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Netflix: South Korea Derails Its Business Model

Oct. 04, 2021 12:52 PM ETNetflix, Inc. (NFLX)42 Comments


  • A new lawsuit against Netflix would normally be a non-event, however, it comes on the heels of another loss for Netflix in South Korea.
  • The deal has the potential to cost Netflix significantly and it comes on the heels of the company's tenuous financial position.
  • Overall, Netflix is trading at a lofty valuation and we don't recommend investing at this time.
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Net neutrality is a simple concept, but a fundamental building block of the internet. The idea is that your internet service provider must provide access to all content equally, with no discrimination based on the company supplying that

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Comments (41)

I do see a positive trajectory ahead for NFLX. Not the mega growth of the past. A bit more tempered and ultimately dependent on a combination of factors. International growth plus the smaller add ons of gaming, Netflix shop and the new book club. Still, expect this to outperform for several years ahead, maybe longer.
It does well for option plays also. Shorter term if there is another modest pullback, I will add a bit more. It’s going to do better than 3 M and my pharma.
It is deja vue, all over again. Remember about 10 years ago when streaming just started and Netflix was accused of consuming large amounts of bandwidth? After all the blames and fingers pointing all parties sat down and worked out solutions that benefit everyone. For example Netflix would put their Contents Delivery Network near the ISP to reduce bandwidth. And then Netflix would transfer their contents to CDN off peak hours through the network backbone. With reduced bandwidth, ISP also benefits from new clients signing up for broadband access because they want to watch Netflix contents like the Squid Game. It is a win-win for everyone to talk to each other.
wwloon32 profile picture
@SaryK. I think most people take Netflix backend for granted. With the heavy usage, there must be some backend infrastructure developed that other streamers still haven't achieve yet. Once the usage is heavy, not only bandwidth been consumed, but also the storage side and processing.

This is why, although Disney+ subscribers is half of Netflix, I think their usage been low. So far, I don't think Disney+'s bandwidth usage is even half of Netflix. That shows a critical engagement problem for Disney+ and other streamers. Despite their claim of getting the pie, in term of usage they didn't break the internet.

Netflix broke it again and again. This is a good sign it is on the right track.
La Marque profile picture
@The Value Portfolio Ajit Pai simply restored net neutrality enforcement to the FTC with legal definitions. Congress has no interest in changing anything at this time.
while I agree with you, I have lost quite some $ shorting Netflix over the years. I am still not a bull but the next thing they can do now to make more $, is just add advertisements. This makes shorting hard again.
nerd_rage profile picture
@siriusly black No ads. NFLX has sworn that off and for good reason. If they dabble in ads, they might try low-ARPU regions.
Longbow Archer profile picture
@nerd_rage How much, if any, pricing power do you see NFLX having. Harris Associates/Oakmark funds is long on NFLX (they are a self-confessed "value" shop) because their thesis is that NFLX can raise prices/has pricing power and the market is underestimating future earnings.

Yet I see the opposite, competition keeping NFLX substriction tiers right where they are.

What's your take on NFLX having pricing power going forward?
@Longbow Archer they have managed to create this social fear of missing out where friends watch similar series so both would probably pay 30 just so they dont miss out. however every quarter with bad content hurts them a lot.
ivanz profile picture
Glad that I only had 3 $650 10/14 NFLX calls sold. Closed them.

My bet is $640 is the pre-earnings top, but one can’t guess on naked calls.

Apt to fall <$600 after earnings tho.

Damn Squid games!!!
David Orr profile picture
Greeeeeen liiiight.


Think how much value this one show creates for Netflix. It was made mostly with a Korean audience in mind and despite that, it attracted viewers from all around the world. A really novel/great experience. Expect to see more of that from various countries in the future...
wwloon32 profile picture
Netflix is a streaming company. When a streaming company does well, it broke internet. And breaking internet is not a good thing to have?

I wonder what kind of logic is this. On this point alone, breaking internet is rather a good sign to welcome rather than having none. That's mean other streamers/entertainment company is not even close to Netflix.

The potential implications is on Youtube, which equal Netflix in consumption.

And regarding to the tenuous financial position, I found it to be absurd to say the least. A cash flow positive company defined as tenuous financial position is not exactly factually nor relevant.
ShermanMcCoy profile picture
"Tenuous financial position."

@ShermanMcCoy if all the ISPs decide to surcharge, and this guy calculates that’s about 1.5b$ we are talking 50 cents a month per sub which they will add as a line item that says ‘carrier fee’ like you get on everything else.

So once we realize where it fits in the big picture it is about valuation methodology to get to price target and… oh wait the p/e is high.
ShermanMcCoy profile picture
@Aceinmysleeve indeed and thanks for that assessment. I remember we talked about this risk years ago. It has always concerned me but, as you point out, it is not material.

