How come Netflix (NASDAQ:NFLX) has a market capitalization of $4 billion, on 2009 net income of just $116 million? That’s about $325 per subscriber, even as each subscriber generates on average about $145 in revenue and $10 in net income per year.
Ethan Epstein makes a pretty compelling case that Netflix’s business model is threatened by problems at the US Postal Service: a rise in postal rates would be bad, and the abandonment of Saturday delivery would be much worse.
But the fact is that the economics of Netflix have always been unique and hard to put into old-fashioned business models, and I think they’ve done quite a good job of reinventing the whole way that we pay for consuming movies. By turning it from a cost-per-movie into a cost-per-month, they can somehow charge more money but cause less pain while doing so.
I’m aware that I’m extrapolating wildly from my personal experience here, but in the olden days I hated paying late fees on rented movies, and as a result was an eager and early adopter of Netflix. But pretty much since day one, I’ve paid more money to Netflix in any given month than I ever would have paid in movie-rental fees, including late fees. I just don’t watch that many movies, and the occasional $10 late fee is still much less than the regular $20 or so I pay Netflix. And while Netflix has done a good job of reducing its rates noticeably: my plan has dropped from $23.84 in 2004 to $18.50 now, including tax, that’s still more than I’d ever be likely to pay a video-rental store.
Indeed, I still occasionally get DVDs from my local rental store, because of the way that serious-and-earnest Netflix DVDs tend to pile up unwatched when the whole reason for wanting to relax with a movie in the first place is because you’re frazzled and just want to kick back with something funny or brainless. The Netflix tail is long, but when you have no more than three movies out at a time, your choice is actually much more constrained than at the video store. And similarly with the streaming stuff: it’s great in theory, but in practice it’s going to take me a long while to work out how to hook it up to my video projector.
Yet despite all of that, I’ve been a loyal Netflix customer for nine years now, and I’m likely to continue to pay them their $18.50 a month pretty much indefinitely, bearing them none of the ill will that I used to have towards surly clerks charging me late fees for scratched DVDs. There’s just so much less pain involved, when you pay for access to movies rather than for the movies themselves.
Still, $4 billion seems pretty crazy to me. Netflix is just a middleman, a delivery company. Shouldn’t that be a commodity, rather than something trading on a p/e in the mid-30s?