NFLX - Netflix

[mikazo]

Interesting article on Netflix's genre/recommendation algorithm:

 

http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineered-hollywood/282679/

[nikhil25]

http://www.fastcompany.com/3024158/netflix-the-red-menace

Interesting Piece.

[jay21]

I'm just starting to dig into cable and NFLX and content are brought up all the time.  In terms of NFLX, something is wrong here.  Their product seems to be very underpriced and the content providers are probably selling content to cheaply.

 

"The video-on-demand service charges $7.99/month per subscriber, and pays somewhere in the neighborhood of $6/month per viewer for content, plus any and all expenses."

 

"In the third quarter, Comcast (NASDAQ:CMCSA) paid out $35/month per subscriber in content costs. This money went to content providers like Time Warner (NYSE:TWX), whose network division includes HBO and basic cable channels like TBS and TNT. This $35/month is supplemented by advertising, which can account for a third of total revenue -- or more, in the case of a high-profile channel like ESPN -- putting us at $50/month or more in total revenue per subscriber. The cost of operating Time Warner’s network was 61% of revenue last quarter; Disney (NYSE:DIS) and Twenty-First Century Fox (NASDAQ:FOXA) paid out even higher percentages. In other words, we're looking at a minimum of $30/month per subscriber to run one of these cable networks -- a ballpark figure, but one that's nearly four times the price of a Netflix subscription."

 

I know that's not an apples to apples comparison because NFLX content is not the same quality of cable TV (in terms of newness, live sports, etc.), but it still strikes me as mis-priced.  This is probably not news to anyone, but I find it interesting.

 

[rkbabang]

I'm just starting to dig into cable and NFLX and content are brought up all the time.  In terms of NFLX, something is wrong here.  Their product seems to be very underpriced and the content providers are probably selling content to cheaply.

 

"The video-on-demand service charges $7.99/month per subscriber, and pays somewhere in the neighborhood of $6/month per viewer for content, plus any and all expenses."

 

"In the third quarter, Comcast (NASDAQ:CMCSA) paid out $35/month per subscriber in content costs. This money went to content providers like Time Warner (NYSE:TWX), whose network division includes HBO and basic cable channels like TBS and TNT. This $35/month is supplemented by advertising, which can account for a third of total revenue -- or more, in the case of a high-profile channel like ESPN -- putting us at $50/month or more in total revenue per subscriber. The cost of operating Time Warner’s network was 61% of revenue last quarter; Disney (NYSE:DIS) and Twenty-First Century Fox (NASDAQ:FOXA) paid out even higher percentages. In other words, we're looking at a minimum of $30/month per subscriber to run one of these cable networks -- a ballpark figure, but one that's nearly four times the price of a Netflix subscription."

 

I know that's not an apples to apples comparison because NFLX content is not the same quality of cable TV (in terms of newness, live sports, etc.), but it still strikes me as mis-priced.  This is probably not news to anyone, but I find it interesting.

 

 

What I find mispriced is what Comcast is paying the various content providers.  I've been paying for cable since I moved out of my parents house 22 years ago, and in those 22 years I don't think any of my televisions has ever been tuned to ESPN for even 2 minutes.  No one in my house watches sports of any type, yet my cable company has to pay ESPN on my behalf and I am not offered an option of not subscribing to ESPN.  This needs to change, the free ride these networks are getting on the backs of people who don't have any desire to view their content or subscribe to their channels is what is severely mispriced in the current market place.  You should only pay for what you want, and the content creators should only get paid for serving the people who want to pay for what they are offering.  Since anyone with an internet connection can access Netflix, while the cable companies have a government enforced monopoly, I'd say that the Netflix model is closer to what a free market in entertainment would be, rather than the highly subsidized and government enforced and protected cable TV model.

