Netflix is one of the best performing stocks this year, up 225 percent year-to-date, with a $9.3 billion market cap. But it is also priced to perfection, with a lot of short sellers hoping to profit from its fall and antsy Wall Street analysts downgrading the stock. Today, CEO Reed Hastings defended Netflix’s prospects in a very public, very detailed, and very unusual blog post on Seeking Alpha. The post was in response to a specific short seller, Whitney Tilson, who last week laid out his case against Netflix in another Seeking Alpha blog post. By addressing this one short seller, of course, Hastings is trying to address the market’s jitters as a whole, and he does a pretty convincing job of it.
Tilson raised a number of concerns, ranging from the recent resignation of Netflix’s CFO to pressures on Netflix’s margins to market saturation and increasing competition in streaming video. Hastings acknowledges that Tilson “only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix. . . . Odds are he is wrong on all of them, in my view.”
Hastings then goes on to rebut the short seller’s argument (short sellers are investors who bet against a stock). I’ll summarize each of Hasting’s counter-arguments below:
- The CFO left because he wasn’t going to become CEO anytime soon.
- The First Sale Doctrine (which allows Netflix to rent DVDs after purchasing them) may be under attack, but it won’t change in 2011. And Netflix’s video streaming business is growing so fast that by the time it does have any impact on DVD costs, it won’t matter anymore.
- Internet bandwidth costs should continue to decline, and while ISPs might like to charge content providers for data, that won’t happen in 2011.
- Free cash flow has taken a hit because of the increased payments Netflix is making to media companies and content owners, but Netflix will begin smoothing that out on a quarterly basis instead of taking big hits once a year.
- Market saturation in streaming video over the Internet is not yet an issue. Market demand is still accelerating.
- Criticisms about “weak content” are not supported by subscriber’s voracious appetite for what Netflix has to offer, but Netflix is trying to get better movies and TV shows all the time.
- Content costs are going up, but postage costs are going down as viewers shift to streaming.
- If necessary, Netflix will take a hit to growth before taking a hot to margins. ”Management at Netflix largely controls margins, but not growth.”
- Netflix is facing a growing number of competitors in streaming video, but it maintains advantages in scale and brand.
- TV Everywhere could become a long-term threat, but it is more of a defensive move fro the cable companies rather than a new profit engine.
- International expansion could have an impact on margins in the short term
Let’s drill down further into some of these issues. Netflix is obviously betting big on the transition to streaming video. The more it can get subscribers to watch streams instead of DVDs, the more it saves on postage. On the flip side, video content owners are demanding more money for those streaming rights. Hastings thinks that concerns about too many streaming services coming online is overblown at this point:
Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.
And while a major new streaming competitor could come in and blow away Netflix’s lead, Hastings makes the case that Netflix has a huge competitive advantage when it comes to the number of existing paying subscribers and its cost to acquire new ones:
For a competitive firm to materially hurt our growth, they have to have some positive differentiator (price, additional content, integration, etc.), and then they have to market their service effectively. This wild-card of major new competitor offering great content and marketing aggressively is the single best near-term short thesis, but no one knows if it will happen in 2011.
The core competitive barrier for direct competitors is brand/subscriber-evangelism. Our large subscriber base is very happy with Netflix, and tells their friends about Netflix. That means that the cost of acquiring the incremental 1m subscribers is lower for us than for a competitor, and thus our net additions are higher
Finally, in terms of the quality of the movies and TV shows Netflix makes available for streaming versus what people get on cable TV, Hastings points out:
. . . at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.
The key question is whether some combination of Netflix, Hulu Plus, YouTube, Google TV and other Internet video services will some day effectively replace the cable TV experience. And if it can, whether that combination will cost more or less than the $80 or more people pay for cable today. But remember, people are already paying for Netflix, which helps Hasting’s case.
Whether or not the stock will keep going up is another question entirely. At $178 a share, would you buy or short the stock?
CNNMoney published an interesting piece by David Goldman this morning entitled, Google: Your new phone carrier? In it, Goldman lays out what he sees as the preliminary steps Google has taken to become a wireless carrier themselves down the road. He also gives some reasons for why they would and would not want to do that. In my mind, the concept is much more straightforward. Goldman ends the title of his piece with a question mark — but it should be a period.
