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.