[Liberty]

What I find mispriced is what Comcast is paying the various content providers.  I've been paying for cable since I moved out of my parents house 22 years ago, and in those 22 years I don't think any of my televisions has ever been tuned to ESPN for even 2 minutes.  No one in my house watches sports of any type, yet my cable company has to pay ESPN on my behalf and I am not offered an option of not subscribing to ESPN.  This needs to change, the free ride these networks are getting on the backs of people who don't have any desire to view their content or subscribe to their channels is what is severely mispriced in the current market place.  You should only pay for what you want, and the content creators should only get paid for serving the people who want to pay for what they are offering.  Since anyone with an internet connection can access Netflix, while the cable companies have a government enforced monopoly, I'd say that the Netflix model is closer to what a free market in entertainment would be, rather than the highly subsidized and government enforced and protected cable TV model.

 

That's basically Malone's theory about unbundling. It used to work because people didn't have a choice, and the technology didn't make it easy to have a choice anyway. But now, it seems inevitable that it'll happen at some point. And because more and more content will go over the top, through the IP connection, those who are able to provide fast internet at the lowest cost will be well positioned (ie. cable companies should be able to go all the way up to gigabit speeds over time with fairly minimal capex, especially once they go all-digital and free up tons of bandwidth on their pipes that is currently being used by analog signals -- telecoms won't be able to go that fast with DSL, and satellite players don't have the bi-directional infrastructure).

[jay21]

http://blogs.ft.com/tech-blog/2014/02/old-media-v-new-media-hbo-and-netflix-battle-it-out/

 

Time Warner released separate financial figures for HBO for the first time on Wednesday, prompting comparisons with Netflix which famously overtook HBO in US subscribers in November.

 

Yet Jeff Bewkes, chief executive of Time Warner, downplayed any such rivalry between HBO and video streaming companies like Netflix, Amazon and Hulu. He said that the subscriptions are complementary. “If you look at Netflix, viewing is higher in HBO homes, and HBO viewing is higher in Netflix homes,” he said. “So those are add ons.”

 

He noted that the network won 27 primetime Emmy awards, the most of any network for the twelfth year in a row and with Cinemax added 2m US subscribers in 2013, the biggest increase in 17 years. “HBO remains in a league of its own.”

[jay21]

What I find mispriced is what Comcast is paying the various content providers.  I've been paying for cable since I moved out of my parents house 22 years ago, and in those 22 years I don't think any of my televisions has ever been tuned to ESPN for even 2 minutes.  No one in my house watches sports of any type, yet my cable company has to pay ESPN on my behalf and I am not offered an option of not subscribing to ESPN.  This needs to change, the free ride these networks are getting on the backs of people who don't have any desire to view their content or subscribe to their channels is what is severely mispriced in the current market place.  You should only pay for what you want, and the content creators should only get paid for serving the people who want to pay for what they are offering.  Since anyone with an internet connection can access Netflix, while the cable companies have a government enforced monopoly, I'd say that the Netflix model is closer to what a free market in entertainment would be, rather than the highly subsidized and government enforced and protected cable TV model.

 

This may be the way things are in the future but I wonder how things will play out.

 

ESPN is probably a good example to think about. It is a very expensive channel, but watched by many so I think this would absorb a lot of the consumers cable budget.  Will the consumer then cut out something like National Geography if they do not watch that much of it.  I would expect that viewership of the non-premium channels would be drastically reduced and some of them would be canceled.  I could see the potential for much less channels in the future.

 

Or maybe the concept of a tv channel will completely disappear and things will operate more like a pay per view basis/netflix streaming basis?  I would log in to my TV and pick what I wanted to watch and I would pay for it (this seems to be the fairest method based on what you described).  I can't help but think about some of the psychological effects of having to choose from an enormous amount of choices and seeing the price of every one of those choices.  You will also experience some pain every time you pay for one show.

[rkbabang]

What I find mispriced is what Comcast is paying the various content providers.  I've been paying for cable since I moved out of my parents house 22 years ago, and in those 22 years I don't think any of my televisions has ever been tuned to ESPN for even 2 minutes.  No one in my house watches sports of any type, yet my cable company has to pay ESPN on my behalf and I am not offered an option of not subscribing to ESPN.  This needs to change, the free ride these networks are getting on the backs of people who don't have any desire to view their content or subscribe to their channels is what is severely mispriced in the current market place.  You should only pay for what you want, and the content creators should only get paid for serving the people who want to pay for what they are offering.  Since anyone with an internet connection can access Netflix, while the cable companies have a government enforced monopoly, I'd say that the Netflix model is closer to what a free market in entertainment would be, rather than the highly subsidized and government enforced and protected cable TV model.

