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  • Netflix Is A Fragile House Of Cards [View article]
    RC, this analysis comes from a fundamental misunderstanding of accounting and economics.

    Let me give you an example -- absolutely certain that Disney studios will spend $1.5B to $3B in 2016 to develop, produce, and promote movies in 2016, otherwise it has no "product" to place in theaters. However, none of that is "capitalized" (it hasnt spent anything yet) either as an asset or liability. Nor is there even any disclosure with respect to "commitments" since it is only in the project devleopment stage. Even if it has a 3 movie deal to fund Star Wars 7-9, it is still too uncertain to even consider that discolusre as a contractual commitment. however, i can assure you as much as tha ti beleive the sun is coming up tomorrow that Disney's studios in fact will spend a bundle of money in 2016 to make and promote movies even though, it isn't on the balance sheet, nor even disclosed as a contractual commitment yet, but do I worry about these "off balance sheet liabilities". No, becomes common sense will tell me that Disey will make movies, and no matter how bad (nee John Carter -- I actually enjoyed that one but I was in the minoirty), there will be revenues to match or hopefully exceed those expenditures.

    Netflix/HBO/Starz on the other hand enters into an "output" deal with the Disney studios for the "pay cable 1" exclusive window (usually 9 months for a period beginning 6-9 mo after theatrical release). These deals are typically where Disney commits to produce a minimum number of studio releases, and pay cable network (Netflix in this instance) in turn agrees to pay $X per film, and it's subject to adjustment depending box office results (bump of hits, and downward on real dogs, subject to floors and caps). So at this time, such a contractual commitment is only a "commitment" for accoutning purposes and not yet a liability because until the film is available (when it is on the asset side) there is no match off for the "liability". However, it is a footnote disclosure because Netflix has entered into a contract that commits itself to pay so long as Disney studios actually delivers. Disney studios on the other hand doesn't have a concommitment footnote even though it has obligated itself to deliver product but right now is only worried about its 2013-2015 releases. But we all know that Disney will in fact spend the money to release films in 2016. The point is both of these are "off balance sheet liabilities" but they are future commitments based upon the expectation of revenues -- they are not "liabilities" in a vacuum. HBO's and Showtime's accounting are no different, to the degree that they have contractual commitments, it si disclosed in the "contractual commitments" footnote in according to GAAP but they are not capitalized unitl the ocntent is availalbe for use and any "liability" is then a timing difference between payment and future obligation. Thus original content is front loaded becasue the network is the producer and funding source, you pay for it and then the amount spent is capitalized and amortized based upon its estimated useful life, and any contractual commitments for future shows are then foot note disclosure.

    However, I think the basic point is that a subscription video-on-demand ("SVOD") business is a high fixed cost business with high financial barriers to entry based upon financial commitments that a network must make -- that's why it took Starz 8 years to reach breakeven when TCI/Liberty first launched it in the 90's. It thus results in a high degree of operating leverage (both good and bad). In such an environment, if the subscriber revenues are not ther to support the content costs, then ouch, but on the other hand, if there is subscription revenues (retrans plus advertising in the case of an ad-support network vs pure subscription model such as HBO/Starz/Netflix) or even god forbid, growing revenues, then the commitment is not an "issue" per se, whether it is grossed up on the balance sheet or not is nto the issue, it's whether you believe there is a revenue stream -- if you dont, then don't buy or for sure, short it as much as you would like, but if there is revenue growth from either subscription growth or pricing bump then be prepared for a different outcome.
    Feb 25, 2013. 08:37 AM | 4 Likes Like |Link to Comment
  • Netflix Is A Fragile House Of Cards [View article]
    why don't you do some research rather than guessing? You write, "Management has stated that "they might" use $225 million of the proceeds to retire $200 million in 8.5% senior notes that are due in 2017. However, I want to be conservative and will wait until next quarter before including this new debt in my analysis. "

    Why wait -- they didn't say "might" (your spin -- or laziness). this was the press release when it priced the offering - you will note the use of the word "will".

    "Netflix will use approximately $225 million of the net proceeds from this offering to redeem its outstanding 8.50% senior notes due 2017, including expenses associated with such redemption, pursuant to the make-whole provision in the indenture governing such notes, and intends to use the remaining net proceeds for general corporate purposes, including capital expenditures, investments, working capital and potential acquisitions and strategic transactions."

    or if you were curious, and wanted to actually do some due diligence, you could have simply read the 8-K filed the next day:

    "On February 1, 2013, the Company called the 2017 Notes for redemption on a redemption date of March 4, 2013. On February 1, 2013, the Company deposited the redemption price with the trustee for the 2017 Notes and effected a satisfaction and discharge of the 2017 Notes in accordance with the terms of the indenture governing such notes. The Company intends to use the remaining proceeds for general corporate purposes, including capital expenditures, investments, working capital and potential acquisitions and strategic transactions."

