Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
7investing lead advisors Anirban Mahanti and Simon Erickson teamed up with TheStreet's Managing Editor (and former 7investing advisor) Dan Kline in a special "Netflix's Past, Present, and Future" discussion. The three describe what it was that made Netflix so special, what present challenges it faces, and whether they believe it will ultimately solve its current issues in the future.
April 28, 2022 – By Simon Erickson
Netflix (Nasdaq: NFLX) shareholders are having a rough April. The stock has gone into a freefall and has now sold off more than 50% during the past month. The common consensus believes this is due to a drop in its paying subscriber count, as well as an admission that competition from Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), and Disney (NYSE: DIS) is heating up.
Netflix has been a one-trick pony thus far. Its revenue has been entirely tied to its global subscriber count, and also the regional pricing that it charges those subscribers.
But things are getting more interesting now. Netflix is attempting to monetize its freeloaders, who are getting the service for free by using the login details of others. It’s also considering a lower-priced, ad-supported tier for potential subscribers who don’t want to pay their standard rates.
The stock market is always forward-looking, and everything that has happened this past month is now in the rear-view mirror. Ultimately, investors must now answer the question of whether Netflix at an $85 billion market cap is a good opportunity going forward?
To answer that question, 7investing lead advisors Anirban Mahanti and Simon Erickson teamed up with TheStreet’s Managing Editor (and former 7investing advisor) Dan Kline in a special “Netflix’s Past, Present, and Future” discussion. The three describe what it was that made Netflix so special, what present challenges it faces, and whether they believe it will ultimately solve its current issues in the future.
Publicly-traded companies mentioned in this interview include Amazon, Disney, and Netflix. 7investing’s advisors and/or guests may have positions in the companies that are mentioned.
This discussion was originally recorded on Twitter Spaces on April 20, 2022.
Simon Erickson 0:01
You know, it’s really an interesting one to kick this off. Netflix (NASDAQ: NFLX) is the world’s largest subscription based streaming company, it’s in approximately 222 million households. And it’s got a $100 billion market cap. However, as awesome as Netflix has been, and it’s one of the world’s best performing stocks up until recently. Up 4,000% over the past decade for shareholders, it used to be a $150 billion company just yesterday. We’ve seen now today a 35% drop in Netflix’s market cap and share price just today.
And there are some legitimate concerns rising and kind of the immediate reaction to this has been that there’s increasing competition. And Netflix is guiding for its subscriber count to decrease by about 2 million subscribers quarter over quarter for the upcoming quarter.
And so this is really going to be an interesting conversation, we’re going to frame it as JT just mentioned as the Past, the Present, and the Future of Netflix. As he said, my name is Simon Erickson. I’m the founder and CEO of www.7investing.com. Every single month, we have our advisors that pick our seven favorite stock market opportunities and we publish them to our subscribers. You can find out more at www.7investing.com/subscribe.
But I’m really, really blessed and honored to be joined by two fantastic guests on the program here today as we’re talking about Netflix. The first is our very own lead advisor Anirban Mahanti joining from Sydney, Australia. So thank you, Anirban, for joining at 6am your time. In addition to being a lead advisor, you have a really good perspective on Netflix, because Anirban you have a PhD that was focused on on-demand streaming protocols, as I understand it, that built along the backbone of what Netflix does as a company.
Anirban Mahanti 1:54
Yeah, that was a while back, I worked on basically what people call scalable streaming protocols. So the idea was to concurrently deliver streams, video streams, to 1000’s of people. Back in the day when I was working on this for my dissertation, back in the late 1990’s and early 2000’s. You could imagine the internet didn’t have as much broadband capacity. The server side, you had to worry about server bandwidth, because how do you manage server bandwidth when 1000’s of people want to watch the same thing. You know, how do you manage even things like disk bandwidth?
Those were real problems. The internet was lossy. And there was a lot of work going on and a lot of academic work. And as I hinted in this article, which people can read, but just a little historical perspective. IBM (NYSE: IBM) was in the forefront, IBM did some of the coolest work in that space. The academics did some of the coolest work. We did some of the coolest work in that space. But none actually launched a company. Yeah, we didn’t launch a company. IBM didn’t do streaming. And really streaming at scale got left to Netflix, YouTube (NASDAQ: GOOGL) for user generated content and Amazon Prime (NASDAQ: AMZN).