 

This may be the way things are in the future but I wonder how things will play out.

 

ESPN is probably a good example to think about. It is a very expensive channel, but watched by many so I think this would absorb a lot of the consumers cable budget.  Will the consumer then cut out something like National Geography if they do not watch that much of it.  I would expect that viewership of the non-premium channels would be drastically reduced and some of them would be canceled.  I could see the potential for much less channels in the future.

 

Or maybe the concept of a tv channel will completely disappear and things will operate more like a pay per view basis/netflix streaming basis?  I would log in to my TV and pick what I wanted to watch and I would pay for it (this seems to be the fairest method based on what you described).  I can't help but think about some of the psychological effects of having to choose from an enormous amount of choices and seeing the price of every one of those choices.  You will also experience some pain every time you pay for one show.

 

I agree, pay per view is not going to work very well.  I see the Netflix model as the medium term future of TV.  Maybe there will be many streaming companies that offer different types of programing and have deals with different content producers.  I definitely don't see the current concept of a TV channel lasting very long.    ESPN could be a streaming service with multiple add-on options, maybe you want to subscribe to Baseball and not Hockey, for instance.  In the end we could all be subscribing to a bunch of $10-$20/month services and paying as much per month in total as we pay now for cable, but at least we will only be paying for the services which have something that we what we want to watch.  If Netflix started carrying the NFL live games and upped its price to $100/month, I'd cancel immediately.

[brker_guy]

Why can't the FCC get their acts together and have Net Neutrality by now is beyond me?  Just check out this arrogance by Brian Roberts at Comcast:

 

 

Comcast CEO Brian Roberts: It’s time to pay the postman. (Just FYI: I am the new postman)

 

http://gigaom.com/2014/05/28/comcast-ceo-brian-roberts-its-time-to-pay-the-postman-just-fyi-i-am-the-new-postman/

 

If Comcast’s Brian Roberts thinks he’s the postman, Netflix’s Reed Hastings thinks he’s the taxman

https://gigaom.com/2014/05/29/if-comcasts-brian-roberts-thinks-hes-the-postman-netflixs-reed-hastings-thinks-hes-the-taxman/

[rkbabang]

Netflix making waves.

 

Netflix to Canada: Take Your Busy-Body Threat and Shove It

 

Netflix Announces First Original Movie, Crouching Tiger, Hidden Dragon: The Green Legend To Premiere Simultaneously On Netflix And In Select Global IMAX Theaters

 

With Four New Adam Sandler Films, Netflix Takes Aim at Theaters

 

Survey confirms viewership pressure on TV networks

[Kiltacular]

Netflix making waves.

 

Netflix to Canada: Take Your Busy-Body Threat and Shove It

 

Netflix Announces First Original Movie, Crouching Tiger, Hidden Dragon: The Green Legend To Premiere Simultaneously On Netflix And In Select Global IMAX Theaters

 

With Four New Adam Sandler Films, Netflix Takes Aim at Theaters

 

Survey confirms viewership pressure on TV networks

 

Netflix's original content is going from very, very good to outstanding. 

 

Check out "Peaky Blinders"...Cillian Murphy is cool.  Annabelle Wallis weakens the knees every time she's on screen.  Helen McCrory has incredible presence.  The storyline, acting, cinematography, etc. are all top notch. 

 

This is an awesome series...season 2 coming in Nov.

[rkbabang]

Netflix making waves.

 

Netflix to Canada: Take Your Busy-Body Threat and Shove It

 

Netflix Announces First Original Movie, Crouching Tiger, Hidden Dragon: The Green Legend To Premiere Simultaneously On Netflix And In Select Global IMAX Theaters

 

With Four New Adam Sandler Films, Netflix Takes Aim at Theaters

 

Survey confirms viewership pressure on TV networks

 

Netflix's original content is going from very, very good to outstanding. 