    It means that the company defeased the next day -- gave call notice (which is irrevocable I'm sure that you know) and they actually took cash on hand and deposited it with trustee the amounts required to settle 30 days later when the redemption notice was settled.

    Most of your analysis hangs on the fact that somebody has alot of cash hanging around. AIG had about $25B in cash the week before it took $100B in cash from the Fed to stem a "run on the bank".

    A supermarket is highly levered operationally as well such that if customers instantly stopped coming and vendors stopped shipping then it runs out of liquidity quickly -- you have to assess the risks of that event happening. General Electric was a rock solid industrial business with piles of cash, but it almost got pulled down by GECC until the Bush administration allowed non-bank banks to access the Fed's liquidity facility and CP support.

    Anyway, get your facts on the balance sheet, it will save you the trouble of guessing. It's simple to read the SEC filings -- I know that entails a teensy weensy bit of effort but I think you can do it. It will make your "analysis" more credible.
    Feb 22, 2013. 03:06 PM | Likes Like |Link to Comment
  • Netflix: A Glass Half Empty [View article]
    You mean just like I can activate HBO and binge view on-demand on HBO Go, the back seasons of Game of Thrones and all current season; as well as True Blood, Hung, etc. and then cancel HBO at the end of the month. HBO has no minimum period -- you can sign up today and cancel tomorrow and your cable operator will prorate only for 1 day.

    But you say, hey but there's new programming coming that you would want to see, as there would be for Netflix, Starz, or Showtime,.. but once you break the mode of linear appointment viewing, and offer an on-demand libarary, which each of the pay cable networks are all going to as well to remain competitive, then the viewer can enjoy all-you-can-eat as they see fit. Just as the restaurant that offers a buffet model can theoretically lose money with the 300 lb football lineman who comes to eat, it makes sufficent money in the aggregate to support the business model, notwithstanding any one individual customer can game the economics.
    Feb 19, 2013. 08:44 PM | Likes Like |Link to Comment
  • Netflix: A Glass Half Empty [View article]
    AAPl is already in the streaming business -- it's called iTunes. For Apple TV, you can either rent movies and TV shows via VOD/PPV or also purchase via EST ("Electronci Sell-Through") to own the content to reside in iCloud. And by the way, I suppose you know that Apple is also somewhat of a MVPD in that it distributes content and acts as billing agent for such content subscription networks as Netflix, Hulu+, MLB, etc.

    So to answer your question, Apple is already in the streamaing business, and it is a distribution partner for Netflix to sell Netflix subscriptions to purchasers of the Apple TV set-top box. In fact it is the most prominently featured third-party content "App" on Apple TV.
    Feb 19, 2013. 08:36 PM | Likes Like |Link to Comment
  • The judge presiding over Greenlight Capital's suit against Apple (AAPL) over the bundling of proposals within its proxy says Greenlight has shown a "likelihood of success," suggesting a ruling in Greenlight's favor is on the way. Apple's shareholder meeting arrives on Feb. 27. (previous) Update (5:19PM ET): Full quote from Reuters. "Candidly I do think the likelihood of success is in favor for Greenlight," says district judge Richard Sullivan. Should the case go forward, he'll focus on whether Greenlight would be irreparably harmed by a bundled vote. [View news story]
    more importantly it leverages by arbitraging two markets: one that capitalizes earning streams at 25x p/e (the perpetual preferred market) and one that capitalizes at a 10x p/e. Einhorn's tax free dividend is actually innovative as it accomplishes the issuance via a distribution (existing shareholders "underwrite" the issuance) and to allow shareholders to decide to sell or to hold. He probably could add the additional wrinkle of making it callable at par (so that Apple can replace it at some future date with debt) or make it exchangeable into long duration debt (such as typical 49 year maturity retail investor targeted bond) at same 4% coupon -- dont know if that would be considered boot and blow the tax free distribuiton though.

    I personally think that his proposal is quite creative and simply employs financial leverage to reap higher earnings growth for common shareholders. It is a basic tenet of Optimal Capital Structure theory that some form of financial leverage -- even without the tax subsidy afforded to interest by our current tax regime, is advantageous in determining the lowest cost of capital for an enterprise. Certainly not the negatve leverage that AAPL currently operates under.
    Feb 19, 2013. 08:09 PM | 2 Likes Like |Link to Comment
  • Netflix: A Glass Half Empty [View article]
    Is there only 1 channel on television? Despite all the wonderful programming that HBO has, has it put Showtime out of business? has it affected HGTV, or even low-brow fare of REal Housewives of [name that city].

    Netflix is another programming network that aggregates, curates, distributes content from partners who have decided that distributing through Netflix is one of their best means of monetizing that content as evidenced by what NEtflix is willind to pay (funded by its subscriptions).