It’s not a question of “if” Google will try to become a carrier. It’s just a matter of “when” they’ll try to.
Now, to be clear, that doesn’t mean I think they’ll actually be able to become a carrier. The biggest hurdle there has nothing to do with the technology needed, the money needed, or the expertise. Rather, the major issue would be the government. Would they allow Google, already one of the biggest corporations in the United States, to enter a new area that could extend their control (particularly in the advertising space)? Probably not. Actually, I have a feeling it might have more to do with Verizon and AT&T lobbying dollars influencing the government to block Google in such a cause.
But again, Google will try. It may be a few years from now, but it’s inevitable.
Here’s the key blurb of the CNNMoney piece, far down:
It’s not likely in the immediate future. Google’s Android is the hottest item in the mobile market, and the company relies on carriers to adopt its software and drive customers to its search site.
But it’s a real possibility down the road. The Federal Communications Commission recently failed to enact strong Net neutrality rules for the wireless community. That leaves open the option for carriers to restrict their subscribers’ access to some of Google’s offerings.
Without the net neutrality safeguards in place, the carriers will make moves to restrict certain services down the road. YouTube is one example. Google Voice is probably another. There will likely be a dozen others.
Interestingly enough, it’s none other than Google who will share a big part of the blame for this happening. Not only did they leave Android so open so as to allow for the carriers to do whatever they want, but they also teamed up with none other than Verizon to dream up the current bogus non-rules the FCC just voted to adopt for wireless access.
But what if it is just a big “keep your friends close and your enemies closer” scenario? What if Google saw teaming up with Verizon as the only way to move at least part of the net neutrality debate forward (as Google CEO Eric Schmidt has more or less stated) and realized that it was inevitable that they’d be competing with them in wireless down the road? It can’t be ruled out. And at the very least, the partnership may be a bit of bet hedging — a way to ensure continued money-making just in case they can’t enter the wireless space down the road.
Remember that Google has done some sly manipulation of the space in the past. In 2008, they put up a huge bid to buy a portion of the wireless spectrum that the FCC was opening. But Google had no intention of actually winning with that bid. Instead, they bid just enough ($4.6 billion) to ensure that the open device and application rules would be put in place on the spectrum, no matter who won the rights to control it. And who won those rights? Verizon (and AT&T to a lesser extent).
While Google and the carriers may seem all buddy-buddy now, in the not-too-distant future, they will likely be at odds with one another. The reason will be that the carriers will begin restricting what Google thinks should be open. And Google will have to make some moves to open things up once again.
Rumors of Google buying one of the smaller U.S. carriers, namely Sprint, have been around since at least 2007. Those rumors pop up every year, and they will likely only intensify going forward. One issue there is that it would only solve the U.S. problem. Of course, given the state of carrier control in this country, it is likely the problem Google will want to solve first. The other bigger issue, again, is the government blocking such a purchase.
Instead, Google may simply try to buy up chunks of spectrum from others. Or build out their white space initiative, the so-called “WiFi on steroids“. Or maybe they’ll dream up some other new technology to try to end carrier dominance. This is the company behind self-driving cars, after all.
Remember, Google is already entering the ISP game with their fiber optic broadband test. Why? Because the state of broadband in this country is pretty piss poor thanks largely to de-facto regional monopolies in place. The next, and more important step is for them to take to the skies. And for largely the same reason. And Google will try to. It’s only a matter of time. I’m just worried that like most things they’re attempting these days, it will be easier said than done.
[photo: flickr/woodleywonderworks]
robert shumake
John Roberts switches to FOX <b>News</b> | Inside TV | EW.com
John Roberts, the veteran newsman who co-hosted CNN's American Morning for three years, is joining the competition. “We are excited to welcome Jo...
Foot-and-Mouth Outbreak Spreads Through South Korea - AOL <b>News</b>
South Korea is suffering its worst-ever outbreak of foot-and-mouth disease, with the highly contagious virus spreading to farms across the country despite a nationwide quarantine effort.
Opinion: Can Oprah Help Restore Civility? - AOL <b>News</b>
Oprah began her new cable television network -- OWN -- at noon on New Year's Day, a network dedicated to the total and complete absence of mean-spiritedness.
robert shumake
John Roberts switches to FOX <b>News</b> | Inside TV | EW.com
John Roberts, the veteran newsman who co-hosted CNN's American Morning for three years, is joining the competition. “We are excited to welcome Jo...