 

Check out "Peaky Blinders"...Cillian Murphy is cool.  Annabelle Wallis weakens the knees every time she's on screen.  Helen McCrory has incredible presence.  The storyline, acting, cinematography, etc. are all top notch. 

 

This is an awesome series...season 2 coming in Nov.

 

Thanks.  I hadn't heard of that one.  I'll check it out.

[merkhet]

Wow. This is a bad day to miss on subscriber numbers. Down over 25% after hours.

 

(Also doesn't help that HBO decided to launch its own standalone streaming service today.)

[valueyoda]

Even though Netflix is the antithesis of what value investors typically look for, the stock starts to become reasonably attractive from a very long term perspective after today's after market 30% decline. Investors ignore the long term pricing power of the few incumbent players in the streaming market. I personally think that Netflix will garner a market leading share in most developed nations within a decade with potentially 80-100 mln subscribers. Netflix's ability to increase prices is present due to an improved catalogue and low pricing to other entertainment alternatives. Let's say that Netflix raises prices by $1 on monthly basis in a few years, when it has 80mln users, then it improves its annual contribution margin by $960mln, which is equivalent to almost $10bn in market value if you put a 10x multiple on it.

[fareastwarriors]

Billionaire Investor Mark Cuban Says He’s Buying Netflix Shares

 

 

http://www.bloomberg.com/news/2014-10-17/billionaire-investor-mark-cuban-says-he-s-buying-netflix-shares.html

[eskebranded]

NFLX is starting to look interesting, though a bit expensive for my taste. FY15 estimates have come in significantly over the past 12 months, $7.15 to $4.82. Could there me more room to the downside? I would probably bet so. The firm is in a unique period as it shifts to a content creator from a just a content streamer. The company has had some early success, and is pursuing this with full force. I think this will continue to be an interesting period for NFLX as spending on original content is expected to rise steeply and eat into its margins going forth, coupled with their international expansion efforts this could get interesting. However, from a competitive standpoint I think that NFLX is doing what is necessary to differentiate its seemingly moat-less business from the onslaught of competitors present and to come.

[ItsAValueTrap]

NFLX is starting to look interesting, though a bit expensive for my taste. FY15 estimates have come in significantly over the past 12 months, $7.15 to $4.82. Could there me more room to the downside? I would probably bet so. The firm is in a unique period as it shifts to a content creator from a just a content streamer. The company has had some early success, and is pursuing this with full force. I think this will continue to be an interesting period for NFLX as spending on original content is expected to rise steeply and eat into its margins going forth, coupled with their international expansion efforts this could get interesting. However, from a competitive standpoint I think that NFLX is doing what is necessary to differentiate its seemingly moat-less business from the onslaught of competitors present and to come.

re: original programming

I believe they're paying for licenses of original content.

 

The company already has a moat.  If you look at the history of broadcast networks (CBS ABC NBC) and top cable channels, you can see that the players with scale have a moat.  They're hard to displace.

[WeiChiLoh]

Seems to be very similar to AMZN historically. If they raise price by $2..$2 x 50m subscribers x 12 x market multiple (18x) = $21.6b, that already more than justify the current market capitalization. Dont this mean you get the additional pricing upside and any subscribers growth for free? Seems like a great opportunity.

[WeiChiLoh]

Personally..I think NFLX can easily raise price by 5% annually (real term, that is an 40c per month) and still achieve a very impressive subscriber growth rate.

[Guest Schwab711]

Seems to be very similar to AMZN historically. If they raise price by $2..$2 x 50m subscribers x 12 x market multiple (18x) = $21.6b, that already more than justify the current market capitalization. Dont this mean you get the additional pricing upside and any subscribers growth for free? Seems like a great opportunity.

 

I think this is a very interesting way to look at Netflix. Sadly they do not own their 'original content' but they have exclusive license for some significant period (10 or 15 years?). Only thing that makes me nervous is guessing how consumers' money will be spent as cord cutting continues and reaches critical mass. The question is, how much will be spent on video content and what will the industry look like? I worry video content spending will drop dramatically similar to the news and Netflix may win a much smaller pot than they first thought.

