Netflix: Deal With AT&T Signals Continuing 'Brand' Vulnerability

Summary

• Netflix recently paid a large premium to maintain streaming rights to "Friends", owned by AT&T.
• The deal signals how important content remains, and how much further to go Netflix has in order to stand on its own as competitors begin to enter the market.
• Despite a recent 24% drop in shares, the accelerating cash burn, required growth, and valuation of 65X 2019 earnings all combine for an unappealing investment proposition.

Netflix, Inc. (NASDAQ:NFLX) recently renewed an agreement with AT&T (T) for the rights to continue streaming classic sitcom "Friends" for 2019. The old agreement had expired, and the renewal saw the price tag for this privilege jump from $30 million, to $100 million. The premium Netflix paid indicates that licensed content is still very important to subscribers at a time when owners of "established" content are getting ready to flood the market with competition.

Although Netflix should be heralded for its growth as the future of digital content distribution, its intensive spending has Netflix continuing operate on a negative free cash flow basis. At 65X next year's earnings, there is more risk than reward given certain challenges the company must answer to.

While Netflix keeps its audience data private as proprietary information, the hefty price that Netflix was willing to pay to keep friends just a little bit longer (AT&T retained rights to offer the sitcom in 2020 on its own upcoming streaming service) is a solid indicator that licensed content still holds strong value to Netflix. While Netflix has built a nice stable of "hits" with consumers including "Orange Is The New Black", "House of Cards", "Stranger Things", and "Making A Murderer", the company still heavily utilizes licensed content to flesh out its offerings. Many of Netflix's original programs lack longevity/depth (how many hours will people spend re-watching a limited number of "Making A Murderer" episodes versus hundreds of episodes of "Friends" or "The Office"?).

Netflix has revolutionized the industry by reinventing the means in which content is distributed to consumers. Netflix has continued to grow as the primary act in town because it has been able to provide high quality content (much of which is licensed) to consumers at a low cost. With various owners of established content brands (AT&T, Disney (

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.