But I’ll stop there. Because we’ve got Dan Kline as well. So let’s do the introductions first, and then we can chat.
Simon Erickson 3:14
That’s perfectly. Anirban, I’ll hand it right back over to you in just a minute to chat about the kind of the past and how Netflix became so awesome. But before we get to that, I would like to also introduce Dan Kline, as you mentioned. He is the managing director of the TheStreet.com. He’s somebody who’s covered the media industry for several decades. I’ve loved following his coverage of Netflix. And Dan I checked your resume and says it used to be a lead advisor at 7investing as well.
Dan Kline 3:36
I did and Simon gave me a promotion. I am the managing editor, managing director sounds more impressive. But yeah, I’ve been following Netflix from the beginning. And the problem is, if you go back to the beginning, being first gives you a lot of advantages. It also makes you lazy in a lot of ways. If you’re first and it’s a good idea, everyone wants you. But your competitors as they come along, they can refine, they can do it better. And I haven’t seen a lot of change from Netflix. They’re sort of doing it as they always did. And I will say, and this is jumping ahead a little bit. I do not buy the $2 million negative guidance. Netflix has always given sort of very conservative guidances. I would bet a sizable amount that next quarter, they will shockingly beat those estimates, because that has has largely been the Netflix way.
Simon Erickson 4:26
Absolutely. And we’re gonna jump into a lot of those things that Dan was just chatting about and kind of the “present” of Netflix. It’s definitely got some challenges facing it right now. And then in the third section, we’re all going to, all panelists are going to get together and chat about what are these issues that they’re facing? And also can Netflix actually fix them? Is there actually a way forward that looks good for investors? And after this 35% sell off, with a market cap of $100 billion, is Netflix a buy or is this a falling knife that we want to stay away from?
We’re gonna chat about that as a group. We’d also love to hear some questions or thoughts from anyone who’s tuning into the show as well, we’ll open it up to the audience and JT can moderate that.
But maybe Anirban, let me hand the floor to you first, because you did a fantastic interview for Ausbiz just recently. You wrote a fantastic article that’s on www.7investing.com. Tell us a little bit about how Netflix became the behemoth of a company than it is today.
Anirban Mahanti 5:21
Yeah, I love this topic. Because there’s a lot of history and a lot of learning by thinking about the history here. So as I just said, academics did a lot of the cool work here. IBM did a lot of cool work. And none of them actually did a company. Around 2007 Netflix was actually. Sorry around 1997 Netflix was basically founded. What is interesting is that around the same time, Time Warner actually was running one of the largest trials at that time for on demand video streaming in Orlando.
Okay, so they had like, fiber laid down or whatever, HFC laid down, and they were doing the streaming to several, probably several hundred households for video on demand. And then they declared that a success, but then stopped. And then basically, the reason for stopping, which is interesting, is that they said. Well, we’re gonna focus on the web, right? The web was a big deal at that time. And that was a good call, except that they didn’t really do anything about it.
Netflix, on the other hand, in 1997, was founded, they basically set up a website and basically became a DVD mailing service with this idea that well, we’re not charging a late fee, as long as, you can’t really order the next lot of DVDs or next two DVDs unless you have returned the previous DVDs. And, so it was a DVD mailing service, right?
But one of the great things with Netflix has always been the ability to pivot. And by that what I mean is, they are good, they were really good. And Reed Hastings and team were really good at spotting opportunities. So there’s an example, around 2007, they were the first one’s, among the first one’s, to actually do an on-demand streaming service on the internet. And this is in 2007, this was really a hard challenge. This is still five, six years after the core research had been done. There was more broadband penetration, but still, it was really a hard thing to do. So they got a small catalog of content, and started streaming.
Now, if you look, if I set the historical stage at that time. Really streaming was really small, like, in terms of its market opportunity. At that time cable television was really big, studios had, studios produced content, they gave some to cable TV, they gave some to theaters, or theater releases. And so they had different ways of monetizing this was really a new way of monetizing content for the studios or content owners, so those people who had the IP for content, so this was great. Another new way for us to make money we’ll give Netflix some content.