    Despite 400 other channels that any viewer can watch, and held hostage to a distirbution model via MVPD gatekeepers that extract 50% of revenues, HBO makes $2B a year for Time-Warner.

    Just exactly where does a big money new entrant buy their programming - the exclusive movie studio output deals are locked up as "exclusives" (look that up in the dictionary if the meaning is confusing). Even the faux exclusive of PAramount/Lionsgate/MGM is pre-committed to Epix and only subsequently avaialble on non-exclusive basis in a pay cable 1.5 sub-window.

    Even among hand-me-down back season TV broadcast programs, some of these are being locked up as exclusives. So you think Google would convince HBO or Showtime to sell their back season content?

    Netflix is no different than any other paid subscription channel OTHER than its delivery system currently bypasses the MVPD gatekeepers (except Apple TV acting as a billing agent) and it is not wed to a linear broadcast model limted to appointment viewing -- that's teh power fo a Subscription Video On Demand. Others can do the same thing, they just need to spend a lot to capture new subscribers, go at risk for licensing content, and then pray alot. Hulu has developed a niche of same season television (catch-up TV) and with balanced ad-supported and subscription model. Amazon, bundles it as part of its shipping bundle but no matter how aspriational it wishes to compete, it's not going to get access to Disney's studio output until the next decade or Sony's output (since it jsut renewed with Starz), or Lionsgate films for pay cable 1 (currently commited to Epix until 2015 which then switches to Starz for another long-term window, 5yrs?).

    If you want to buy a name for cash flow, buy AAPL, or an utility -- others may wish to invest in something with continuing growth opportunities such as AMZN to reinvest contribution. If you don't like the fact that Netflix is executing a strategy of pre-emptive international expansion and investing cash cow cashflows from mature DVD biz, then sell the stock or short it. I want Netflix instead to go faster, spend more monies to lock up ever more content, grow its footprint like a banshee, and create substantional barriers for entry. The debt investors who fought among themselves to be allocated part of the $500MM and the pleasure of a 5.75% fixed return understand the investment contemplated by the business model -- and I applaud the company for taking that money, and hopefully spend it on more content and faster geographic expansion, so that shareholders can reap that return 5 yrs, 10 yrs from now. A they say, "we've all seen this movie before"
    Feb 13, 2013. 01:13 PM | 3 Likes Like |Link to Comment
  • Netflix (NFLX -2.8%) gives back some of last week's gains after Sony (SNE +0.5%) extends its movie-licensing deal with Starz (STRZA +8.1%) to 2021. Stifel thinks the deal is likely in the $300M/year range, on par with the recent Netflix-Disney deal. With Starz having ended its relationship with Netflix specifically to keep its pay-TV industry customers happy, the odds of its content re-appearing on Netflix anytime soon are slim. [View news story]
    with Starz getting LNF (away from Epix) as well in 2015, the Pay cable 1 exclusive window will be largly allocated among the existiing players plus Netflix (HBO-Epix-Starz-Netfli... Assuming Warner will not be allowed to auction its output deal away from HBO, only Fox is left of the Big 6 studios for possible re-auciton during its upcoming renewal. And therefore the action is going to move away from movie output deals to those that can reach critical mass and (critical acclaim or audience appeal) of originals AND in exclusives of back-season serialized dramatic television. Essentially television serialized drama will have their own pay cable 1 output deals but will be largely distributed ot streaming platforms because for now, the traditional pay cable networks don't want broadcast hand-me-downs (even though they are accepting movie studio hand-me-downs). That gives Netflix room to lock-up exclusives on these "12- 24 hr long-form movies" to fill its library.
    Feb 11, 2013. 05:32 PM | 1 Like Like |Link to Comment
  • Coinstar (CSTR +2.3%) and Verizon's (VZ +0.2%) Redbox Instant streaming JV has struck a deal with Microsoft (MSFT +0.5%) to make the Xbox 360 the JV's exclusive console platform. Redbox Instant, whose launch has been delayed from Q4 '12 to the end of Q1, will presumably get some free marketing as part of the deal. Netflix (NFLX -0.7%) is available on all three major home console platforms. [View news story]
    this sounds like an arab wedding. Xbox can sleep with everyone, but Redbox Instant can only play on an Xbox "console" (I guess that only rules out PS3 and Wii as polygamy prospects). Given that streaming is a scale business, where subscriber aggregation drives all the economic and operating leverage, why would it make sense for Verizon not to seek to maximize distribution. Before I call it a "stupid" strategy I will just call it a typical Verizon "bell head" strategy instead.
    Feb 5, 2013. 03:28 PM | Likes Like |Link to Comment
  • Clearwire's Options Are Arranged Or Forced Marriage [View article]
    "think", "guess", or "guessing" "presumably"..... 8 times.

