Netflix has posted more stunning results; growth all round – subscribers, revenue, stock price and, yes, debt.
The stock market, indeed business in general, is meant to be a gamble. Netflix personifies this, and its shareholders are backing its great big bet. In the relatively Wild West that is the disrupter territory of OTT, Netflix is the settler who believes land is the key. If you grab enough land everything else will take care of itself. Sure, land on its own doesn’t make money but we can worry later about what to grow on it, and we’ll be so well settled that no one will be able to take away our territory.
To say Netflix doesn’t know what to grow sounds weird, and it is a little unfair given the number of viewers and the amount of popular content. But if crops are profits, not just sales or subscribers or hours of content, then Netflix is still in the dark, or at best the half-light. I’m sure it has endless desk research to show that at X number of subscribers at Y price versus an aggregate cost per hour of content in a given period of N, there is Z amount of profit. Hurrah!
But the entertainment business is far from all logic. What happens when the rubber hits the road is incredibly difficult to predict. At what price point X versus content satisfaction Y over N territories does X become too high and churn, the flip side of subs, kick in?
What defines content satisfaction? Netflix’ own thinking has gravitated to quality – versus the quantity of its early philosophy (this is partly out of necessity, it can’t license nearly as much as it used to from competing media companies). That means vast ($8 billion in 2018) of original content spending, a big bet on creating a hit factory, as this is what it needs. Breaking Bad, House of Cards, The Crown. All brilliant but Netflix is now producing so much that for each one of them there are inevitably three Marco Polos. Broadband capacity, emerging markets and demand may be limitless, but the talent pool certainly is finite. In content you don’t simply get what you pay for; sometimes you spend a little and get a lot, often you spend a lot and get next to nothing.
And the demand itself is a problem. Part of its core philosophy has been to enable binging. Another cornerstone – like low retail pricing – that it is problematic to ditch. But it means that when Netflix does hit gold the value of that asset is burned through very quickly. Stranger Things was a great social media build to a hit – all good – but I heard a stat that in the US 26 million homes watched all its episodes between the Friday evening launch and the following Monday evening. And now they all want something else. Most makers and sellers only have to refresh their product range every few years not week after week after week.
I say I ‘heard’ a stat. That’s because – beyond subs and financials – Netflix reveals next to nothing. So, no one outside knows what is under the hood. How much is watched outside its top ten ranked programmes at any given time anywhere? Does it have broad and deep product appeal that is regarded as solid sustainable good value? Or is it a Jenga tower of hits where a couple of quarters of duds will see a fall – especially if it tries any more expansion of the price envelope?
And what about the competition? Prime has a different business model, it is the DVD basket at the end of the aisle for Amazon shopping. Even so, it is growing fast and is big competition where it matters – for great content. And now comes Apple. There are recent signs it is finally going to take TV and content seriously and, though its track record on this turf is patchy at best, what we do know is that the kind of money that looks gargantuan to a still relatively small and independent global player, to Apple is pocket change.
None of this is to say that Netflix is a bad debt, far from it, the track record of its management so far is pretty flawless. It is to say there is no such thing as a safe bet.