Foot-and-Mouth Outbreak Spreads Through South Korea - AOL <b>News</b>
South Korea is suffering its worst-ever outbreak of foot-and-mouth disease, with the highly contagious virus spreading to farms across the country despite a nationwide quarantine effort.
Opinion: Can Oprah Help Restore Civility? - AOL <b>News</b>
Oprah began her new cable television network -- OWN -- at noon on New Year's Day, a network dedicated to the total and complete absence of mean-spiritedness.
robert shumake
Netflix is one of the best performing stocks this year, up 225 percent year-to-date, with a $9.3 billion market cap. But it is also priced to perfection, with a lot of short sellers hoping to profit from its fall and antsy Wall Street analysts downgrading the stock. Today, CEO Reed Hastings defended Netflix’s prospects in a very public, very detailed, and very unusual blog post on Seeking Alpha. The post was in response to a specific short seller, Whitney Tilson, who last week laid out his case against Netflix in another Seeking Alpha blog post. By addressing this one short seller, of course, Hastings is trying to address the market’s jitters as a whole, and he does a pretty convincing job of it.
Tilson raised a number of concerns, ranging from the recent resignation of Netflix’s CFO to pressures on Netflix’s margins to market saturation and increasing competition in streaming video. Hastings acknowledges that Tilson “only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix. . . . Odds are he is wrong on all of them, in my view.”
Hastings then goes on to rebut the short seller’s argument (short sellers are investors who bet against a stock). I’ll summarize each of Hasting’s counter-arguments below:
- The CFO left because he wasn’t going to become CEO anytime soon.
- The First Sale Doctrine (which allows Netflix to rent DVDs after purchasing them) may be under attack, but it won’t change in 2011. And Netflix’s video streaming business is growing so fast that by the time it does have any impact on DVD costs, it won’t matter anymore.
- Internet bandwidth costs should continue to decline, and while ISPs might like to charge content providers for data, that won’t happen in 2011.
- Free cash flow has taken a hit because of the increased payments Netflix is making to media companies and content owners, but Netflix will begin smoothing that out on a quarterly basis instead of taking big hits once a year.
- Market saturation in streaming video over the Internet is not yet an issue. Market demand is still accelerating.
- Criticisms about “weak content” are not supported by subscriber’s voracious appetite for what Netflix has to offer, but Netflix is trying to get better movies and TV shows all the time.
- Content costs are going up, but postage costs are going down as viewers shift to streaming.
- If necessary, Netflix will take a hit to growth before taking a hot to margins. ”Management at Netflix largely controls margins, but not growth.”
- Netflix is facing a growing number of competitors in streaming video, but it maintains advantages in scale and brand.
- TV Everywhere could become a long-term threat, but it is more of a defensive move fro the cable companies rather than a new profit engine.
- International expansion could have an impact on margins in the short term
Let’s drill down further into some of these issues. Netflix is obviously betting big on the transition to streaming video. The more it can get subscribers to watch streams instead of DVDs, the more it saves on postage. On the flip side, video content owners are demanding more money for those streaming rights. Hastings thinks that concerns about too many streaming services coming online is overblown at this point:
Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.
And while a major new streaming competitor could come in and blow away Netflix’s lead, Hastings makes the case that Netflix has a huge competitive advantage when it comes to the number of existing paying subscribers and its cost to acquire new ones:
For a competitive firm to materially hurt our growth, they have to have some positive differentiator (price, additional content, integration, etc.), and then they have to market their service effectively. This wild-card of major new competitor offering great content and marketing aggressively is the single best near-term short thesis, but no one knows if it will happen in 2011.
The core competitive barrier for direct competitors is brand/subscriber-evangelism. Our large subscriber base is very happy with Netflix, and tells their friends about Netflix. That means that the cost of acquiring the incremental 1m subscribers is lower for us than for a competitor, and thus our net additions are higher
Finally, in terms of the quality of the movies and TV shows Netflix makes available for streaming versus what people get on cable TV, Hastings points out:
. . . at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.
The key question is whether some combination of Netflix, Hulu Plus, YouTube, Google TV and other Internet video services will some day effectively replace the cable TV experience. And if it can, whether that combination will cost more or less than the $80 or more people pay for cable today. But remember, people are already paying for Netflix, which helps Hasting’s case.