    yeah, that's as much research as what Moe and Curly got from the Magic Eight Ball.

    the reason that the special committee cannot ultimately agree to the DISH proposal is that DISH asset strips from CLWR its best spectrum and then leaves all CLWR shareholders holding the bag. alternatively, if DISH is only allowed to strip the spectrum AFTER it successfully buys the company, then the prospects for CLWR shareholders is nil since Sprint will have purchased the strategic shareholders' holdings and wont sell its majority holdings.

    so dream on.... Hope is not an investment thesis.
    Feb 3, 2013. 10:39 PM | 2 Likes Like |Link to Comment
  • Netflix: The Long Term And The Short Term Of It [View article]
    dgulick: Sony's deal was with Starz (starz's subsequent sub-license to Netflix initially created some controversy for both its studio partners) and that had a number well north of 20MM, I want to say it had to be ~35MM. Remember that Starz itself had around 21 MM subs then, and this was at a point pre-price split, where streaming was either standalone or bundled with part of the Netflix's DVD pkgs. In any case, that limit only applied to Sony's new release films in the pay 1 window, and Sony-Columbia catalog films that were licensed to Starz still were available on Netflix until the Starz-Netlfix deal expired.

    I'm sure Sony saw that Disney abandoned Starz. While Sony's eyes are probably popping out and salivating about what it can extract from Starz, it also will be concerned of the viability of Starz as a distribution partner. With Disney's properties leaving, Starz is left with only Lionsgate's output beginning 2015 (yes Lionsgate is a founder and shareholder in Epix but yet decided to abandon Epix output deal with Starz because it felt Starz had stronger distribution than it's equity-owned Epix -- the point is that content will gravitate to distribution that can monetize it better).
    Feb 3, 2013. 09:47 PM | 1 Like Like |Link to Comment
  • Netflix: The Long Term And The Short Term Of It [View article]
    Icon: you got it, NFLX "rents", just like everything in media, you have a value chain, of talent (writers, actors, production, directors), development (essentially funding and marketing) and distribution. Doesn't every movie theater "rent" the film that studio produces, and why doesn't the studio just dictate a different cut on hot films. Every programming network similarly "rents" -HBO "rents" movie output deals from Warner Bros, Fox, and Universal as pay cable 1 window, and also "rents" original programming produced both by other studios and its own development and ultimately "rents" talent. Remember how James Gandofini sued to void his contract for Sopranos. So even if you "own" the show, there's always tension in allocating the money pie.

    However, the real point is that content needs distribution in order to monetize. The studio's output deals is not a function of what the studio's want, it's a function of what bidders are willing to bid against each other to win. House of Cards was shopped to HBO and Showtime before Netflix picked it up, largely on the pitch of what Netflix was willing to pay per episode and also the innovations (releasing all shows at once and the on-demand model rather than appointment viewing) afforded by internet delivery. So you are absolutely right, some programming that are particularly valuable will go up over time -- but that's because those who can monetize better or have broader distribution can chose to pay more. Everybody thought Murdoch (well the traditional Big 3 networks) was crazy to bid what he did to get NFL football for Fox -- doesn't seem too dumb now.

    Regarding the recent bond deal, my understanding was that the book was way over subscribed with nearly 100 names in the order book -- that's why they upsized the the deal from $400MM to $500MM. If you think the largest credit financial institutions in the world are dumber than your analysis of the Netflix's financial position, than I guess that must be the case.

    During 2012, Netflix had negative FCF of -$58MM in 2012, one of its greatest periods of investment (significant international expansion, big ramp in content spend, and launch of original programming -rumored $100MM for two seasons of Fincher's House of Cards), yet it ended with $750MM in cash and equivalents -- so it will take 12 more years of the same level of investment to run out of money. Oops, new $500MM used $225MM to redeem $200MM bonds and prepay interest, and remaining $275MM to add to kitty of over $1B cash and equivalents. Of course they will probably increase their original spend this year (actors, grips, make-up, directors -- all tend to want to be paid when they are working on the show rather than get paid over the next 3 years while the show is being aired)-- this is where, using your terminology, Netflix "owns" the show rather than "rents" the show. But when you produce and develop a show rather than "rent" you end up front-loading the investment up front but then you dont pay ongoing license fees thereafter.
    Feb 3, 2013. 09:21 PM | 1 Like Like |Link to Comment
  • Netflix: The Long Term And The Short Term Of It [View article]
    All HBO nets is $7 something a month accroding to the last Kagan report that I saw. I think $8/mo is plenty. 40mm subs (in 2 yrs) is $3.8B in annual revenues against a domestic-only content spend of around $2.5B by then, throw $500MM at it for marketing customer acquisition, billing, you're at $800MM contribution which is only ~21% contribution -- thats 500bps cheap to their state target of 100bps contribution margin accretion per quarter target (although that was only for 2013).

