"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett
Innovation, managing the competition and keeping costs down are the three primary keys to success out of what are often five major objectives in any business model. Of course this is just my opinion. I've omitted the other two because unless these first three are followed the two remaining keys will not matter. The other two are strategic marketing and getting as much money as you possibly can out of the customers that you have acquired. As soon as I completed this first paragraph I couldn't help but to notice how glaring were these concerns and/or similarities between two companies that appear to model each other in streaming movie giant Netflix (NFLX) and satellite radio king Sirius XM (SIRI).
A tale of two cities
Both firms in their current states are almost mirror images of each other. Here we have two subscription services that are heavily focused on content and not only are both companies struggling to innovate, compete and manage costs, but remarkably both companies are also rumored as prime acquisition targets. And to top it off, both have just recently raised their rates. But for me, the bigger and more important topic centers on their ability to survive that which is their biggest weakness - failure in execution. I continue to be asked by readers for my reasons for having turned bearish on Sirius XM. And it always comes down to one thing - holding the company to a higher standard and demanding more return on my investments.
CK: When you came on to the Sirius scene you were touted as a Sirius supporter and readers appreciated the fact that you had an opinion that was at odds with other "contributors" such as Rocco. However after you started to question Mel and the direction he was taking Sirius, you quickly fell out of favor with longs. Cameron, what factors/events caused you to change your tune about Sirius XM?
That was a question that I appreciated and one that I think is not often asked enough. Too often assumptions are made about an investor's perceived flip-flop without truly seeking to understand what the "break point" was. For me, it was the embarrassing "release" Sirius 2.0 last December long after the holiday shopping season had already lapsed. To "release it" on the last day of the year, what exactly was the point? What was the objective? I couldn't imagine a bigger failure in execution for a product that was touted for two years. Has anyone heard about the Sirius 2.0 yet - even now? I've spent the past several months doing more due diligence as well as market analysis and I am not entirely pleased with what I've found, particularly with the direction of the business model.
If you can't beat them, join them
For Netflix it now has to deal with threats from the cable operators who interestingly were once threatened by Netflix. Comcast (CMCSA) is one such example where the top cable operator in the U.S. plans to take Netflix head-on with its own Internet movie streaming service called Xfinity Streampix - one that will offer a library of TV shows and movies. The service will be made available only to Comcast's cable TV subscribers. But the service could also operate as a standalone service outside of the cable subscription package under programming agreements it has with some of the partners that supply it with shows and movies.
If you want evidence of just how real of a threat it has to deal with, it has now forced Netflix into the mentality "if you can't beat them, join them." I say this because the company now wants to become a cable channel. In recent weeks, the company's CEO Reed Hastings has quietly met with some of the largest U.S. cable operators in an attempt to add Netflix to their cable offerings. I was actually impressed by how bold of an idea this is to the extent that Netflix would go to Time Warner and pay them for the opportunity to compete with their own premium movie channel in HBO. The idea is that Netflix would become available as another on-demand option for cable subscribers through their set-top boxes.
If a partnership came to fruition, a cable operator might offer Netflix as an additional option added onto a subscriber's cable bill. To Netflix' credit it has begun to think outside the box and now appreciates that its competitive disadvantage can work in its favor. The question is will it work? However, from that standpoint the company yet has a chance at survival, but I can't say the same for Sirius XM at this point as I continue to see evidence that it has yet to appreciate what the competition such as Pandora (P) is doing and how they are forging ahead within the space of IP audio distribution. As an investor, a part of my due diligence is to research and discover potential threats to my investments instead of waiting for a Liberty (LMCA) acquisition to bail me out.
Just as cable operators decided to directly compete with Netflix, I have my suspicions that they will soon decide to directly compete with Sirius XM. But unlike Netflix, Sirius will likely not have a route to "join them" once it realizes that it "can't beat them" - this is due to the reliance and heavy dependency on the automobile. For this reason, I continue to focus on the threat of IP radio and why I can't discount that it is already very big and will only get much bigger to the extent that it overwhelms satellite. Cable operators have the existing IP broadband distribution and it is only a matter of time before they figure out a way to increase their ability to further monetize their advantage by bundling services to ensure revenue growth beyond market saturation.