[WeiChiLoh]

Seems to be very similar to AMZN historically. If they raise price by $2..$2 x 50m subscribers x 12 x market multiple (18x) = $21.6b, that already more than justify the current market capitalization. Dont this mean you get the additional pricing upside and any subscribers growth for free? Seems like a great opportunity.

 

I think this is a very interesting way to look at Netflix. Sadly they do not own their 'original content' but they have exclusive license for some significant period (10 or 15 years?). Only thing that makes me nervous is guessing how consumers' money will be spent as cord cutting continues and reaches critical mass. The question is, how much will be spent on video content and what will the industry look like? I worry video content spending will drop dramatically similar to the news and Netflix may win a much smaller pot than they first thought.

 

Agreed. Although I can see why binge watching Tv series or movies would have a more lasting moat as compared to News... I think what is impt here is to identify NFLX TAM and try to guess how much of TAM can they capture. After which determining the value in which consumers are willing to pay as compared to current prices (some call it pricing power...) and then get to the fair value of the company and pay 20/25cent on the dollar.

[ItsAValueTrap]

1- Netflix might eventually get to the point of $15-20/month subscriptions with substantially better content.  With higher scale, their margins will go up and they will be able to afford better programming.

 

They will likely apply their model globally.

 

After that, Reed Hastings might find new opportunities to get into... e.g. niche premium bundles.

 

2- I don't particularly see Netflix as being that different than HBO, broadcast networks, cable channels, etc.  The dynamics are largely the same.  Scale is still incredibly important.

 

IMO history will repeat itself.  Netflix will become disturbingly profitable once their economies of scale really kick in.

[tombgrt]

Made a Netflix account yesterday and I'm already hooked. It has been out here in Belgium for only a month and I haven't found many flaws yet, very nice. By changing the settings (both dubbing and subtitles) I can easily practice my French as well. :)

 

The content, HD quality and ease of use make it easily worth the 9 euro's per month compared to downloading everything for free (what I was doing before Netflix). I'd be willing to pay almost double the current price already. I'm sure plenty of people would pay even more if they can add in some extra features.

 

Too bad the stock is so expensive. Scale advantage is going to make this a wonderful business. I don't see how content packs from cable companies, especially in smaller countries like Belgium, can compete with them.

[eskebranded]

NFLX is starting to look interesting, though a bit expensive for my taste. FY15 estimates have come in significantly over the past 12 months, $7.15 to $4.82. Could there me more room to the downside? I would probably bet so. The firm is in a unique period as it shifts to a content creator from a just a content streamer. The company has had some early success, and is pursuing this with full force. I think this will continue to be an interesting period for NFLX as spending on original content is expected to rise steeply and eat into its margins going forth, coupled with their international expansion efforts this could get interesting. However, from a competitive standpoint I think that NFLX is doing what is necessary to differentiate its seemingly moat-less business from the onslaught of competitors present and to come.

re: original programming

I believe they're paying for licenses of original content.

 

The company already has a moat.  If you look at the history of broadcast networks (CBS ABC NBC) and top cable channels, you can see that the players with scale have a moat.  They're hard to displace.

 

I agree, however my concern is the durability of their positioning. Like all things time will tell.

Do you think NFLX is attractive at these levels?

[ItsAValueTrap]

Do you think NFLX is attractive at these levels?

 

IMO it's fairly valued or somewhat expensive.  But it depends on your time frame.  If you are willing to wait 20-30 years, then Reed Hastings might create a lot of value and significantly grow the underlying business.

 

Example:

Netflix's current market cap is 23.2B.  If you assume that Netflix will ultimately trade at a 20X multiple, then a 23.2B market cap valuation needs to be supported by earnings of $1,160M.  Peak profitability was YE2011 with profits of $226M.  Doubling its subscriber base and more than doubling margins would fill the gap between $226M and $1,160M (5.13X).  I think both are doable.

 

*Ignoring the time value of money and assuming at discount rate of 0%.

 

There's not a lot of upside unless you are willing to wait like 10 years.