    I dont think they need to raise prices. Certainly Verizon RI and Amazon Prime didn't feel the need to come at higher price points. All the bears keep on sayng that omg content is going sky high, the model will never be profittable, and look at the powerful competitors coming in. Well if it's such a lousy business why is it attracting competitors and if hte economic model so unsustainable, why are other new entrants charging the same or less. And why would Disney one of the most sophisticated media conglomerates in the world tie up its studio properties with Netflix until 2025 (pay cable 1 typically decade long exclusives) if they didn't think Netflix economic model worked -- perhaps maybe they actually understand the economics and realize that Netflix's mis $7/mo ARPU is 3x the amount of ARPU that Starz nets per sub/mo after the MVPD toll.

    $8 all-you-can-eat is fine; the incremental sub is damn near 100% contribution, so they should levverage their scale and pur pedal to the medal. Hell they should drop price to aggresively grow and suck the oxygen out from the competitive new entrants but that might attract a bit too much attention from DC. :-)

    Good luck with Dish -- at least their new Hopper Extreme DVR with built in SlingPlayer continues to innovate so all is good for consumers.
    Jan 31, 2013. 06:36 PM | Likes Like |Link to Comment
  • Netflix: The Long Term And The Short Term Of It [View article]
    Different folks will make different decisions in terms of viewing choices --- for the life of me I cannot figure out why my wife likes those shows on HGTV, but she does, nor does she have any interest in NFL RedZone. That's what all the bears don't understand when they think it's winner take-all buisness; and frankly the programmers, or content curators - really thats what the streaming subscription networks are, no different than other progrmaming networks --- the only thing different is that hte streaming networks are initially pursuing a direct-to-consumer distribution model, both because the inertia/short-sighted thinking of the the MVPD's (monopolist always resort to the same thinking so not surprising) and because they can (in that they are not beholden to the existing MVPD gatekeeper mafia), and the fact that they are not constrained with channel slot limitations of linear programming.

    I don't disagree that Netflix should not "charge" for enabling devices but only for utilization. For example I have two cable boxes on FiOS that i rarely use but it's just too damn much hassle to return it, so I pay $12.50/mo happily to fund my laziness (although one I eventually put a sling player on it so I can watch my TV anywhere on my smart phone -- including that RedZone during football season). Netflix's model is we'll let you connect as many devices as you wish to be enabled for Netflx (your roku, BD DVD player, Wii, Apple TV, all your tablets, your smartphones) but we will charge you for the ports that you actually use and eh basic all-you-can eat subscription is for only a limited number of simultaneous devices. Obviously they lowered the limit from 3 to 2 because they are eventually setting the stage for up-charge. Don't know when, maybe 2015, or 2014, or maybe they just wait to see when they get sufficinet inquiries from consumers that start getting frustrated with the 2 slot limit and eager for ways to get additional slots. I'm like you, my older (beyond college) children are/were on Netflix with my account, and now that one sitll is a smooch but the other got frustarted with me calling to ask "are you on netflix right now because the kids wan to watch Dora" that she got herown subscription - afterall it's only two starbucks a month.

    When HBO GO first launched, it had a one device at a time limitation (I knw because I was trying to borrow someone else's ID to try out the service because he was on verizon since my TimeWarnerCable MVPD did not support it ) but it was really stupid because of the TV Anywhere authentication protocol, you had to proactively disconnect each time, otherwise they wouldn't allow access by another device. They quickly fixed that problem (3 months maybe) and then later also changed the T&C to allow 3 simultaneous active viewing devices, in order to match Netflix's then policy. Don't know that they have downgraded the limit to follow as I havent checked out HBO GO for awhile because the TV's that I watch most often ahve Apple TV devices. Probably can't work out a rev-share model that doesn't conflict with HBO's existing deals with cable operators. Amazon Prime initially had problems with multiple access with the same userID but that may have been short-lived and i dont know what its current policy is but they have so few subsccribers that I doubt it's much of an issue. The SVOD is really a loss-leader product to entice participationg in Amazon Prime in order to increase sell-thru of phyical and also to entice the streaming subscriber to click on PPV/VOD as well as EST because that's where AMZN makes its money, but it results in a frustrating user experience because more often than not you ckick on something and AMZN wants to upcharge you on a rental charge and/or only sell a digital copy (during the EST only window that precedes the PPV/VOD window, or more typically when the studio content moves to teh pay cable 1 window on a pay cable/streaming network, it would "go dark" in the PPV/VOD channel an will only be available in EST for digital distribution).

