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  • This Just In: Netflix Business Model Broken [View article]
    Since you're back writing about Netflix, I'm back commenting on your posts. I was at the MS conference last week when Hastings made his comment. There was some other statements from that conference. Netflix content spend this year is equal to half of Amazon's operating profit so you have to wonder how much money Amazon will spend on acquiring new content considering they are already subsidizing Prime and the Kindle Fire.
    You Tube was willing to pay the same licensing fee as Netflix for the right to stream CBS content, but CBS chose Netflix. Why? Because You Tube is a threat to broadcast television with their goal of stealing advertising dollars from linear television. Comcast controls the content for NBC Universal and nothing else. If they want to stream that content exclusively on Xfinity that's their prerogative but it's not enough to deter consumers from the 20,000 hours of content Netflix offers. Time Warner Cable is separate from Time Warner so one company has the content the other has the pipe. Hasting's comment on distributing Netflix through the cable operators is a recognition that Verizon and Comcast are discussing potential nationwide streaming services. Those MSOs not wishing to launch streaming options may look to Netflix as a defensive alternative to other cable operators encroaching on their turf.
    Netflix's "power" is the same as any other network acquiring content. They pay for it. If they don't grow subscribers they will not have enough cash to acquire additional content. On the other hand if subscriber growth continues they will have a huge competitive advantage over any other company wishing to compete. The reason is any other entrant is either going to have to offer a significantly cheaper service or have a much deeper library to entice subscribers to switch from Netflix to a new service. That is why Hastings is spending aggressively; it raises the bar for any one wishing to compete. Why has Amazon only attracted 2% of the streaming audience to date?
    Mar 6, 2012. 12:00 PM | 7 Likes Like |Link to Comment
  • Netflix: 6 Bucks For A Penny [View article]
    Thanks for your thoughts Bill. I would like to add a few comments of my own regarding the future of Netflix.

    I don't know where the stock will trade over the next few weeks, but I am reasonably confident it will trade higher then the current price over the next couple of years. Here are a few reasons why I believe Netflix will be a much bigger company then it is now.

    First, there are 52 million homes with a DVR in the house. Those households are paying between $10 and $17 a month for a device that is used less and less frequently as so much television content is available for streaming. So the US streaming audience is bigger then current estimates suggest.

    Second, the competition is not all it's cracked up to be. A year ago everyone was consumed by all the entrants into OTT video. Yet a year later the only true competition to come forward is Amazon. Yes, Hulu is a decent service but it is ad supported and recent management departures leave its future in flux.

    Amazon is competing with Netflix but not head to head. At the end of the day, Amazon's main goal is to get you to buy more content. By allowing you to watch some video programming for free with your Prime account, Amazon is certain you will be willing to pay to watch other video content. That is why they don't segregate their content. When you search a show or movie it shows up as a prime offering, a rental option, or an opportunity to buy. It is much like the lending library for your Kindle. In the end Amazon wants you to buy. So they will not go head to head with Netflix for big content deals.

    Third, potential profitability on streaming is very high. Showtime's profits can be isolated in CBS's 10K. As of last year, Showtime had a 38% operating margin. Showtime is only netting $6.85 of the $15 charged by the cable operators, so clearly Netflix can earn much more money on incremental subscriber growth.

    Fourth, new content offers pricing leverage. Yes Netflix is upgrading their content offerings with the Disney deal and the launch of original programming this year. Does anyone seriously think the company will never raise subscription prices as the content improves? Early reviews suggest House of Cards is comparable in quality to HBO and Showtime productions. HBO costs $15 a month; Netflix costs $8. Each $1 increase is $3.50 per share.

    As for the valuation of the stock, please don't include the start up losses from the international business in your EPS calculation. All media businesses lose money as they build out their audience. There is the negative cost of acquiring content upfront which is then offset by future subscription fees and/or advertising dollars.

