THB #123: Netflix Day, 4 of 4 - The Aftermath

Bugs Meets Wall Street

It’s schadenfreude Wednesday.

The Netflix market cap is going to be right around $100 billion at the end of today’s trading. ($100.42 billion at the close, off 35.12% from yesterday)

Wow.

I have tried to watch and read “all” of the takes on what is going on from a wide range of writers/talkers. This is that time when people expose themselves, taking wild swings when they think they are protected by viewers/readers unable to focus… take that shot… maybe you will be The One Who Knew.

Of course, they are almost all too scared of being mocked to bring up the obvious… that a $100 billion Netflix is, for the first time in 7 years or more, acquirable. Someone brought it up on one of the shows and professional broadcasters squealed like scared animals.

Yes… it is unlikely. But it’s a lot more likely than it was when Netflix was worth $170 billion a few months ago.

But let’s put that aside.

There are a few camps. One is that Netflix is a bunch of arrogant f-ups who have been screwing up for years and they finally got exposed.

Another is that the entire entertainment market is, suddenly, a giant question mark and perhaps the most stupid take of the day, that the entire streaming universe is now capped at 220 million households.

Another is that this can all be fixed by adding $2 billion a year by enforcing password usage and adding advertising eventually.

Then there is the (bizarre) take that they just need better programming. And I have heard others response, smartly, that this company spends around $18 billion a year on original programming… what could ever improve their “quality?” Yes… concentrated focus is often the source of better programming. But that doesn’t keep 222 million subscribers watching every month. AND a big part of the Netflix way of spending on content has already been to engage a lot of the best talent in the world.

People think of content like it’s widgets, change the formula a little and make it what you want. Doesn’t work that way. This is the delusion of classic American cinema and international cinema in America… we see 10% of the content pre-1970 and less than 10% of international cinema and we think that creme off the top is the whole bowl of milk. No. Netflix will have better content years… and worse. It all averages out.

I saw the headline, “Netflix hit a wall” and I wanted to hit the author with a wall. Talk about a meaningless observation. None of this is new intel. Growth has been slow for a couple years. They have been chasing a lot of countries and region growth has been a million here, a couple million there. The US/Can region has been stuck for years. Of course, most of the people who are telling you that something material changed this week are the same ones who were logrolling for Netflix stock price hysteria for years.

Jim Cramer, ever the extremist, thinks he is an expert in advertising and that if Netflix just added sponsors for its hottest shows (“Stranger Things is brought to you by Pepsident!”), they could make a quick fortune and no one would hardly notice. Should have been doing it for years. (To be fair, his take on yesterday’s sad earnings call almost exactly matches my own.)

And there are still a few people who still want to believe in the 900 million addressable household notion and think this is just a weird blip caused by too-rapid acceleration during COVID. (“It’s a COVID stock!!!”)

Me? I think much of what I have written about before, ad nauseum.

Streaming is not a gold rush business. Putting Netflix aside, it is an opportunity for domestic content players to expand their direct revenue streams beyond the shores of North America and across the globe. The domestic business has never been likely to be significantly improved as a revenue model for the various legacy players. The existing model in America is flawed, but it’s also very mature and has mostly maximized revenues against relatively small investments. But the idea of eating the rest of the planet - as Netflix has 2 international subs for every 1 domestic - is compelling and a real opportunity.

In the last 20 hours of listening to everyone I can, I have heard almost no one mention international and that domestic is almost completely saturated and international is the only place for growth. Why? Because they don’t know shit about international. I know a LOT less about international than I do about domestic too. But I do know that if you hit 70 million domestic subs, you are pretty much done there and need to look elsewhere if you are measuring growth primarily by subs.

So… that said, what does it mean about Netflix?

Netflix is a mature business with a fantastic base of comfortable subscribers and some legitimate growth potential, beyond fliers like gaming or even clean-up work like getting their password usage under control.

Do they need ads? In some places, yes. In other places, no. Does it make sense to undercut where they are in America? Probably not… unless there is a serious reconsideration of how it will all work.

For instance, you can’t really be charging me $20 a month for the service and suddenly hit me in the face with marketing, whether “sponsored by” slating at the top, bottom, and maybe middle of a show or a more traditional 9-12 minutes of show followed by a 90 second-180 second block of ads. (Sorry, Cramer.)

There hasn’t been a ton of writing about how streamers have added ads to date. I gather that, for instance, that the HBO Max ad version doesn’t interrupt any of the HBO shows. (Not 100% sure on that one.) Hulu added a commercial-free tier a few years ago, but has always been ad-based first… and Disney+ doesn’t have an ad-tier and won’t until around year’s end. So the statements that everyone else is already doing it and why is Netflix lagging are a little lame.

The lack of a real standard leaves room for Netflix to take another big risk and innovate TV ads… even though Hastings suggested the opposite… that they would just farm it out to existing ad players.