    I agree with you, plenty of bloggers or bears who are short that will jump up and down and will probably have some success in knocking the value down -- that's why I am partially hedged. I doubt that the stock will get to the dirt cheap levels from a few months ago but I'm hoping it will test $100 again this summer, probably wishful thinking on my part. But you never know....
    Jan 31, 2013. 03:56 PM | Likes Like |Link to Comment
  • Netflix: The Long Term And The Short Term Of It [View article]
    i dont really think it's a battle per se. I suspect that you will find in 2013 that at some point one maybe a few independent MVPD's (or this could be internaitonal) will become distributors for Netflix's content, just like Apple TV, which is evolving into a virtual on-demand MVPD, on a rev-share basis. The highest margin product for facilities-based MVPD's is their broadband ISP product, and the killer app that pulls upcharges for higher bandwidth pipe is video streaming.

    It was interesting that Rich Greenfield of BTIG pointed out that in a Q&A session last fall at one of the conferences (I think it was the Goldman conference because I remember the comment) that Netflix was cable friendly because despite the fact that video streaming, and specifically Netflix, drove the lion's share of bandwidth utilitzation that the MVPD's enjoy with their higest margin product, that Netflix, as opposed to other programmers, had YET to charge any retran or license fees to broadband operators. So it will be interesting as to whether friend or foe, and different operators will view it differently. Some will figure out: hey, an incremental $8 ARPU and maybe $1-2/mo contribution for fulfillment, plus the possibility to entice up-charge to higher speed pipe, then why wouldn't it look at it as just another pay channel that the MVPD can leverage over his existing plant. As opposed to the ex-sports writers, who now blog about new media, and next week will get a gig as the weather reporter, Netflix's offering is not intended to attack real-time content which is the crux of linear television and thus all this fuss about cord-cutting is much ado about nothing. Netflix is just another pay premium channel - just happens to have a huge library compared to the typicla pay premium channel. Just like the typical HBO/Showtime/Starz, Netflix offers a smorgasbord of delay broadcast recent releases in the pay cable 1 window (Weinstein/Paramount/L... Animation/film District and Disney branded studios, and potentially Sony-columbia and 20th Century Fox when those auctions come up for renewal), catalog film product (i.e. 2nd run pay cable or post-broadcast syndication for pay cable 3-5 windows), adding prior season television from global licenisng sourcing, and strong childrens programming platform, and at least to date, sans the spicy adult stuff that is the norm for HBO/Showtime/Cinemax/S... late night rotation).

    Yes, on most recent conference call, RH talked about the personalization platform being introduced some time in 2013 and that they were in beta. They have been talking about this for at least a year, but more so at media industry confabs. I'm sure that v1.0 will be lacking and that it will evolve from consumer feedback. But the trojan horse in this personalization initiative is a potential shift in paradigm. The bear thesis is that Netflix will run out of households and that after everone tried their free trial they are lost forever. In reality the content constantly evolves (just as HBO's content) and ultimately the programmer has to have sufficient content to justify the retention. However the paradigm shift that is intrigueing to me that is lost is the shift from shared viewing and household subscription to perrsonalalized content consumption and therefor incremental revenue streams. The analog is that POTS (plain old telephone service) was a shared houshold telephone line for almost 100 yrs (in the beginning even shared among neighbors) and the industry probably maxed out at around 1.4 lines per household (combination of second lines, so-called teenager chat lines before AIM and FB, and fax lines). Then comes the cellular industry and the telephone first became mobie (in-vehicle) and then portable (personal), because you could no longer share it once you drove away with it. And then family plans evolved to present an improved value proposition and to encourage retention due to the ETC structure of the post-paid industry. Now we have over 100% wireless device penetration of POPULATION in nearly every part of the developed world, particulalry as networks evovled to be data consumption devices beyond simply voice. I see the same paradigm shift in video content distribution -- televison viewing is no longer solely a shared viewing experience (as the cable industry will attest as to the numbe of boxes per household - we have 6) and once you take it away from a fixed network delivery and inject mobility/portability plus overlay the ease-of-use and speed of development of content consumpiton devices, the ARPU lift potential is evident for subscription services. Personalized profiles is the first stage of the evolution to family plans and sub-subscriptions. Initially Netflix did not limit the number of devices, then they changed the T&C to 3 simultaneous streaming devices, and tested episodically to actually enforce the rule but seemingly more often than not, allowed violations of the policy. now I believe the policy may be 2 simultaneous streaming devices, but I am not sure this is enforced religiously or perhaps if you have two iPads plus an Apple TV on premises going through the same router, all Netflix sees is one IP address. However, at times i've been blocked and wondered about adding a second account but kind of a hassle to figure out which User ID to assign to which device. Pesonal profiles will lead to family plans and to eventual upcharges that will result in ARPU lift (just like cable charges you for additional boxes or cellular charges for additional phones on a family plan). I envision this would be something like you get 2-3 profiles and 2 simultaneous streaming slots for the basic $7.99 subscription, and maybe an up-charge of $2-$3 for each 2 additional profiles plus additional simultaneous streaming slot. Most people don't realize that cable MVPD household penetration hasn't really gone up in the past 20 years, but ARPU has probably easily tripled, as the cable industry has successfully milked price increases and selling additional product bundles. Netflix will be no different -- currently it's subscriber acquisition, the paradigm shift to personal video consumption will drive personalization leveraged by social media, and all that means is a big pot of money at the end of the rainbow. I want Netflix to make no money now but instead spend every subscription revenue dollar to lock up content, grow subs, and constantly evolve the UI to improve stickiness and engagement. the profitability of such a subscription model is well tested. At less than 3x revenues for a subscription business that should have sustained 30%+ contribution margins at scale, but most importanly can manufacture the next gross add at 0.17 x annual subscription revenues, that to me is reasonable on an intrinsic value basis, but I believe there is such controversy and misunderstanding of the Netflix business model that it will get episodically cheap so I only added to the long side when it was close to 1x revenues, and have hedged a third of my posiiton now, but I think the future, while not guaranteed, is extremely bright, because I really can't find a lot of true competitive threats -- although I keep looking for it.
    Jan 31, 2013. 10:43 AM | Likes Like |Link to Comment
  • Netflix: The Long Term And The Short Term Of It [View article]
    AM, which exclusive deal were they outbid on? As somebody pointed out, Epix went non-exclusive in the delay streaming window (now NFLX, Verizon, and AMZN) because cost to maintain the faux exclusive was too high relative to the value that Epix could get for going non-exclusive. It's "faux-exclusive" even the initial 2 yr window when NFLX had it because it was 60 days after the output content from Paramount/Lionsgate/MGM had already appeared on EPix and EpixHD (its budnled SVOD streaming platform).

