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Wednesday, October 17. 2018
Today there was a brief article on Netflix which claims that it's a kind of Ponzi scheme. This is based on a concept which I found interesting, but misguided. Netflix gained 7mm subscribers, but spent $7bb on programming. The next question was "were these 7mm people spending $1,000 a quarter?"
That's the wrong question.
The nice thing about programming is it's evergreen. Once you have it - you have it forever. So it has value over time, value that is increasing, since revenue can be generated forever, in theory. $7bb in programming didn't generate 7mm subscribers, but the range and quality of programming on Netflix did. Assuming each subscriber wants to watch every program on Netflix, that could take some time, especially if Netflix continues to add programs, which they will. Since each subscriber pays $11 a month, the cost of new programming is amortized over about 7 1/2 years, assuming subscribers stay that long. It seems, right now, that the average subscription is about 13 years or more (my parents have had it in some form since it started in 1997).
So the new programming 'pays for itself' over time. This isn't even scratching the surface, though. There's still locked up value in Netflix' vault. They don't currently run ads. Given the information they have about users, and the ability to target ads effectively, there's tremendous unlocked potential revenue wrapped up in Netflix programming. Netflix doesn't have to forever rely on growing its subscription base, that's probably just their current focus.
Netflix viewers watch about 1 billion hours of programming each week. The average hour per person is falling, but the collective total is rising. If you assume a potential 2 ads per hour of viewing, at a cost per thousand of $25 (the average rate for video right now), that's a potential of $50mm per week. That's $650mm per quarter in addition to subscriber fees. Whether Netflix chooses to enter this market is an entirely different question, but it's rare for subscription services to not enter the business of advertising, when they have so much information about their qualified audience.
I don't know if Netflix is a good investment. I don't watch much TV, let alone that much Netflix. I have watched some of Netflix' offerings, and there are good documentaries, as well as some enjoyable shows. My guess is it's overvalued at its current stock price (it seems everything is overvalued at the moment), but I do think it has good long-term prospects either on its own or if and when someone larger scoops it up.
But it's important to remember that programming is not unlike software. It has increasing returns to scale. Once the money is spent, it can accrue revenue 'forever'. The cost of storing and distributing it is falling dramatically, so only the cost of creating it is relatively high. Even that is falling. Higher quality shows are more expensive to make, but the average cost of developing video programming is declining.
Posted by Bulldog in The Culture, "Culture," Pop Culture and Recreation at 12:57 | Comments (7) | Trackbacks (0)
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Netflix has 137 million subscribers. At $11 per month, that's $18 billion per year. Content costs are projected to be about $13 billion in 2018. Netflix is in the black, and eyeing vast new overseas markets.
Showing your naivete, once again.
It is profitable, but it's trading at 83 times forward earnings, and has negative cash flow.
It's not going out of business, and my point is that the analysis I linked to is improperly done. But your analysis is based on hope.
I was abroad the last 2 years. The AirBnbs I was in, in London, Vienna and Prague already had Netflix, obviously to attract US visitors. It only has 2% of the worldwide market, so the concept of growth still looms large, and to do that, it will need investment in programming.
But profit isn't everything, it depends on how the money is used, and where the destruction of capital is taking place.
I deliberately avoided making a judgement one way or another, but raised some useful points worth considering. All you did was play a role which is useless - stating the obvious.
But you're pretty useless to begin with.
"The nice thing about programming is it's evergreen. Once you have it - you have it forever. "
Is this true when Netflix seems to disappear as many programs each month as it introduces?
They reappear, too.
The main reason for programs disappearing has been partnerships which Netflix had, have ended.
Other programs which they have more rights tend to appear and then disappear. The long run game, theoretically, is that costs of software and storage reach a low point which allows 'everything' to remain live.
The flip side to that is having too much choice is as bad as having none at all. So in all likelihood, programs will 'cycle' through at different periods of time.
The first problem with NetFlix is that their productions are poor. Bad plots, poorly made, leftist propaganda.
I had a subscription for a few years then wearied of it all.
The second problem with NetFlix, and it's the bigger one, is cheap software. We are at the point where video streaming software and online payment software and systems can be had largely "out of the box".
Soon any content provider can and will be streaming their own stuff. The Instapundit taught me that what the internet does best is disintermediation, and NetFlix is just another middleman about to get squeezed.
So is Amazon and they will get squeezed for the same reasons. I already buy electrical parts from an American wholesaler which has it's own website, online payments and ships the same way Amazon does - USPS, UPS and FedEx. They do a better job than Amazon and a better job than my wholesalers and I'm way up here in Calgary Canada.
The search engines will connect us all to exactly what we want which will be sold to us by the actual producer of the good or service.
Most programming is 'poor'. So Netflix' quality isn't really the issue. During a winter period last year, my wife and I binge-watched a really awful series (the name escapes me) for 3 or 4 days. It's the only time I have ever binge-watched anything, and I did it for a reason. Just to see what it was like. I hated it, and while the program was entertaining at first, it got really boring by the time I got to season two, as the storyline got convoluted, the characters stale, and production values fell. Lots of effort are put into the first season, and sometimes the second, to keep people 'hooked'.
I'd tend to disagree on the leftist propaganda, too, simply because what out of Hollywood ISN'T leftist? I don't find Netflix to be any worse than anything else in that regard. Just a lot more stupid in how it's presented.
Agree on the pressure Netflix and others will face. That is why they are spending so much (as are Roku and Amazon) on their own branded media. They have realized they can't survive as an outlet for the studios when the studios can create their own 'netflix'. Disney has done so, Sony has too. The TV networks have Hulu (which may dissolve eventually), and so on.
Amazon will survive. Maybe not in the exact form they are now, but in some form. They are already a shipping firm, and they can do shipping cheaper than any of the other major shipping firms. They just haven't entered the game outside of Amazon. But Amazon is also realizing the media content is the REAL winner. Not only can you sell advertising, or place your own, but you can create associations between the media and the consumption patterns.
It's really intriguing to watch as all this plays out. In the end, as I've always believed, content is king. The pipes and storage and tech all have momentary explosions of value, but the content is really what wins the day.
We agree that most current programming from all sources is poor. It probably always was. My father always told me that 90% of everything crap.
One of my main complaints with Netflix was their failure to acquire and keep older outstanding videos. I don't want to watch much new stuff, but there is a lot of older stuff that has withstood the test of time.
Much is from the UK which seemed to have, for a time, higher standards, especially comedy.
I'm back to buying DVDs which in theory is more expensive than NetFlix, but I don't watch TV much, so not more expensive in practice.
As for disintermediation, it's all very interesting to watch. Capitalistic destruction and recycling in action.