Anyone reading this a fan of HOLLYWOOD or THE POLITICIAN? Didn’t think so.
Peter Morgan (The Crown) was inked to another big deal coming off his writing success with THE CROWN.
Netflix signed Jennifer Garner to a multi-picture deal. Roughly 15 years later than they should have, but I’m sure it makes sense in the Netflix “Money Ball” approach to things.
Recently they gave a (reported) multi-million dollar multi-picture deal to Addison Rae. Addison has the 3rd most followers on tikTok but with one “ok” performing movie under her belt was a questionable social media star the person to hitch the Netflix cart up to?
Personal rant***
No one is saying social media stardom isn’t viable in traditional media, but you don’t see shows starring Trump, Pewtiepie, and 2 porn stars being shopped around Hollywood for a reason.
***end rant
Those deals and the dozens of other ones will either be successful or flops. And the major TV studios have been doing overalls for years, so why are theirs questionable?
#1 They tend to pay too much.
Traditional studios will sign a Ryan Murphy for a ton of cash, but not the writer of 2 episodes of some series. Up and comers are great if you have an eye for it, but usually you pay top dollar to experts not medium dollars to prospects. The overall investment is too great beyond that person’s signing money. And because Netflix is so hands-off, they are really rolling the dice.
Making movies and TV to a deliverable product is hard.
#2 Normal TV overall deals are attached to a specific project.
How it normally works:
A writer has some heat-
A writer writes a script or pitches an idea all over town-
Creative execs read or hear pitch and bid to get the project-
Enough interest is generated that studios have to up the bids -
One of the ways they “up the bid” is by making the writer an “overall”.
or
Ryan Murphy shops GLEE, everyone wants it, he gets $300mil.
Usually, Netflix spends based on their algorithm. And bids against themselves.
“It’s worked so far?”
Well, in a vacuum with zero competition, yes. In a world where Disney+ has the hottest new legacy branded programming (Mandalorian, STAR WARS, Marvel (Loki), Hulu (Handmaids Tale) Warner Brothers has DC, HBO as well as a tv legacy library second to none, and don’t sleep on Peacock. Peacock, who may be the smartest of the bunch long term as they have a competitive library but choosing not to spend like a drunken sailor. Also, Apple TV, AMAZON, TUBI, and a laundry list of other new and creative ways to get content out to the public…..I question if overspending is a wise move.
Ever notice how AMAZON has all this great information about the project you are watching 1 click away? Ever notice Netflix doesn’t?
The book company AMAZON bought the app you have to use to see who is in the project you are watching on Netflix. That is because Amazon diversified.
When you get that big (Netflix market cap is $279 BILLION) you start to get into other businesses. Amazon is the posterchild, but you don’t go to GE to buy lightbulbs anymore, or Nokia to have them mill you some paper, or Abercrombie And Fitch to buy golf clubs.
But that is how those businesses started. And Netflix’s utter lack of interest in anything other than subs for content should terrify every investor.
When has anyone who knows anything about investing ever said, “I think the smart move is to put every penny in….”. Spoiler — never. You’d fire that clown and hire someone selling you mutual funds with solid dividends.
They are building a hell of a library of content however, traditionally content syndication sales (2nd run) are shows with a lot of episodes in the can and great familiarity with global audiences. Netflix kills almost everything after 2, ten-episode orders. So they aren’t familiar enough, they never publicized these shows outside their own ecosystem and thus have no value to other exhibitors.
I don’t think they are buying land anywhere so a Sears play isn’t there and Reed Hastings becoming George Soros (he’s fast becoming the largest far left political donor) and no matter your politics, from a business perspective, you upset 30% of the USA no matter the side you pick.
Which is why most companies that size give money to both political parties. It’s an open secret they are hedging their bets as they need whoever wins to be accessible to them.
I feel this is a much bigger problem than others. Let me explain.
The Koch Brothers are the largest donors on the planet and are the main reason a bunch of yahoo’s don’t believe in climate change. But how do you boycott heating your home? If Ted Cruz or Trump isolates Hastings as the cause of his loss or calls him the next George Soros, next thing you know, “Honey, we’re getting rid of that liberal Netflix propaganda station”.
And just like that they lose 10,000,000 subs overnight. This isn’t a political rant, but a practical business strategy that everyone tries to maintain.
From Yahoo Entertainment news, Aug, 2021
OAN is the far-right One America News Network, which is notorious for spreading COVID misinformation and conspiracy theories. (a little long so skip past the italics, if you like but makes my point)
“(John) Oliver stated that, according to the Reuters report, “OAN’s founder Robert Herring testified AT&T executives once told him they wanted a conservative network, and he claims, ‘When they said that, I jumped to it and built one.’ And once he built the channel, AT&T carried it first on their U-Verse system and then on DirecTV.”
“OAN has grown into the toxic network it is today,” said Oliver as a picture of MyPillow CEO Mike Lindell appeared over his shoulder, “one that’s happy to give a platform to batshit election fraud theories from America’s most out-of-breath pillow fetishist.”
As for OAN’s content, according to the LWT host, “AT&T told us DirecTV respects the editorial independence of the channels it carries, just as AT&T is committed to providing editorial independence for every WarnerMedia show — including this one,” which Oliver happily took as free reign to go off on his parent company.
“That is such a relief! Especially that last part. Because if I may, I’d like to use that generous editorial independence to offer some constructive feedback to AT&T,” said Oliver”
“Take AT&T’s recent campaign. ‘More for your thing, that’s our thing,’ which is, respectfully, complete gibberish. It sounds like Yoda pitching a penis-enlargement device. It is so nonsensical I have to assume something was lost in communication, which actually would be a much more appropriate slogan for the company,” suggested Oliver. He went on, saying, “How about ‘AT&T, all the business savvy of Quibi without the courtesy of committing corporate suicide,’ or ‘AT&T, if you run a cable out the back of your headquarters and plug it into T-Mobile’s network while they aren’t looking, that’s legal, right? Asking for a friend.’ Any of those are all yours if you want them!” In the end, Oliver did not mince words as he concluded his verbal attack with a clear message.
“Look, AT&T, I know our relationship is a little awkward, especially since you’re trying to spin this business baby off in your deal with Discovery,” shared Oliver. “But while we are still technically related, let me just say this: You’re a terrible company. You do bad things and you make the world worse. Please don’t bother keeping in touch once the merger’s complete. Although that should not be a problem. You’re AT&T. It’s not like your messages will go through anyway.”
If AT&T is the only company that delivers Fiber to your house, you have to suck it up. Netflix isn’t fiber internet.
What is Netflix’s future?
Good question. but I’d say they have another year or two of an awkward equilibrium where new foreign subscribers balance out US declines, then a gradual decline that eats profit like a hungry hippo in a watermelon patch. The real issue is going to be sentiment when Disney + passes them. And thats happening. No way to stop it. The 100 articles talking about how big a lead they lost will just bruise the company, probably another leadership change and they decline like Apple did after kicking out Jobs the first time.
I’m not saying to short them, but start thinking about it.