    Regarding HBO, you seem to be defining HBO by the quality of its exclusive programming, I would argue that Showtime, perhaps is just as strong, particularly in adult comedic drama; and it's ccertainly not limited to HBO. Chris Albrecht took that DNA to Starz with him so there's nothing unique about HBO having the only secret sauce to fund and develop content, the only problem he has there is that his budget is a fraction of what it was. Talent gets attracted to money and creative freedom. My favorites on HBO were Band of Brothers, Treu Blood, and Curb Yoru Enthusiasm. but are they that much better than Dexter, Californication, The Tudors, or Borgias on Showtime -- dont know, I think it's a matter of taste and choice. But that's the whole point, what is the market value of diffrentiated content (Not otehrwise available on broadcast television, i.e. with adult themse, profanity, violence, and nudity) in a subscription model. The market evidence suggests that there's plenty of talent to support multiple networks and the subscription revenues that they generate to fund talent's creations. Just like every studio has their hits, they also have their flops (remember John Carter from Disney?). As opposed to you, I think original program development is a no-brainer. There are plenty of hand me downs from broadcast networks where serialized drama cannot develop suffficient audience for appointment viewing that can act as a farm team. I was a sucker for The Event, or V (pretty bad I know), or the Sarah Connor Chronicles, and even that I disccovered on Netflix called Surface that was a one season phenom on Syfy. So I have a different opinion that programming is the easy part.

    I respect HBO for its innovative strategic evolution, and its user interface for HBO Go is brilliant and visually stunning (as compared to the static icon panels that Netflix inherited from its DVD case-front days), but it is strategically handcuffed and struggling to evolve. Its content budget is about the same as Netflix but channeled to output deals form 3 of the Big 6 and probably 60% of its broadcast hours occupied by its original programming. however, it grew up in an environment of limited channel slots, so a "quality vs. qunatity" was an excellent strategy. Actually it's "quality among a targeted audience versus breadth to a variety of niches" because the latter could never make sense in a woorld of linear broadcasting with limited channel slots allocated by the MVPD's. But the world is cahnging to an on-demand model, and HBO's reliance on the MVPD's clunky interface and distribution gate-keeper is making it increasingly vulnerable. HBO has no way to get directly to the consumer and had a hard fought fight with its own ex-sibling Time-Warner Cable over compensaiton for HBO Go and whether HBO was forever limited to offering HBO Go only via an authenticated TV Everywhere model (i.e. the subscriber had to have a pre-existing subscriotion relationship through an MVPD). The problem is that anybody whoever expereinced HBO GO would never want to consume HBO from his cable operator but ther ewas no way for HBO to promote and market this much improved product other than tied to the inertia fo the cable oeprators.(and their outlandish toll).

    Let me tell you where Netflix is better than HBO, more specifically from a business model and strategic positioning, rather than the quality of original programming content that you seem to be comparing the two.