So what’s interesting is that Netflix even had Disney’s (NYSE: DIS) content. And, and Marvel’s content and Star Wars content for a long, long time, because those guys considered Netflix as an opportunity to leverage, another way to monetize their IP. Right? And this continued for a while and Netflix saw that, well, eventually people are gonna figure it out that on-demand is going to be the way. It’s going to supplant linear television, it’s going to supplant satellite television, it’s going to supplant all these things. So we need to really get into the into the game of making content.
So they made this transition around 2012-2013. And again, in a way Dan can speak to this a lot, because there’s a lot of clever things that happen in the, what is original content? What’s licensed IP, and how do you distribute it. And there’s a lot of other things that happened, but let’s call it, they got into making original content. Content that they sort of were the first to broadcast out on the internet around that time.
And that was a great move, because that set them up for the challenge that was going to come. But again, 2012-2013 that happened, competition, in the true sense, never really arrived until about, I would say 2019. That’s when Disney launched that’s when Apple TV+ (NASDAQ: AAPL) launched that’s when a Peacock (NASDAQ: CMCSA) launched. That’s when Paramount launched 2019-2020. And that’s a long gap. There’s a famous Jeff Bezos line says that in tech, and if we want to call this tech, and Dan might disagree with this. And I might actually agree with his disagreement.
But in technology if you have two year lead way, that’s a long, long time. These guys had a huge lead weight. So their mantra became, let’s grab all the eyeballs we can. Let’s produce content like crazy. Let’s spend billions of dollars on content and therefore while they’re GAAP profitable, and this is accounting profit, they have accounting profits, but on a free cash flow basis they’ve been negative. They’ve been pretty much negative all the while.
Then I think what happens, I’m just speculating, I’m just painting a story. Then what happened is COVID happened, and everybody saw a surge of users running to these platforms because people had nothing, nowhere to go. They were locked in homes in many countries, you couldn’t leave your home, or three kilometers outside your home and things like that. What do you do? You watch a lot of content.
And so what happened is you had a surge of users come in, you couldn’t build new content, because you couldn’t really shoot for new movies or shows and things like that. So your content budget went down, and they made close to $2 billion of free cash flow. That’s probably the only time I’ve seen Netflix generate that kind of free cash flow. But if you juxtapose this with the fact that Disney went from like zero subscribers, to 130 or 140 million subscribers in like two years. Apple TV+ became the first streaming service to actually win an Oscar, then you see the competition, is coming alive in a big way, in different ways. If Netflix wants to claim that they are kings of content? Well, that’s hard to believe. And if you want to believe that they’re great at acquiring customers, that’s not hard to believe, because somebody else is showing how quickly they can generate content.
So Netflix is stuck in this situation where they need to grow quickly in terms of subscribers, and they need to moderate content spend, but they can’t, because that has been their sales and marketing edge.
So that’s why I think Netflix is stuck. And I think one of the things that they did, and I’ll just stop at this soon, is they didn’t pivot. So they did the pivot to streaming, they did the pivot to original content, they tried many times to pivot to other things like, interactive content, and maybe being at the intersection of gaming and streaming, and sort of reinventing the area. But they didn’t, because they actually got a bit lazy. They got a bit lazy, they saw this as a big opportunity, they saw that there’s been no competition for a long time, they got lazy.
They did a lot of technical innovations in terms of broadcasting or streaming in low bandwidth areas. Streaming where there is data rates, where you pay for data, for example, on cellular networks in places like India, low bandwidth plans, things like that. But they didn’t really innovate on, I would say, pricing, distribution, and just the modality of the experience. And I think that’s what happened to Netflix. And that’s why they’re kind of stuck now as to, well what next. And I’ll stop there and hand the floor to somebody else.
Simon Erickson 12:26
Yeah, perfect. So Dan, let me spot you up. There’s a lot of interesting stuff like Anirban just mentioned. I think two of the really important ones was just the content budget that Netflix was continually spending that was pushing them into negative free cash flows. But then also the competition that he mentioned. So bring us into the present now, where does Netflix stand in the media empire now that everybody’s adopted digital streaming now?