    I believe a better way to look at Netflix is to estimate what the US business can earn in the next year or so and then put a value on the international subscribers. Netflix generated an 18.5% contribution margin in the 4th quarter (significantly less then Showtime) and management believes margins can grow approximately 100 basis points per quarter. If they can maintain the pace of subscriber growth in the US another year, the earnings will be over $5.50 per share assuming a continued decline in the DVD business.

    I believe the international subs should be valued at $100 per sup. That is very conservative since they are generating $84 dollars a year in revenue. Just to put it in perspective, the stock market is valuing a Time Warner cable subscriber at $3300. I realize the monthly fee at Time Warner is much higher, but a Time Warner sub is not worth $40 more particularly as more and more are either discontinuing their service or cutting back to a more basic package.

    All in all, Netflix's current subscriber base can justify a stock broadly in the $150 to $200 range over the next year. However, if you model the company out several years with a higher sub base and much better margins you get a significantly higher stock price.

    So the bears can continue to highlight competition, cost of content, and lack of near term profits. For those that believe, we'll let the story play out a little longer.
    Jan 29, 2013. 10:31 AM | 3 Likes Like |Link to Comment
  • Is Netflix On A Suicide Mission? [View article]
    HBO and Showtime didn't produce any original content when they launched. How good was the quality of the content when cable first started. As subscribers grow, Netflix has more money to invest in content. A small portion the content will be originally produced (Lilllyhamer, House of Cards). Yes there will be competition, but Netflix has first mover advantage and has the largest audience, meaning they have the money to spend. Amazon will compete but it is tangential to their other business so the investment will be measured. How many channels are on your cable system? Does only one network make money? HBO, Showtime, Starz, and Epix are all subscription networks on cable. Is only one of them profitable? You will be right on your short if Netflix can not grow their subscribers. If subscribers continue to grow, I believe your short thesis is a risky bet. Their problems last year were self-inflicted. For the time being, it looks like customers are giving the company another chance.
    Jan 27, 2012. 01:49 PM | 3 Likes Like |Link to Comment
  • Is Netflix On A Suicide Mission? [View article]
    They are not killing the DVD business. Consumers are killing the DVD business. Think music. Consumers no longer buy CDs. They download from ITunes. Streaming video is no different. They are happy to let consumers continue to order DVDs by mail, but they are not going to spend marketing dollars on a dying business.

    As for the relative profits. The streaming business has lower margins because it is still ramping. Repeating what I posted on your site last week, all television networks in their infancy generate losses, because they must procure content before they attract viewers/subscribers. That statement is true for HBO, MTV, ESPN and all the other networks that have been launched in the last 35 years. The quality of the content determines how quickly a network attracts viewers/subscribers which of course will determine the level of subscriptions or advertising revenue. As a network reaches an inflection point on content costs the contribution of each additional subscriber falls entirely to the bottom line. They are virtually no additional costs. So actually streaming content is a very profitable business.

    Again Netflix is no different then HBO/Showtime other then the programs are streamed over the internet rather then over the air. In addition Netflix allows for viewing on demand, personalizes your selections, and has a wide selection of programming. HBO and Showtime have superior programming, because approximately 40% of the content offered is originally produced. But you pay $15 a month for each service on top of a $80 to $100 monthly cable bill. So $7.99 a month is a bargain.

    If you don't like Netflix's content, that's your prerogative, but the fact subscribers are growing again as our hours watched suggests a large segment of the population is finding enough content to continue subscribing to the service.

    Showtime earns a 35% operating margin on 24 million subs. At 40 million subs Netflix will earn $10 assuming a 20% margin.

    Thanks for shorting the stock. The one certainty of each short sale, is it eventually has to be bought back
    Jan 27, 2012. 11:07 AM | 3 Likes Like |Link to Comment
  • Can Netflix Avoid Going Under In 2012? [View article]

    If you ever analyzed the value of a "paid television network" you
    might begin to understand the potential value of Netflix.

