Jerry Seinfeld's Agreement With Netflix Isn't About Nothing

| About: Netflix, Inc. (NFLX)
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Summary

Jerry Seinfeld is going from Sony's Crackle to Netflix - this is significant for both services.

Netflix proves yet again it is willing to spend a lot of money for stars. The debate continues as to what that means for shareholders.

Crackle will have to get serious in the next several years about building Crackle's brand equity.

Netflix (NASDAQ: NFLX) believes Jerry Seinfeld will add value to its streaming platform. The company has signed a deal with him that will bring his show Comedians in Cars Getting Coffee to the service, as well as comedy specials and other programming, according to Deadline. Previously, Seinfeld called Sony's (NYSE: SNE) Crackle asset home.

Although the article didn't say what Seinfeld was to receive for compensation, I'd have to assume it's a lot. Both Chris Rock and Dave Chappelle made very lucrative deals to bring their talents to Netflix.

This is Netflix being true to itself, and if you're a believer in the Netflix spend-now thesis, then you have to feel really good about your holding. If you've been on the sidelines and are worried about the spend-now-equals-too-much thesis, then you might be inclined to initiate a long-term short investment...which would probably be the wrong move. The market relishes the opportunity to destroy short sellers when the positive prospects of the spend-now approach in the media industry creates a vast subscriber base that is disruptive to the traditional long-term players in the space. That, and anytime a big star like Seinfeld joins the team, Wall Street looks past the big contract it took to secure such a celebrated human resource.

Generally speaking, I am not fond of the overpaying-talent approach, but as far as stock appreciation goes, it has served Netflix well. Seinfeld is an extremely wealthy individual, and it isn't surprising that he left Crackle. That service, at this stage in its development, does not seem overly concerned with rushing things as far as branding is concerned, or even as far as making money is concerned. I assume that Sony, over time, wants to switch from an ad model to a subscription model, but to do that, it's going to have to do a lot more than offer as its top product something on the order of Comedians in Cars Getting Coffee. Understand that Netflix cannot possibly be signing Seinfeld based on that program; it's an idea which, quite frankly, is more suited to a poor man's Netflix. Rather, an investor can bet it is all the other concepts that Seinfeld is sure to set in motion, backed and marketed by his own personal brand, that CEO Reed Hastings is after, and for which he is more than willing to pay. The lesson for Sony/Crackle is that it has a choice to make: either go big on spending or go big on fascinating concepts that are skillfully executed by cheaper and/or unknown talent.

An interesting side note here: we've all heard about Netflix's secret algorithms designed to assign specific values to deals. I would have to think the probability that the company overpaid to some extent for Seinfeld's agreement based on the idea that the algorithm would generate a fair-value assessment that Seinfeld's team of agents would want to beat. It would be no different than paying a P/E premium for a blue-chip stock, or one that is in a high growth phase. The man who supposedly built his empire of wealth on a show about nothing (not really true, many of the episodes were plot-heavy - furthermore, the one show maybe truly about nothing, the much-loved Chinese restaurant episode, was probably the most boring of all of them) is going to make sure he is getting the highest top-dollar deal he can get. Otherwise, there are other platforms he could seek (he could have even tried to sell content on his own, as Louis CK has).

For now, this looks like a good deal for Netflix in the context of what it is doing. Again, I have said in the past that big stars don't always work out on an economic basis. But Netflix will do what it does, no matter what I think, and just considering this agreement, I believe the company competitively acquired a visible talent from a weaker player in the space. At some point, though, Hastings is going to have to explicitly map out how he intends on growing cash flow in the face of higher costs for content production/acquisition. Seinfeld is risky, and so is the stock, but I continue to hold it, and I would not short it. In fact, it continues to be an investing idea worthy of consideration for a portfolio section based on risk.

Disclosure: I am/we are long NFLX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.