Dan Kline 12:49
Yeah, so here’s the problem. Think of it like an all you can eat buffet. If you’re hungry, and there’s very few choices and you get to go to even like a mediocre, like old school Vegas, or even a Golden Corral all you can eat buffet, you’re gonna stuff your face. And that was Netflix in the early days. They were throwing shows at the wall. They’re like, Will Smith battles and Orc, like sure, whatever. Like, Fred Savage and his college friends who cares like 17 shows that nobody watches. They just threw everything at the wall. And because you didn’t have a lot of choice, it made sense. And it seemed great.
Well, here’s the problem now. I’m a Disney+ subscriber. Disney+ puts out only shows I want to watch. I haven’t even gotten to Moon Knight yet. But these are shows I want to watch, that my friends are watching, that people are excited about. They also have some of that archival programming, where if I’m just bored, I can watch The Simpsons. And then you have HBO plus [Max] (NASDAQ: WBD) or I don’t even remember what they call it now. But they have the HBO streaming service which has Peacemaker and has other shows that are premiere. Amazon Prime which isn’t my favorite, has The Boys and has Upload and has other things that just have to go in your calendar.
So if you have this big list across five or six services of things you really want to watch well how often do you go to Netflix and just be like hey, what’s on? I heard a lot of people liked Squid Game maybe I should watch that. I’m like three months behind. Heck Apple TV, I loved Foundation. You know, there’s too much good television and instead of really focusing on good television, Netflix just kept up it’s “we’re gonna have something for everybody”. And I actually asked one of my reporters today to take a look at the the highest rated by Netflix puts out how many hours people are watching. And whether those shows are actually well liked, and it’s not done yet.
But most of the shows they say everyone is watching do not have great Rotten Tomatoes ratings. Meaning sure it’s there. And if you’re at the buffet you might have like the third piece of cake just because it’s free, but you might not if you can go to Disney+, which is the fancy tiramisu, or creme brulee, or whatever it is you want.
So Netflix has been a technological innovator. But I’m not so sure a an interactive episode of Black Mirror which a good friend of mine was a big part of working on. I’m not so sure that gimmick, even though it was very cool, keeps people watching as much as if they had outbid Amazon for Lord of the Rings rights. Instead of doing 17 movies starring Ryan Reynolds that nobody can name. I think there’s a generic-ness to the content.
But there’s also, and people get so mad at me when I say this, so please keep your tweets to yourself, they have a fundamental flaw in their delivery strategy. They have stuck with the “we are going to take a season of a new show, and we’re going to put it out there all at once”. I know they’ve made some exceptions to it. But that is largely what they do. So what happens. A new season of Stranger Things comes out. It gets 24 hours, 72 hours, maybe of publicity. And then you never know when you can talk with your friends about it.
Whereas when Mandalorian was out, or Boba Fett, I had an unwritten rule with my co workers that if it came out on Friday, you had to watch it by Monday, or people might talk about it at work. Well, those shows as they come out on a week by week basis, also get publicity every week. You get Entertainment Weekly, and the Ringer, and all these other pop culture and comic book sites, writing about these things, whereas most Netflix shows just disappear. And it doesn’t give it that pop culture zeitgeist that can make something popular that wasn’t. It doesn’t give it a chance to build. Even network television, which is quick to cancel, will put a new sitcom on and give it 10 or 12 weeks for people to maybe find it. And if they do, they might go back and watch the old episodes.
In this case, Netflix is throwing money away by putting out these shows that no one’s seeing. And they’re kidding themselves with these, like how many minutes people watched. Because I don’t think anyone’s enjoyably watching a lot of these things. They’re just background filler, and they’re saving those episodes of Foundation or The Boys or whatever it might be, for when they’re really engaged and watching television. Netflix has to pivot its content strategy
I’ll say one more thing. The other problem is they’ve been very creator friendly. And what does that lead to, it leads to indulgent crap like Bridgerton. I know there’s an audience for it, and people like it. But there’s a reason networks give show notes and rein in creators. Creative freedom is great. But it can also lead to disasters, it can lead to the last few Star Wars movies, which were not all they should have been. So there’s a lot of problems with the process. And I haven’t seen Netflix willing to address that. They never talk about cutting down their content spend and focusing on event programming. And the reality is Simon, all we have time to watch is event programming.
