The Netflix Decision

“Jumpman, Jumpman, Jumpman, them boys up to something.”

Something is telling me that those folks up in Los Gatos are up to something. Netflix knew it was coming, the current pricing model won’t last.

Lets first give credit to Netflix’s awesome story.  They currently have 69.17M subscribers who either pay $9.99, $8.99 or even $7.99 (my friend just corrected me) <did I miss a price bracket?>.  They produce Emmy worthy content and provide an outstanding product at an unbeatable price.  They are smart, had first-mover advantage and followed their heart in what they believed.  Like my previous posts mention, pick stocks where you invest in the CEO and I promise you the returns will follow exponentially. Reid Hastings, the Co-Founder and CEO, is truly an epic guy who believed in the following:

  1. Video viewership was going to shift to online streaming.
  2. Online streaming costs would continue to decline.
  3. Low-cost, cancel-anytime subscription models attract users.

My belief is that Reed reinvigorated the subscription model for consumers which is now dominating the technology space.  I believe Reid and team would tell you they made a “marketing guess” of charging $9.99 to gain users while figuring out how to produce a profitable long-term solution.  Netflix also experienced lower marketing costs due to strong word-of-mouth while their customer satisfaction ranked near the top of customer service surveys for retailers or media distribution companies.  Any company would love to spend less acquiring users.

I told a friend recently that I started analyzing all of my reoccurring costs i.e. Google Storage, Apple Storage Plan, Netflix, Spotify, LinkedIn Premium, Amazon Prime, etc.  You should do, it might shock you.  What sparked this post is when he told me that he paid $12.99 for Spotify. I currently pay $9.99 and still do today.  So, if Spotify is increasing their costs, who else will follow and why?

For Netflix it is all over their financial statements.  Net income has been decreasing since 2013. The cost per core user is growing and even acquiring a new user at the current price may hurt as well.  Investments have increased which have driven the cost of the service.  As more and more subscription-based products like Spotify are added to consumer budgets, Netflix cannot afford to just keep gradually increasing the price without sound logic to consumers. Additional, more creative revenue models will be needed to produce and bring on more content, which will ultimately make it a better product and grow the user base. House of Cards costs $60M to produce per season and that is only one show of many. Even Netflix’s new partnership with Disney, included in your membership, is estimated to lose $300M a year or cost $4.33 per user.

Which is why I believe they are at a crossroads.

The economics of the unbundled world is still unclear. Each new streaming player is coming up with its own valuation for the channels it offers. Sling TV, from Dish Network, costs $20 per month for a suite of channels that includes ESPN, Cartoon Network and TNT but no broadcast networks. Sony’s Vue, which is only available through PlayStation consoles in a few markets, costs around $50 and includes CBS, Fox and NBC stations but no ABC. Apple’s lineup is expected to cost between $30 and $40 per month but Apple as well as Google are unwilling to pay to get content.

Lets also analyze the a la carte option.  Say you want only the following networks: TNT, Disney Channel and USA.  It is estimated that TNT would cost $8-$10, Disney Channel would cost $8-$10, and USA would cost $5-6 per month.  Netflix is better than all three combined and offers Disney in their service; however, did you notice that TNT = Netflix?

So what will Netflix do?

PATH 1:  Netflix increases the monthly cost from $9.99 to $29.99/month

They start competing against traditional cable/satellite.  Some think Netflix would lose because they aren’t as deep into households where cable companies have higher subscriber counts. I say why the heck can’t they take the next step here, it’s a hip service and built for a >$50K HHI audience.  I thought I heard people were cutting the cords?

PATH 2:  Monetize with video advertisements

Let say they make you watch ten fifteen second video advertisements per month, randomly across your viewing.  First, would you be okay with it?  Second, would it be worth losing customers?  Using a nice $.10 cost-per-view that’s an additional $1.00 they could make per user and that doesn’t really help the balance sheet.  They would also need to invest in building an ad sales team or partner with someone like Facebook to sell it for them.

PATH 3:  Becomes the in-home movie theatre

  • Netflix continues to produce new movies and launches over streaming; included in current pricing to attract more users.
  • Studios partner with Netflix and share 20% of the revenue to launch movies.

PATH 4:  Netflix licenses their own content

This one is pretty obvious.  Coming now to Amazon Prime is………Netflix originals…..yeah right.

Get ready.  I really think changes to your experience are coming soon, just like my buddy who is paying more for Spotify.

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The Netflix Decision

Investing in adTech and applicable investment principles

“It’s funny how time fly, I’m just having fun, just watching it fly by.”

Dr. Dre – The Watcher

High returns with low risk is the key in any stock pick or investment.  One should at least understand this much.

I thoroughly enjoy the stock market and would consider myself as close to proficient as the Dreyfus model will let me be.  Friends and colleagues ask me all the time what they should be investing in. Before the barrage of questions ensue, I try my best to collect as much information as possible about the person to help prepare for a future discussion. Things like what they do professionally, talk about, interests or even what they enjoy doing on their iPhone. When the question comes, I always lead with the following questions.

Me:  What tech products or services do you routinely use or could not live without?  

Person:  I love Facebook, Netflix and Amazon.  

Me:  Do you own any of these stocks?

Person:  No.

Not much to it, right?  I didn’t talk P/E ratios or valuations and confuse the hell out of the person, all I did was ask the person what they liked.  The KISS principle also gave me an opportunity to hear about companies for the first time which I may have missed out on previously.  Year-to-date across the three stocks mentioned, there have been upward spikes of 127% in Netflix, 75% in Amazon and 18% in Facebook and over the past three years 571% in Netflix, 124% in Amazon and 381% in Facebook.  If you don’t have Kevin O’Leary’s voice from Shark Tank in the back of your brain saying “I like making money” then this article won’t do it for you.

So what prevented an investment for many in some of these obvious breadwinners?  I’ve heard it all.  I have a family, recently married, too old for risk, don’t understand or would rather spend it in Vegas.  Vegas, really?  All it takes is a little dedication to due diligence into companies you are passionate about, trust me.  Here are my key starting points for first time investors.

  1. Will the demand continue to climb exponentially for the product?
  2. Is the CEO’s middle name execution and last name Darwin?
    • Think Jobs, Musk, Zuckerberg, Bezos
  3. Can you remain patient enough to achieve big returns?

So my point to you is like the song – don’t be a watcher, be a do’er.  We experienced a month in the stock market, late August through September, where a really great buying opportunity was presented.  Technology stocks were not the only great buying opportunity as every sector was hit hard.  Even stocks with exponential growth and continually beating earnings were hit 30%.  This allowed investors another great time to buy more in positions that follow the above principles.

Even though Google and Facebook aren’t publicly know as “adTech” companies, they are. The revenue from their advertising technologies is absolutely the engine running all of their other projects, exclusive company parties and futuristic ideas. Continue to stick with FB and Google and ignore the field.  Competitors to the stocks above like Cable, Twitter and eBay will most likely be playing catch up for another three years and at that point too late.   We currently are watching an adtech phenomenon, where Google and FB dominate like Tiger Woods did when the field of 240 other golfers were just that far behind him.  All I’m saying is open an online brokerage account start putting money to work.  Pick some obvious winners and try using some of my principles.  The hardest part is first buying stock and then holding for a couple years.

Disclosure:  I hold positions in Netflix and Facebook.

Investing in adTech and applicable investment principles