Imagine Netflix getting enough money from a less invasive ad program to make more money and reduce my monthly subscription fee by a few bucks. Well… then you have something that could work for all of your subs. For $3 less a month, would I be okay with sponsored by bumpers and “hold” ads (when I put the show on hold) with uninterrupted (by them) programming? Maybe. Serious consideration. (Cramer will say it was his idea.)

It’s not the money. It’s the mentality.

On the other hand, for $3 a month, I might just go ahead and pay. The trick would be for Netflix to find a number that works almost equally well for them either way.

Internationally, there is not as much ad money on the table. But the reality on the ground is that consumers in many countries simply cannot afford to pay the monthly fare and/or don’t have quality internet access. (I wrote a piece last month with this element noted. “6 of the 14 1m+ population countries have 20% or less internet penetration.”) So that is another set of barriers to manage. For everyone, not just Netflix.

Here’s another thing I rarely heard… that the media and the street were simply dead wrong for years about the hyper-notion of Netflix and world domination and that listening to Netflix love slaves like Rich Greenfield was a huge mistake. Always Wrong Rich was projecting 2022 sub adds for Netflix in the mid-20ms… just before Netflix had projected just 2.2m new subs in Q1. A wild outlier from reality. He’s not the guy anyone should be listening to this week, except to hear him apologize. (He’s doing the media rounds today and the same media that fakes knowing what is going on are giving him a platform to keep spinning his brand.)

Netflix isn’t actually “in trouble.” They are very much the same business that they were last week, last month, and last year. I agree that they need to make changes. I have been saying it for years.

But the reality is that Netflix didn’t really change anything… the perception of Netflix changed. The rose-colored glasses cracked. It took 2 quarterly reports. One that sucked… really upsetting even Netflix bulls with a crappy projection of 2.5m sub adds the next quarter. Then, the next quarter lands and they not only don’t do the 2.5m that everyone already hated, they went negative.

It’s like a movie where the lead character gets in trouble and just as you think they are going to recover, they take another blow. Thing is, in a movie, you pretty much know that somehow, they will make a comeback by the end. (That is, unless it’s an Adam McKay movie and the happy ending is the end of the planet.)

Netflix’s greatest sin, in my view, has been to let people believe the mythology. Had they ever moved to slow things down by offering a taste of reality - which they were not obliged to do legally - the bubble burst would not have been as severe. (Side Note: I still feel Bill Clinton was guilty of doing the same, not managing the first tech bubble so that the mess when it exploded was as messy. And if you like, on similar tip, W and the real estate crash.)

Netflix was already making adjustments. They are a mature company. Just resting on your laurels is not a good plan. They aren’t idiots. Did they go too fast here or too slow there? That’s not really an area where there are many truly educated guesses happening. Everyone just wants something to change right NOW!

Yeah, me too.

Thing is… it was the tone of the earnings call that I think really symbolized the story here. At first, I was edified that others felt the same way I did about it. But then, as I heard it the 20th time today, I got out of my own ego and recognized that this was a classic content experience. The numbers were terrible… but it was the tone that really upset people. Why did they sound like they didn’t see what everyone else was seeing? (This was also true last quarter.)

Netflix has been the Bugs Bunny of the stock market for a decade+. People loved it for winning. People loved that it was tweaking the establishment. People loved how it seemed to be able to escape the inescapable.

Netflix didn’t turn into Elmer Fudd overnight or in 2 quarters. But maybe a little Daffy Duck for the moment. They still think they are The Bugs (or better, really)… and they still have a lot going for them… but instead of doing what they do and putting Bugs behind them, they keep trying to be The Bugs. And they keep getting shot in the beak.

"When I was a child, I spoke as a child, I understood as a child, I thought as a child: but when I became a man, I put away childish things." - Peter Gent.

Ha… not really (sorry to those of you who don’t recognize the name Peter Gent). It’s 1 Corinthians 13 or, as the bible scholar Donald Trump would call it, “one cornishisans a baker’s dozen.” I first heard it in the movie North Dallas Forty, which I still love.

Netflix still has a lot of advantages and a great business. But they are, in so many ways, a legacy company now. They have millstones around their collective neck that cannot simply be spent away. Every one of these major players have considerations to manage other than what they would most like to do or think is most advantageous for their narrow goals.

You can argue with me about what “legacy” means to you. I get that. But Netflix needs to stretch out before it goes to play softball now. They are a little lactose intolerant. They fall asleep on the couch instead of trying to get romantic with their better half. They aren’t old. But they ain’t young. They can still burn up the dance floor at the big party on Saturday night. But they might need to ice their knee on Sunday.

They are also still the person at the table that everyone else expects to pick up the check. Even at a meager $100 billion valuation, they are still leading the category.

Yesterday and today, their stockholders/doctors told them to lose a few pounds… eat some more veggies… drink 2 drinks instead of 3.

Maybe they will take the advice and have some renewed energy and resilience in the next couple years… maybe they will Netflix and chill. Only time will tell.

Until tomorrow…