Simon Erickson 17:45
These are all fantastic points. Even with more and more content, there’s only 24 hours in the day. And you can only dedicate so many hours to watching entertaining programming or even not entertaining programming. As you mentioned, Anirban points out that Netflix has had some issues with its distribution, and innovating in the distribution side of things. Dan just pointed out that it needs to have some some fixes to its delivery strategy from this binging of shows over the weekend, and then you forget about them a couple of days or weeks later. And it doesn’t really have a very focused content strategy.
And now I want to progress to the future, I want us to all talk again, about what Netflix can do as potential options to get back on the right track for investors. Now, one of the things that Reed Hastings mentioned on the conference call, which is something he’s really shied away from, in the past, for the most part, was the possibility of an advertising tolerant subscription tier. He says, and I quote, “but think of us as quite open to offering even lower prices with advertising as a consumer choice”.
Now, of course, Netflix in the past has been only a subscription model. That’s how they derive their revenue. And it seems like Reed Hastings, the Chief Executive Officer of the company is opening the idea of monetizing this platform, and all of the streaming hours that goes into it to advertising. And of course, this is a different model, right? If we’re going to be declining subscriptions from 222 million subscribers this quarter to potentially 220 or lower in the upcoming quarter, you’ve got to offset that somewhere. There’s got to be a story for investors going forward. But the total number of streaming hours on a year over year comparison continues to grow, streaming versus traditional cable or linear television.
So I want to open this up to either Dan or Anirban, whichever of you would like to speak first on it. But what do we think about the idea of an advertising supported Netflix tier at a lower price point?
Dan Kline 19:33
So I’ll jump in very quickly, because I’m gonna say something I think in your mind might want to talk about. I think that model might make sense in parts of the world where pricing matters. That pricing has been a huge issue for Disney in India. Pricing in Japan can be a problem. But in the US, cutting your price is repeating the mistakes of Peloton (NASDAQ: PTON) and Under Armour (NYSE: UAA) where you undervalue your product.
This is supposed to be a premium product and where they’ve lost focus is not making it a premium. What’s the last event that you were really, I know people will say Bridgerton Season 2. But like, I don’t feel like there’s the level of excitement for almost anything they have, the way there was when they had Oranges is the New Black, when they had the the one that Kevin Spacey was in that we’re not allowed to talk about anymore.
Those days are kind of over and they need to, Apple doesn’t cut its prices it gives you a better product. And we saw Peloton cut its prices made it less special. Lululemon (NASDAQ: LULU) doesn’t cut their prices. Under Armour did and they undercut their brand. I would like to see a retrenching. Just make really good content. And then after Anirban talks I will throw out one crazy idea that I think they should pursue.
Anirban Mahanti 20:46
Yeah, I think I’m with Dan on that. I think, so if you think about the streaming addressable market, and you think that they’ve sort of saturated North America. North America is like, like the price capital in terms of how you can charge people and how willing people are to open their wallet. That’s not true for many parts of the emerging market. It’s actually not true for many parts of Europe. There are a lot more price conscious consumers in those parts of the world.
So I think advertising and having an ad supported tier will actually help. I’ll go as far as to say, that if you think about India, maybe at like, charge $1 or something, maybe you can still expect some revenue. But maybe a free tier that is completely ad supported for that market might actually be a better idea than even trying to charge something for it. Or maybe you can have a system with the amount of ad that gets shoved at you. It’s proportionate about the money you’re willing to pay. And that might help. But yeah, I think that’s the way forward. And I’m with with Dan on that.
Simon Erickson 21:58
Dan, one more comment you wanted to make?