Whether or not the stock will keep going up is another question entirely. At $178 a share, would you buy or short the stock?
CNNMoney published an interesting piece by David Goldman this morning entitled, Google: Your new phone carrier? In it, Goldman lays out what he sees as the preliminary steps Google has taken to become a wireless carrier themselves down the road. He also gives some reasons for why they would and would not want to do that. In my mind, the concept is much more straightforward. Goldman ends the title of his piece with a question mark — but it should be a period.
It’s not a question of “if” Google will try to become a carrier. It’s just a matter of “when” they’ll try to.
Now, to be clear, that doesn’t mean I think they’ll actually be able to become a carrier. The biggest hurdle there has nothing to do with the technology needed, the money needed, or the expertise. Rather, the major issue would be the government. Would they allow Google, already one of the biggest corporations in the United States, to enter a new area that could extend their control (particularly in the advertising space)? Probably not. Actually, I have a feeling it might have more to do with Verizon and AT&T lobbying dollars influencing the government to block Google in such a cause.
But again, Google will try. It may be a few years from now, but it’s inevitable.
Here’s the key blurb of the CNNMoney piece, far down:
It’s not likely in the immediate future. Google’s Android is the hottest item in the mobile market, and the company relies on carriers to adopt its software and drive customers to its search site.
But it’s a real possibility down the road. The Federal Communications Commission recently failed to enact strong Net neutrality rules for the wireless community. That leaves open the option for carriers to restrict their subscribers’ access to some of Google’s offerings.
Without the net neutrality safeguards in place, the carriers will make moves to restrict certain services down the road. YouTube is one example. Google Voice is probably another. There will likely be a dozen others.
Interestingly enough, it’s none other than Google who will share a big part of the blame for this happening. Not only did they leave Android so open so as to allow for the carriers to do whatever they want, but they also teamed up with none other than Verizon to dream up the current bogus non-rules the FCC just voted to adopt for wireless access.
But what if it is just a big “keep your friends close and your enemies closer” scenario? What if Google saw teaming up with Verizon as the only way to move at least part of the net neutrality debate forward (as Google CEO Eric Schmidt has more or less stated) and realized that it was inevitable that they’d be competing with them in wireless down the road? It can’t be ruled out. And at the very least, the partnership may be a bit of bet hedging — a way to ensure continued money-making just in case they can’t enter the wireless space down the road.
Remember that Google has done some sly manipulation of the space in the past. In 2008, they put up a huge bid to buy a portion of the wireless spectrum that the FCC was opening. But Google had no intention of actually winning with that bid. Instead, they bid just enough ($4.6 billion) to ensure that the open device and application rules would be put in place on the spectrum, no matter who won the rights to control it. And who won those rights? Verizon (and AT&T to a lesser extent).
While Google and the carriers may seem all buddy-buddy now, in the not-too-distant future, they will likely be at odds with one another. The reason will be that the carriers will begin restricting what Google thinks should be open. And Google will have to make some moves to open things up once again.
Rumors of Google buying one of the smaller U.S. carriers, namely Sprint, have been around since at least 2007. Those rumors pop up every year, and they will likely only intensify going forward. One issue there is that it would only solve the U.S. problem. Of course, given the state of carrier control in this country, it is likely the problem Google will want to solve first. The other bigger issue, again, is the government blocking such a purchase.
Instead, Google may simply try to buy up chunks of spectrum from others. Or build out their white space initiative, the so-called “WiFi on steroids“. Or maybe they’ll dream up some other new technology to try to end carrier dominance. This is the company behind self-driving cars, after all.
Remember, Google is already entering the ISP game with their fiber optic broadband test. Why? Because the state of broadband in this country is pretty piss poor thanks largely to de-facto regional monopolies in place. The next, and more important step is for them to take to the skies. And for largely the same reason. And Google will try to. It’s only a matter of time. I’m just worried that like most things they’re attempting these days, it will be easier said than done.
[photo: flickr/woodleywonderworks]
robert shumake detroit
robert shumake
John Roberts switches to FOX <b>News</b> | Inside TV | EW.com
John Roberts, the veteran newsman who co-hosted CNN's American Morning for three years, is joining the competition. “We are excited to welcome Jo...