    Breadth of programming: in an on-demand world, a "library" is inherently driven to scale and breadth of content. It's not necessarily having sufficient high quality content to aggregate sufficient audience but rather having the breadth of content where narrow niches can be served since you are no longer constrained by channel slots constrained by appointment viewing. In such a world, narrowcasting and aggregating sufficient audience to pay for such niches creates barriers to entry and a network effect -- you go to that shopping mall because there is sufficient breadth of product to attract you (and somebody else) to the same desitnation even though each may be consuming totally different content/products.

    Control of distribution. Netflix spends 2 months of revenues for each gross add while HBO pays 40%-50% of its revenues FOREVER in a rev share model. Granted the MVPD does fulfillment, billing, and other services too, but to rely upon the MVPD to access and market to consumer is an achilles heal,a nd one which HBO is desperately trying to figure out how to evolve away from. The TV Anywhere brouhaha ultimately ended with a system fo authentication where HBO is blind to the customer where the MVPD contorled teh USer ID authentication and kept all the subscriber profile informaiton hidden from HBO. Netflix's marekting engine and its know-how and experience as to the utility and efficiency of different marketing channels is the envy of the pay cable netowrk industry...becasue they dont have it and are nowhere close. Add to that Netflix's breadth of placement on conneccted devices, promotional partners that promote its app (walk into every single wireless store and see what the carriers promote as the value proposition for 4G - you got it, you can stream Netflix on your super-duper smartphone), and distribution flexibility -- such as its disttibution alliance with Apple on Apple TV (the idiots that say Apple is a competitor to Netflix dont realize that Apple loves the agent model where it get rev share particiaption without the need to fund or underwrite content risk). Apple sold 2 million Apple TV's in the last quarter and each, you got it, primarily features Netflix as the first partner content offering. Same with Netflix positioning the prominent Netflix Red Button on the remote controls of a premdominant number of connected smart TV's and otehr devices such as sonnected DVD players and other streaming boxexs like Boxee,e tc.

    Dominant content verticals: One example is that Netflix totally dominates childrens prgramming with an aggregation including both Disney and Viacom, and also PBS, BBC, and other global franchises, bar none. No one has the audience that can come even close in the web on-demand space -- not Disney, not Nick, not Sprout, not The Hub, nobody. and in particular children programming, particularly younger childeren, is a drug opiate substitute, and Netflix is teh drug delivery platform. This audience locks in the parents who pay for the Netflix subscription as a low-cost babysitting service. There are also other categories such as prior season serialized dramas -- nowhere else (it doesn't work for broadcast synidcation) is there distirubtion for this content with the breadth of audience that Netflix has and the scale to underwrite the cost of exclusivity. HBO cannot ever be the outlet for Breaking Bad no matter how much they respect the programming adn its critical acclaim, and maybe wish that they had originally picked up the show when Sony first shopped the concept, but because of HBO's brand positioning, it would be hard for HBO to air content, no matter how wonderful, that was developed on another network, let alone, heaven forbid, to broadcast prior season (but yet HBO does braodcast with delayed window studio movie content, and even so-called catalog, read odl, movies that have been cycled a few times). Netflix is not so constrained -- if there is content that can attract audience utility and it's priced efficiently then it works for Netflix and works for it well,...and it may attract the next bucket of incremental subscribers who find this particular programming relevant.

    Personalization. While Netflix is currently pretty lousy, it is better than anyone else. My recommendation engine is burdened with the chlalenges of how do you recommend to a subscriber who loves Angelina Ballerina (a british cartoon targeted towards 3-5 yr old girls), Predator and Aliens, and Glee. Of course Netflix will be the first to evolve to personal profiles, improved parental controls, social media intergration, and ultimately a advertising/promotion model -- not to advertise product, but to take the personalized profile and recommendation engine to insert promotional trailers (liek the TV networks and teh movie theaters) to secure increased engagement.

    Anyway, HBO has great content, but Netflix is better strategiclly positioned in evolution to a new distribution and content consumption paradigm of internet televsion. HBO, and pay cable networks such as Starz and Showtime, will need to increaasingly play defense while Netflix has the luxury of playing offense and innovating at internet speed. HBO will have the luxury due to its strong content position to at some point tar the bandaid off and evolve away from MVPD distribution, but networks like Starz, which averages in the high $2/sub range in net monthly revenues after the MVPD take, do not have the financial scale to compete against Netflix,a s seen in the recent Disney jumping ship to Netflix. In Disney's case, it wasnt even that much due to the money, but rather teh stronger capabilities fo the Netflix distribution platform to showcase and ultimately moneitize Disney's studio product which is obviously another way of promoting the Disney brand and its studio franhcises such as Marvel, LucasFilms, etc.
    Jan 30, 2013. 12:24 AM | 1 Like Like |Link to Comment