Dan Kline 22:06
So what is the one thing Netflix does not do? That could move the needle that people really want? I would say they need to outbid Apple or Amazon or whoever it’s going to be for NFL Sunday Ticket. And I know they say they’re not going to do it. And if it’s not Sunday Ticket, because maybe they feel they have all the subscribers they can get in the US. Maybe it’s some mix of Premier League and various, driving foreign soccer leagues. Only foreign if you live here, of course. I think they need to go to event programming and sports is event programming they really don’t have. And they’ve been very hesitant, and I get it, it’s expensive, it’s harder to do. You have to pay $10 million or $20 million to announcers like Amazon’s doing on Thursday night football.
But there’s not a lot of franchises out there. If you say like, okay, Netflix should spend a billion dollars. Well, they lost out on James Bond. I don’t know what’s out there, unless they buy Sony (NYSE: SONY), which is a hit or miss of product stuff. And I think some of the rights get weird if that was to be sold. I don’t know who else they could buy. Maybe they take NBC Universal off the hands of Comcast (NASDAQ: CMCSA) because Comcast has the second best IP after Disney.
But I don’t see what they could do besides sports. And they’ve been very hesitant to do sports. But if it was my money, I’d put a billion dollars or a couple billion into NFL Sunday Ticket. And you know you’re going to drive some memberships of people that absolutely have to have that.
Simon Erickson 23:37
Which I would be one of those Dan to see my beloved New Orleans Saints. And hopefully they’ll win a couple of games this next year, I’d be happy subscriber.
I’m gonna move on in just a second and ask both of you what you think about Netflix at $225 a share? That’s a $100 billion market cap today? Is this an opportunity? Are we optimistic about Netflix in the future? Or do we think that there’s a lot farther down, that this can still go?
But before we get there, I do want to add in one more comment, which is about the competition. Anirban, you have said on 7investing many times a quote that sticks with me and I love it, which is, “it’s very difficult to have a business that is just a feature of your competitors”. And Netflix has built its entire business around subscriptions. But when you look at its competitors, Disney doesn’t have to create its own original content. It’s got all the IP in this vault from several decades, over a century of IP that it’s already created. It can just rehash out there.
Amazon Prime subsidised by the people that are paying for a subscription to Prime and it’s just giving the content away to them for free. Over the top content, everybody who’s got content now is exploring the open internet and connected television and different ways of monetizing this. And of course, Apple, as we mentioned, is already winning awards and has very deep pockets to subsidize this as well.
I think it’s going to be challenging for Netflix, if they’re only going to rely on the subscription model. I think it almost is a must have that they expand in advertising and other ways to open up new income streams. Especially when you see that they’re guiding a loss in subscribers quarter over quarter. And on top of that, we didn’t even talk about the 100 million households that they think are sharing subscriptions right now, who aren’t actually paying for them because they’re just using the same login details. I’m of the impression that that Netflix is going to face a lot more competition, as streaming becomes more and more popular and displaces linear television.
But Dan let me come back to you, and then Anirban, I’ll come to you as well. What do you think about Netflix at today’s $100 billion market cap? Is this an opportunity? Or are we staying away from it?
Dan Kline 25:32
No, I’m staying away from it only because I don’t trust management. I think they’re facing more competition. The HBO Discovery mashup as one subscription is a really good mix of content. You’ve got all that background content, like your House Hunters, and your Diners, Drive-Ins, and Dives and stuff you can kind of put on when you’re doing something else. But then you have HBO, which has that very long history of premium content.
When they talk about pivoting, they talk about a lot of pricing stuff. Like look, do I think the 100 million people, sorry mom, that steal Netflix are going to pay up for it? Or this idea that I’d pay a few more bucks so someone else can use it. And it’s very hard to police, like I spent the weekend in the Bahamas, my wife spent the weekend in West Palm Beach. My mother uses my Netflix in Salem, Mass. How could they possibly prove that it’s not me, given how much I travel?
Like, there’s just a lot of, sort of incremental stuff they talk about when they’re not talking about the real problem. Which is like, you’re a television service that isn’t producing television I want to watch. And I’ll throw out an example. Are there ten Netflix properties bigger than Finding Nemo? Which is like the 40th most important Disney property? Like, could you do a show with Ant Man’s friends? And it’s bigger than anything Netflix has? I kind of argue you could because we all sat through a lot of really ridiculous Marvel shows that turned out to be really good. And they just don’t have that. What are they going to do, be like the monster from Stranger Things now is a talk show? I don’t want to own it because I do think they need to shake up the the executive suite. And I don’t think they’re going to do it.
