We all know about Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) - I think it is safe to say that I'm not reinventing the wheel here. These are two huge companies that share a lot in common.
(Please watch the companion video, where I discuss more about this changing landscape, on YouTube of course!)
According to its latest 10-K, Netflix has its streaming services that now accounts for 47.9 million domestic paid memberships and 44.3 million international members. In total Global, Streaming Memberships are nearly 93.8 million. YouTube is on a whole different parallel, driven by very distinct in a user experience. Whatever the case may be YouTube and Netflix are vastly altering the media landscape and will cause significant problems for many of the traditional old school media companies.
At the heart of it, Netflix and YouTube are essentially on-demand services, no different than the on-demand feature you can access on your set-top box from your cable provider. The main difference is merely the content. For NFLX, it is in a sense a traditional mainstream media company. The one key difference in my opinion for Netflix is that it has a reach on a global scale. Something very few of the traditional media companies have. This range gives Netflix an ability to continue to grow well outside of the 115 million US domestic household. On the international front, Netflix is only at the tip of the iceberg, with 44.3 million users. According to Eurostat, there are nearly 219 million households in Europe alone, more than double the US. Also, according to Statita, there will be approximately 165 million households in Latin America. Between Europe and Latin America, we could be talking about nearly 385 million households. Does this mean, that ever home in these regions are going to have NFLX of course not? But it does mean we are likely to see continued growth. If we look at the US a model and say that NFLX gets to a 45% penetration rate in those two regions, you could be looking at nearly 173 million subscribers. I have not even factored in Asia, Africa or Australia yet. At approximately $8 per member per month, that would equate to about $16 billion revenue per year, not including the US. NFLX has a reach to an audience unlike any other media company. It goes direct into users' homes or mobile devices with no interruptions. I believe the scale and reach of NFLX are what differentiates it from its peers and the traditional media companies.
YouTube presents an even bigger challenge for traditional media than NFLX, but in a whole different light. YouTube is the place where anybody can rise to stardom and to do so can result in million and sometimes billions of view and millions of followers. All of these viewers and followers translate into money for the creator of the video and of course YouTube itself. The beautiful thing about YouTube is that you need nothing more than an iPhone, an internet connection an and idea and you are in business. YouTube is the home to videos such as unboxing, treasure hunts and impersonation. It all comes at the cost of nearly zero because the person who is producing the content, for the most part, is doing it at a fraction of the cost a media producer like CBS (NYSE:CBS) can. For the first nine months of 2016, CBS had an operating cost of $6.1 billion on revenue of $10.5 billion. It requires CBS 60% of its income just to operate. Meanwhile CBS All Access has about 1.2 million subscribers at $5.99 per month with commercials, $9.99 per month without commercials. Now compare a YouTube family that has nearly 2.0 million subscribers and videos that have multiple 10 million view tapings. Then, of course, you have another famous person known for unboxing that has over 8 million subscribers and videos that in some case 100s of millions of views. These are children's shows. How much money can 50 million views earn a person on YouTube? According to a YouTube calculator somewhere in the ballpark of $35k to $85k. Would you want the over or under on the 60% operating cost?
The last time, I checked there were only 24 hours in a day, and if people are watching these types of shows on a daily basis, then that means they likely aren't watching something else. According to Alphabet's last earnings call, nearly 1,000 creators reach the milestone of having 1,000 channel subscribers per day. That is a lot of people watching some of the smaller YouTube creators.
If you are a company like CBS, for example, how do you compete in this changing world? On the one hand you have Netflix with the size and reach of programming. On the contrary, you have YouTube stars making a killing on their video content at likely better margins than a CBS. The short answer traditional media can't compete.
Like I said Netflix and YouTube are altering the media landscape.
Clients of Mott Capital Management, LLC own shares of Netflix.
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Disclosure: I am/we are long NFLX.
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