Given that NFLX 2029 bonds are bid at a 26 point premium to par, talk of a "tenuous" financial position is arguably somewhat misplaced, but then again this isn't the first piece of nonsense we have heard here and it won't be the last...
lol. NFLX is at its lowest valuation since its inception. ignorant writers.
@raining2009 copy that. Consumer choices are now more than ever but nflx will be a “core” service along with Disney + and prime. Others will be much more price sensitive
In the Apple App store Netflix is currently the #1 free app. More popular than tiktok!
@Cgain Free tops apps on my iphone:
1.Insta 2. FB 3. TikTok 4. Netflix
David Orr profile picture
You're assuming everything bad and even then the cost isn't that high.

* SK might not allow ISPs to charge the senders of data.
* Even if they do, NFLX should be able to pass on the cost, since presumably every other streaming service would face the same cost.
* Even if both of those have the worst possible result for Netflix, SK is one of many countries. Surely this won't play out badly in every country, and possibly might not catch on in any other ones.
* Why would the cost of data stay constant over time? Bandwidth gets bigger over time. There's more competition with home 5g and LEO satellites.

Besides that, Netflix bears ignored its growth and pricing power for many years. Here you're just continuing that mistake.
Basit Saliu profile picture
Netflix is so undervalued should be trading at over $700.
I'm not clear as to how the carrier's demands are inconsistent with what Netflix should pay under conditions of strict net neutrality. Is this because only the person who subscribes for internet service should pay for service,-- and not the source of the steam,-- and that this payment by the subscriber should not depend on the volume of data coming from any source? But if the the source,-- the provider of the stream,-- can legitimately be required to pay, what does net neutrality say about the principles governing its payments?
sKibi profile picture
The author’s analysis/extrapolation is dumber than dumb, as if what happens in S Korea is precedential that will inform the Internet infrastructure value chain and regulatory framework throughout the developed world. In SK, ISP’s charge around $20 per month for 1GB service (I pay $70 for VzN FiOS). Why didn’t author say instead, OMG, Verizon and T will have their broadband ARPU cut by 2/3 instead?

If South Korea implements in effect an excise usage tax, NFLX and other content networks simply pass it through. Oh “it will affect NFLX the most because it has the largest subscriber base” - wait you mean the guy with the largest subscriber base and REVENUES to amortize such a infrastructure “excise tax” would be the best to mange it. Such an inane analysis. So the FCC is giving up on Net Neutrality principles bcuz some court 15K miles away where internet connectivity is almost free decides that a usage tax seems fair. Really?
nerd_rage profile picture
@sKibi When did the FCC start supporting net neutrality?
sKibi profile picture
@nerd_rage in essence since 2005, and then after various litigation, FCC reclassified ISP’s as common carriers in 2015. It changed policy and repealed that order in 2018 on a 3-2 party vote, and which became effective in summer 2018 despite continuing litigation. Whether net neutrality will prevail or what aspects of it will evolve in the US is not really the point, but rather that the US or any other country’s ISP regulatory framework will not give a damn how SKorea decides to manage its internet infrastructure regulatory framework.
As soon as this author said he canceled his family's Netflix subscription, his credibility went out the window.
jakeelwood5 profile picture
@northofboston Why? Netflix sucks.
sKibi profile picture
@jakeelwood5 so does this author's so-called "analysis" LOL. Stock only went up $31 today. market must have read this article and realized how dumb it was and saw it as a price increase opportunity.... or maybe the fact that the viral global audience demand illustrates the competitive advantages of Netflix's global content sourcing model.
nerd_rage profile picture
Governments are emerging as NFLX's biggest threat. Censorship, quotas, now this. Governments can't just accept their people might be interested in things the government does not currently control.
@nerd_rage I agree. Antitrust regulatory risk is probably their biggest headwind. But I think that’s at least 5-10 years away and they’ll be prepared for it.
Big, tired yawn!
lol.... nice way to try to spin the biggest global TV hit quite possibly of the last decade (if not ever), as negative.

nerd_rage profile picture
@Cgain Let's see how the subscriber numbers are impacted.
@Cgain I think they were fair...having a big show does not change the dynamics of the business...when they were the only player.. yes their valuation made sense..it does not, with the competition (not just Disney, HBO, Amazon, Apple TV+ .. but strong local broadcasts globally)...and other headwinds the article talked about..adding games too the line up is not going to change their trajectory...games .. like video.. is hit based..and once you have watched Sqid Games.. you are shifting through old reruns...!
ShermanMcCoy profile picture
@nerd_rage people don't download the app unless they are subscribing. Ergo, Asian app downloads are a good leading indicator of subscription additions.
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