    1. We should expect more on line viewing options (AMZN, GOOG, Hulu)but there won't be an unlimited number. The reason the number of competitors will be limited is the cost of acquiring differentiated content and the difficulty of building up an audience. The bigger risk is the emergence of new video content (i.e. You Tube) that increasingly competes for a limited amount of time to view video.

    2. As a first mover, despite the missteps of the past year, Netflix is
    likely to maintain a significant share of the overall on line
    audience. We should be reasonably certain absent further missteps the current Netflix subscriber base is fairly sticky. Yes there will be continued investment by the other competitors but again, other then You Tube, there isn't new, original content being created on line. Yes HBO Go and Cable everywhere are viable options but only within their current economic models.

    3. The oft mention comment there is nothing on Netflix streaming is a product of too much choice. Despite an explosion of cable networks in the last ten years people continue to complain there is nothing to watch on tv. If viewers complain about the original content (but watch it anyway) why would they suddenly be more enthralled with the content on Netflix?

    3. Netflix as a "TV network" has a couple of distinct advantages.
    One, they know what their subscribers are watching. This data is very significant since they know the value of all content. Traditional
    networks are dependent on Nielsen ratings which are statistical
    samples of a television audience. Second, they are not limited by
    time slots, or demographics. Netflix can be many things to many
    viewers so in theory it is much bigger then a tv network which usually plays to specific demographics. Third, because Netflix knows the viewing habits of each member, they can suggest content to watch. As the number viewing options continues to explode, knowing what to watch at any moment is increasingly becoming a challenge. Recommendations from Facebook friends will help viewers but even those recommendations
    may be limited to popular shows.

    4. What might Netflix earn some day and what might it be worth? To answer this question we have to mix apples and oranges. Right now Netflix is investing in content and establishing new markets so profits are suffering, but like most television networks they will reach an inflection point where the relatively fixed programming costs are surpassed by subscriber growth. Remember there is nothing so unique about Netflix's model. They acquire programming and sell subscriptions. The difference is you watch the content via the internet rather then a cable provider. For potential profits, let's look at Showtime. Showtime is part of CBS's cable networks. The only other properties in that operating segment are the Smithsonian network and the CBS Sports College television network, These are both minor
    properties and probably not generating much EBIT. Showtime, with 20 mm subscribers generates a 37% EBIT margin. Obviously, Showtime has some good original programming but even at 20% EBIT margins, Netflix would earn substantial profits.

    I don't know what Showtime would be worth as a stand alone property but here's another look at what tv networks are worth. At a recent Hasbro presentation they said leading children's networks are valued between $3.5 billion and $17 billion. These are advertising supported properties, but the interesting point is the most watched children's television network only reaches 1.7 mm viewers. As we know, Netflix is valued around $6 billion. Or you can look at Viacom with a $26 billion market cap. For $26 billion you get Nickelodeon, MTV, Comedy Central, TV Land, Spike, CMT, BET, VH1, and Paramount Studios. It's quite an array of networks, but how much "must see tv" are on all these networks. In my opinion for $7.99 a month you can easily find more compelling programming then schlock on the suite of Viacom properties.