Foot-and-Mouth Outbreak Spreads Through South Korea - AOL <b>News</b>
South Korea is suffering its worst-ever outbreak of foot-and-mouth disease, with the highly contagious virus spreading to farms across the country despite a nationwide quarantine effort.
Opinion: Can Oprah Help Restore Civility? - AOL <b>News</b>
Oprah began her new cable television network -- OWN -- at noon on New Year's Day, a network dedicated to the total and complete absence of mean-spiritedness.
robert shumake
John Roberts switches to FOX <b>News</b> | Inside TV | EW.com
John Roberts, the veteran newsman who co-hosted CNN's American Morning for three years, is joining the competition. “We are excited to welcome Jo...
Foot-and-Mouth Outbreak Spreads Through South Korea - AOL <b>News</b>
South Korea is suffering its worst-ever outbreak of foot-and-mouth disease, with the highly contagious virus spreading to farms across the country despite a nationwide quarantine effort.
Opinion: Can Oprah Help Restore Civility? - AOL <b>News</b>
Oprah began her new cable television network -- OWN -- at noon on New Year's Day, a network dedicated to the total and complete absence of mean-spiritedness.
robert shumake detroit
There are many articles related to the subject of making money online. Some of them offer good advice and tips, but most of them are just written by people who are trying to get others to sign up under their referral links; and some of them are just flat-out scams. I believe that if you truly want to make money online, you must truly be an internet junkie.
I have been addicted to the internet for almost four years. I spend most of my time sitting at my desk, facing a computing screen, and I enjoy it very much. I have always searched for opportunities to make money online, but mostly have only come across "get rich quick" scams that don't work. Well, a couple of months ago I started finding money making opportunities online that actually work. In the past, I would search for jobs/tasks that I could do from my computer, and be paid for over the internet. Of course, that always yielded nothing more than "paid to surf" programs and "paid to fill out surveys" stuff; you know the kind of garbage I'm talking about.
To clear this up, once and for all; "paid to surf," "paid to read emails," "paid to take surveys," and "paid to click ads" programs DO NOT WORK! Sure, maybe if you spend 24 hours a day reading emails for thirty different companies, you might make $100 a week, but is that really how you want to spend your time? Even worse, do you really want to keep track of getting paid from all those companies?
If you want to successfully make money online, you have to find websites that will pay you to do what you're already doing. That's it, that's the big secret. AC is the perfect example because they pay writers to write. Sites like MySpace, YouTube, and IMdb thrive on user-created content. The only problem with these sites is that they don't pay users for their contributions, and keep the millions of dollars in advertising revenue for themselves. The industry is changing, however.
If you find that you spend most of your time writing blogs, join a site like Associated Content. Associated Content will pay you for the articles you submit. They will even split ad revenue with you, too. If you spend most of your time online promoting your original photos, music, and videos, join a site like Spymac. Spymac is like MySpace, except they will give a percentage of their advertising revenues to the most active and popular users each day. If you love posting your original short videos and films on YouTube, post them on MetaCafe instead. MetaCafe will pay $10,000 to the owner of any original video(s) that receives 2,000,000 views! Think about it, if you post 100 videos on MetaCafe, and over the course of a year, each one of those videos gets viewed 20,000 times, you'll earn $10,000! Sure, it might take a few months of work to get that many videos uploaded, but it's worth cashing in on that kind of money in the end.
Another unique way I started making money online, was by creating a record label that focused primarily on digital sales. I did this because I was already spending lots of time selling my own music online, and I knew how the system worked. That's the point I'm trying to make; stick to what you like and what you're good at. If you're looking for ways to earn a living via the internet, it is probably because you're sick and tired of doing menial tasks for someone else, in exchange for little compensation. So, why would you waste your time filling out surveys or clicking on ads? Do you really think that you're going to enjoy that? Do you really think some company is going to pay you anything substantial for such a simple task?
As of lately, I've been actively contributing to the aforementioned sites, as well as, running my own company, and I'm making some pretty decent scratch. I won't lie to you by telling you I'm rich. I'm not rich. But at the pace I'm going, I will probably net $30,000+ by the end of this year. If you were to ask me how many hours I work each day, I really couldn't tell you, because I'm getting paid to do all the stuff I would normally do. If you don't like uploading original content to the internet and promoting it, then you probably are never going to make money online; but if you do, then there are lots of opportunities.
robert shumake detroit
John Roberts switches to FOX <b>News</b> | Inside TV | EW.com
John Roberts, the veteran newsman who co-hosted CNN's American Morning for three years, is joining the competition. “We are excited to welcome Jo...