Simon Erickson 27:12
How about it Anirban? How are you liking Netflix at $225 a share today?
Anirban Mahanti 27:17
Yeah, so like, that article I wrote, one of the things I was basically trying to interpret, is that if you think about if your valuation is the sum of future free cash flow. Right now, I don’t know how they get to producing a decent amount of free cash flow. Because just as Dan has said, I think their strategy of producing a huge amount of content, to then get a huge amount of eyeballs and then hope to retain them is kind of not working anymore.
But I mean, I think they’ve reached that level where it’s gonna be a really hard slog to get the new subscriber. And without the new subscriber then they don’t have the free cash flow. Can they have an ad engine that’s going to generate enough amount of? I think people excited about the ad, and I think I’m excited about it as well.
But if you just look at the ARPU per user, for a company, like say, Facebook, I mean Meta (NASDAQ: FB). You realize that the ARPU per user in the developing world is really tiny. Because I mean, the ad market there also generates low amounts of dollars compared to what the ad market does in North America. So they really have a lot of rethinking to do, if they want to be an ad based business. They’re not gonna have ads in the most lucrative market. Right? So it’s a little bit of a lose lose situation in that sense.
So I’m not really sure. I mean, right now, I’m with Dan, with the view that I think, this was a company that used to really be on the, thinking one step ahead of competition, and it has completely dropped the ball. It’s become like, with the co-CEO model that they’ve got, it’s become basically a media company. Right? It’s not thinking like a tech innovator anymore.
So basically, so you need to evaluate it like media company, right? I mean, how much would you you pay for it? Maybe 15 times earnings or something like that? I don’t know. 15-20 times earnings. It’s probably close enough to that point. But I don’t know. Like, I mean, something needs to change, something needs to happen for me to get interested. I mean, I was a long time shareholder from about 2011, I actually sold it when Apple TV came. To me that basically was the moment I said okay, there’s gonna be a lot more competition because Apple is never first doing these things.
And as you just said, when there’s so many people that are just bundling this. So many other people who have IP who can then stream it. It is really hard to see what’s Netflix’s moat, right. For all I know Netflix could be the new Peloton, right?
So, the mental model says that, you know it’s the first reaction is to say, oh, the price has fallen so much it must be value. But I think the price is baking in something else. And for the longest time it was baking something else, it was baking in a lot more greatness than we see. I don’t think Netflix is gonna go away. I think Netflix is gonna. I’m not saying Netflix going bankrupt. So don’t take me, don’t, my negative view does not mean that this is not a good streaming company. I think it’s going to be there. But I think valuation is going to change based on how investors think its future looks. So yeah, no, I’ll just observe it.
Dan Kline 30:26
There are also Anirban hasn’t been like wholesale cancellations. Pretty much most people where, I don’t want to say where money’s not a factor, because money is a factor for everyone. But like, I don’t know, I have Netflix and my wife watches it sometimes. And maybe if I’m traveling, I download a comedy special or something. I’m not getting rid of Netflix. And I think most people with reasonable incomes probably won’t.
But I do think there’s gonna be a lot of attrition. And I think we’re like six weeks away from a press conference where they just say Metaverse and NFT a lot. And it’s supposed to mean something because their experiments with interactive, which again, someone I went to high school with runs that division. But they’re niche little things.
And it’s like, they’ve talked a lot about games. And you’ve explained to me many times why in the Apple world why games work. I don’t think being the 75th most important mobile games player is good money spent for Netflix, when I don’t know, maybe go buy the rights to a book I read. Like I mean, Foundation, was just sitting out there and Apple did a wonderful job with it. Buy, I don’t know, George R.R. Martin’s Wildcards, which I think Hulu had the rights to. Buy Stranger in a Strange Land. There’s a lot of sci-fi out there, that isn’t actively being produced and make really good shows which Netflix used to be able to do. And I think Ted Sarandos could do it. But maybe he, maybe being the CEO, he’s more focused on that, than actually creating great content.