    At 40 million subs, Netflix will be earning $10.
    Jan 20, 2012. 09:30 PM | 3 Likes Like |Link to Comment
  • Netflix: Limited Downside, Significant Upside [View article]
    Let's talk about competition. Name another service that has announced an offering that generates revenues from that service commensurate with the programming that needs to be licensed to compete with Netflix. Amazon: already subsidizing every Kindle Fire they sell and customers' shipping costs. Offering programming via Prime brings in no new revenue; it only enhances a Prime membership. By the way why is LoveFilm trailing Netflix in the UK even though they were the established player. You Tube: spending a $100 million on programming and $200 million on promotion. Will generate revenues from advertising. Doesn't sound like a competitive service. Apple: not licensing content but willing to rent or sell to the consumer. Good for some viewers but not an all you can eat model. Coinstar: looks like vapor ware. Still no announcement of a launch date, cost of the service, what programming will be offered and where it will be marketed. At 24 million subscribers, Netflix is generating $2.3 billion which can be reinvested into programming. That's $2.3 billion more then any competitor.
    By the way for everyone who believes Netflix is fading into oblilvion, go back and read the transcripts of all earnings reports from the media companies (Time Warner, Viacom, Disney, Scripps, Discovery, CBS, Comcast, etc.) Every call included a discussion on Netflix.
    The fact remains Netflix offers you the opportunity to watch what you want to watch when you want to watch it without commercial interruption. Unless of the competitive services are going to offer more programming or a lower price service consumers will keep choosing Netflix. The company has $4 billion market cap compared to the $20 to $35 billion market caps of the traditional media companies. Last I look they were all losing viewers and/or subscribers while Netflix continues to grow subscribers.
    May 10, 2012. 12:47 PM | 2 Likes Like |Link to Comment
  • Just Out Of Bankruptcy, CIT Group Is Being Pressured Again [View article]
    Timely article David since the company hosted it's first analyst day in six years this morning. I'm still trying to figure out how you came to focus on CIT as a way to express a negative outlook on Europe. Nearly 80% of their portfolio is US based with only 6% of loan exposure to Europe. The largest exposure is to Great Britain at 2.7%. Total exposure to the PIIGS is $180 million out of $34 billion of assets, not exactly a problem. Bottom line, CIT is a US lender and it's fortunes will be primarily determined by the health of the US economy.

    I also hope you realize their loans to the airline industry are leases of aircraft which are secured by the equipment. In addition, much of the aircraft leasing portfolio is to government owned airlines.

    Lastly, you reference their cost of debt which is dated story at this point. The company has been lowering their funding costs since emerging from bankruptcy. In the first quarter, the net interest margin (adjusted for FSA) was 1.97% up from 1.41% last year. Management indicated this morning, they expect the margin to be 2.50 percent in the second quarter, over 100 basis points wider then the same period last year.

    Bottom line, the company is trading at 75% of tangible book value; has sold off low earnings assets; lowered the cost of funding by 120 basis points; and has $5 to $7.50 in earnings power.

    If I were you, I would hedge my short position
    Jun 14, 2012. 03:59 PM | 1 Like Like |Link to Comment
  • Is Netflix On A Suicide Mission? [View article]
    Anyone see the Wall Street Journal article this morning on Lillyhammer? It already premiered on Norway. One in five homes watched the show and it is the highest rated drama in Norway this year. So much for Netflix not producing any of it's own content. Keep shorting!
    Jan 30, 2012. 10:08 AM | 1 Like Like |Link to Comment
  • Is Netflix On A Suicide Mission? [View article]
    How are they driving the consumer away? I still get DVDs in the mail. I'm paying a higher price, but when I looked at competing services I couldn't replicate the convenience and choice at a comparable price. The DVD business will be what it will be.

    You're right on the cash. Their problem was a reset on the subscriber number after they had already made programming commitments. Now subscribers are growing again so they are in a better position to match spending with revenue projections. If subscribers turn south again, they are in trouble.
    Jan 27, 2012. 01:56 PM | 1 Like Like |Link to Comment
  • Netflix's (NFLX) streaming service offers just 5 of the top 100 2011 movies compared to 10 one year ago and in the 40s for Amazon (AMZN), iTunes (AAPL), and Vudu (WMT). The data make even clearer Netflix's move away from offering popular movies on a subscription basis and towards more of a TV-network type model, writes Tristan Louis.  [View news story]
    If you like the price that's good for you. Overall cable subcribers have declined in each of the last three years. The cable companies say it's the economy. I say it's a segment of the population using Netflix, hulu, and an antenna.
    Jan 23, 2012. 03:05 PM | 1 Like Like |Link to Comment
  • Netflix's (NFLX) streaming service offers just 5 of the top 100 2011 movies compared to 10 one year ago and in the 40s for Amazon (AMZN), iTunes (AAPL), and Vudu (WMT). The data make even clearer Netflix's move away from offering popular movies on a subscription basis and towards more of a TV-network type model, writes Tristan Louis.  [View news story]
    No television network in history has been profitable early on, whether it be advertising supported or subscription. The simple fact is you incur programming costs before you attract viewers/subscribers. The negative costs can exist for three to five years. Netflix had the advantage of a cash flowing DVD business to subsidize the start up of their streaming business.