Foot-and-Mouth Outbreak Spreads Through South Korea - AOL <b>News</b>
South Korea is suffering its worst-ever outbreak of foot-and-mouth disease, with the highly contagious virus spreading to farms across the country despite a nationwide quarantine effort.
Opinion: Can Oprah Help Restore Civility? - AOL <b>News</b>
Oprah began her new cable television network -- OWN -- at noon on New Year's Day, a network dedicated to the total and complete absence of mean-spiritedness.
robert shumake
robert shumake detroit
Netflix is one of the best performing stocks this year, up 225 percent year-to-date, with a $9.3 billion market cap. But it is also priced to perfection, with a lot of short sellers hoping to profit from its fall and antsy Wall Street analysts downgrading the stock. Today, CEO Reed Hastings defended Netflix’s prospects in a very public, very detailed, and very unusual blog post on Seeking Alpha. The post was in response to a specific short seller, Whitney Tilson, who last week laid out his case against Netflix in another Seeking Alpha blog post. By addressing this one short seller, of course, Hastings is trying to address the market’s jitters as a whole, and he does a pretty convincing job of it.
Tilson raised a number of concerns, ranging from the recent resignation of Netflix’s CFO to pressures on Netflix’s margins to market saturation and increasing competition in streaming video. Hastings acknowledges that Tilson “only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix. . . . Odds are he is wrong on all of them, in my view.”
Hastings then goes on to rebut the short seller’s argument (short sellers are investors who bet against a stock). I’ll summarize each of Hasting’s counter-arguments below:
- The CFO left because he wasn’t going to become CEO anytime soon.
- The First Sale Doctrine (which allows Netflix to rent DVDs after purchasing them) may be under attack, but it won’t change in 2011. And Netflix’s video streaming business is growing so fast that by the time it does have any impact on DVD costs, it won’t matter anymore.
- Internet bandwidth costs should continue to decline, and while ISPs might like to charge content providers for data, that won’t happen in 2011.
- Free cash flow has taken a hit because of the increased payments Netflix is making to media companies and content owners, but Netflix will begin smoothing that out on a quarterly basis instead of taking big hits once a year.
- Market saturation in streaming video over the Internet is not yet an issue. Market demand is still accelerating.
- Criticisms about “weak content” are not supported by subscriber’s voracious appetite for what Netflix has to offer, but Netflix is trying to get better movies and TV shows all the time.
- Content costs are going up, but postage costs are going down as viewers shift to streaming.
- If necessary, Netflix will take a hit to growth before taking a hot to margins. ”Management at Netflix largely controls margins, but not growth.”
- Netflix is facing a growing number of competitors in streaming video, but it maintains advantages in scale and brand.
- TV Everywhere could become a long-term threat, but it is more of a defensive move fro the cable companies rather than a new profit engine.
- International expansion could have an impact on margins in the short term
Let’s drill down further into some of these issues. Netflix is obviously betting big on the transition to streaming video. The more it can get subscribers to watch streams instead of DVDs, the more it saves on postage. On the flip side, video content owners are demanding more money for those streaming rights. Hastings thinks that concerns about too many streaming services coming online is overblown at this point:
Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.
And while a major new streaming competitor could come in and blow away Netflix’s lead, Hastings makes the case that Netflix has a huge competitive advantage when it comes to the number of existing paying subscribers and its cost to acquire new ones:
For a competitive firm to materially hurt our growth, they have to have some positive differentiator (price, additional content, integration, etc.), and then they have to market their service effectively. This wild-card of major new competitor offering great content and marketing aggressively is the single best near-term short thesis, but no one knows if it will happen in 2011.
The core competitive barrier for direct competitors is brand/subscriber-evangelism. Our large subscriber base is very happy with Netflix, and tells their friends about Netflix. That means that the cost of acquiring the incremental 1m subscribers is lower for us than for a competitor, and thus our net additions are higher
Finally, in terms of the quality of the movies and TV shows Netflix makes available for streaming versus what people get on cable TV, Hastings points out:
. . . at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.
The key question is whether some combination of Netflix, Hulu Plus, YouTube, Google TV and other Internet video services will some day effectively replace the cable TV experience. And if it can, whether that combination will cost more or less than the $80 or more people pay for cable today. But remember, people are already paying for Netflix, which helps Hasting’s case.
Whether or not the stock will keep going up is another question entirely. At $178 a share, would you buy or short the stock?
CNNMoney published an interesting piece by David Goldman this morning entitled, Google: Your new phone carrier? In it, Goldman lays out what he sees as the preliminary steps Google has taken to become a wireless carrier themselves down the road. He also gives some reasons for why they would and would not want to do that. In my mind, the concept is much more straightforward. Goldman ends the title of his piece with a question mark — but it should be a period.
It’s not a question of “if” Google will try to become a carrier. It’s just a matter of “when” they’ll try to.
Now, to be clear, that doesn’t mean I think they’ll actually be able to become a carrier. The biggest hurdle there has nothing to do with the technology needed, the money needed, or the expertise. Rather, the major issue would be the government. Would they allow Google, already one of the biggest corporations in the United States, to enter a new area that could extend their control (particularly in the advertising space)? Probably not. Actually, I have a feeling it might have more to do with Verizon and AT&T lobbying dollars influencing the government to block Google in such a cause.
But again, Google will try. It may be a few years from now, but it’s inevitable.
Here’s the key blurb of the CNNMoney piece, far down:
It’s not likely in the immediate future. Google’s Android is the hottest item in the mobile market, and the company relies on carriers to adopt its software and drive customers to its search site.
But it’s a real possibility down the road. The Federal Communications Commission recently failed to enact strong Net neutrality rules for the wireless community. That leaves open the option for carriers to restrict their subscribers’ access to some of Google’s offerings.
Without the net neutrality safeguards in place, the carriers will make moves to restrict certain services down the road. YouTube is one example. Google Voice is probably another. There will likely be a dozen others.
Interestingly enough, it’s none other than Google who will share a big part of the blame for this happening. Not only did they leave Android so open so as to allow for the carriers to do whatever they want, but they also teamed up with none other than Verizon to dream up the current bogus non-rules the FCC just voted to adopt for wireless access.
But what if it is just a big “keep your friends close and your enemies closer” scenario? What if Google saw teaming up with Verizon as the only way to move at least part of the net neutrality debate forward (as Google CEO Eric Schmidt has more or less stated) and realized that it was inevitable that they’d be competing with them in wireless down the road? It can’t be ruled out. And at the very least, the partnership may be a bit of bet hedging — a way to ensure continued money-making just in case they can’t enter the wireless space down the road.
Remember that Google has done some sly manipulation of the space in the past. In 2008, they put up a huge bid to buy a portion of the wireless spectrum that the FCC was opening. But Google had no intention of actually winning with that bid. Instead, they bid just enough ($4.6 billion) to ensure that the open device and application rules would be put in place on the spectrum, no matter who won the rights to control it. And who won those rights? Verizon (and AT&T to a lesser extent).
While Google and the carriers may seem all buddy-buddy now, in the not-too-distant future, they will likely be at odds with one another. The reason will be that the carriers will begin restricting what Google thinks should be open. And Google will have to make some moves to open things up once again.
Rumors of Google buying one of the smaller U.S. carriers, namely Sprint, have been around since at least 2007. Those rumors pop up every year, and they will likely only intensify going forward. One issue there is that it would only solve the U.S. problem. Of course, given the state of carrier control in this country, it is likely the problem Google will want to solve first. The other bigger issue, again, is the government blocking such a purchase.
Instead, Google may simply try to buy up chunks of spectrum from others. Or build out their white space initiative, the so-called “WiFi on steroids“. Or maybe they’ll dream up some other new technology to try to end carrier dominance. This is the company behind self-driving cars, after all.
Remember, Google is already entering the ISP game with their fiber optic broadband test. Why? Because the state of broadband in this country is pretty piss poor thanks largely to de-facto regional monopolies in place. The next, and more important step is for them to take to the skies. And for largely the same reason. And Google will try to. It’s only a matter of time. I’m just worried that like most things they’re attempting these days, it will be easier said than done.
[photo: flickr/woodleywonderworks]
robert shumake detroit
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robert shumake detroit
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