    The reason subscriber growth has restarted is because consumers are no longer looking at the streaming business as substitution for the DVD by mail business. Originally, subscribers expected to see the latest box office releases amongst the streaming options. Now they are watching literally billions of hours of television shows and older movies without any commercial interruptions. When you line up what Netflix offers compared to a basic cable package you realize all you are giving up is your local news and ESPN.

    Netflix streaming business is break even at 23 million subscribers
    Jan 23, 2012. 03:02 PM | 1 Like Like |Link to Comment
  • Netflix's (NFLX) streaming service offers just 5 of the top 100 2011 movies compared to 10 one year ago and in the 40s for Amazon (AMZN), iTunes (AAPL), and Vudu (WMT). The data make even clearer Netflix's move away from offering popular movies on a subscription basis and towards more of a TV-network type model, writes Tristan Louis.  [View news story]
    Watching television shows without commercials for $7.99 a month is much better deal then your $85 cable bill.
    Jan 22, 2012. 10:39 AM | 1 Like Like |Link to Comment
  • Netflix (NFLX +6.9%) shares are soaring, making it not only the best performing stock in the S&P 500 today but for the year so far, up 22%-plus on no news. The stock that had been "the plaything of momentum traders" last year apparently has resumed its old role, Mark Gongloff cracks.  [View news story]
    Netflix lets you watch want you want to watch, when you want to watch it without commercial interruption. Plus, if you are uncertain about what to watch, they'll make suggestions to you based on your viewing history. For $8 a month you get television on demand. How cool is that!?
    Jan 6, 2012. 02:00 PM | 1 Like Like |Link to Comment
  • Something for Netflix (NFLX -1.7%) bulls to hang their hats on: The NPD Group reports that more than half of all consumers between the ages of 18 and 24 with an Internet-connected TV use it to watch Netflix. The trend could bode well for the company with the pace of growth of Internet-enabled devices still strong and with the young demographic seemingly enamored with the service set to age into the sweet spot of advertising. [View news story]
    52 million homes have a DVR which includes a monthly subscription price greater then Netflix. US streaming market much greater then Wall Street is estimating.
    Jan 22, 2013. 11:09 AM | Likes Like |Link to Comment
  • How Google Seeks Global Domination [View article]
    thoughtful article Dana. I believe the only short coming to Google's strategy is Frommer's is the old paradigm. We've gone from trusting the reviews of the supposed expert to relying on the opinions of the masses (if our friends are in the mix so much the better). No longer do people rely on Consumer's Report, New York Times Book Review, Roger Ebert, Michelin, and all the other go to sources of the past for what we're suppose to buy, watch, read, or eat. Now we rely on Amazon, Yelp, Trip Advisor, Netflix, and other user generated reviews to help us with our consumption decisions. Frommer's has a very small audience and while being part of Google will no doubt drive more traffic to the site it can't compare with all the reviews and traffic that Trip Advisor garners. I am long Google and I am particularly excited by their advancements with You Tube but I believe their attempt to gobble together some antiquated travel and dining compendiums into a dynamic travel intermediary is a bridge too far.
    Thanks again for your thoughts.
    Aug 14, 2012. 01:19 PM | Likes Like |Link to Comment
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