Anirban Mahanti 31:52
Yeah, I think I’m with you on that Dan. I don’t disagree with anything that you say. I mean, yeah, I mean, right now Netflix is a company in transition in some ways, in my view. Yes, I’m not canceling my subscription. Just another thing though, the number of times they’ve pushed a price increase. I’ve come to the point where like Netflix is, one of the issues we have with Netflix, we like to watch television, for example, like with my daughter. And for the two of us, plus my daughter to watch, Netflix really has a small narrow selection of content. They don’t really produce a lot of good family content, so to say, right?
So for family content you might have to go to Disney, or go to Apple TV+. And if you’re not watching Netflix that often, the thought of canceling it has come to my mind. But, you know, I’ve been a subscriber even before it was legal to actually, or even before they legally launched inside Australia, I had a VPN connection into the US content. I’ve been a subscriber for so long, I just feel an emotional connect, disconnect from Netflix.
So I bet a lot of consumers are like that. And if you can afford that $15-$16, or whatever they’re charging? Like, I mean, if it seems like it’s okay to spend that, then, it’s for the off chance that you’re gonna watch it once a month. Yeah, I think, again, this is a company in transition in many ways, as Dan has just indicated, Simon has mentioned, and I think, I’m just watching to see what next? Does Reed Hastings have a trick up his sleeve?
Simon Erickson 33:18
That is the question Anirban, and this is the point now. We’re winding down. So if you do have a comment you’d like to make, please request the speaker privileges from JT. He’ll get you set up. We’re taking comments from everyone. A reminder also, we will be providing this on our 7investing site as a recorded podcast, that will be at www.7investing.com/podcast. If you want to review this later on, we’re gonna have it available up there within the next day or a couple of days.
Just to chime in. I would like to echo what Anirban and Dan both said that I’m also cautious, maybe cautiously optimistic, but I’m just certainly not a super, banging my fist on the table buyer of Netflix, even at today’s prices. Their strategy has always been invest in the content, put the money to work. And I think that we have seen that content is not an oil well. This isn’t something where you go out, you spend a couple of billions of dollars and then you could just sell oil for the next 50 years, because you’ve always got a buyer for it. Free cash flows do not come easy in the entertainment industry.
And even with Netflix’s 66% stock sell off from its peak of last year, I still think that rising competition is going to put a lot of the strategy kind of under fire here. Right? When we’re asking questions of can they continue to raise prices? When you know that you’ve got other options? If you want to watch other content out there? Can they have an advertising supported tier that’s at a lower price? Will that even be successful? Or are people going to be looking to over the top connected TV content? I mean, that’s a question that we don’t know the answer to. Is there a moat to Netflix? I mean, I know that our family has jumped in and out of Netflix, when we want to watch a show like Dan was just talking about, the binge strategy. You get in, you watch it and you cancel the next month and then when something else comes up, you can always flip the switch. There’s not really a whole lot of switching costs in the entertainment world.
But okay, I think that that kind of wraps up what we wanted to talk about. If there’s anyone that would like to make a comment at this point, JT, I think that as the moderator, you might have a chance to, to grant speaker privileges. If you see anyone at this point that wants to say something, now would be the time to do so.
JT Street 35:15
Yeah, and actually, we did have a request, and I approved it. So if our speaker Daniels is on and has a question, go ahead and fire it off for our panel.
All right, thank you very much. I so much enjoyed the analysis by you guys. Actually I know what’s wrong. I was wrong with the numbers. I do understand that something was wrong with the business model. But my question to the panelists. Is there anything for long term investment that’s not really broken? You guys didn’t talk so much on that. Like, what can be the long term hook for someone who still wants to go with the stock? Is there anything left? Thank you guys so much.
Simon Erickson 35:51
Go ahead, whoever wants to take that first. The question, is there anything left to like in Netflix’s business model going forward?
Dan Kline 35:57
Yeah, of course, there is. I mean, the reality is, they are a massive company with over 200, I forget the exact number, 220 million subscribers. And that makes it a lot easier to course correct. And to fix your mistakes. This isn’t a company that lost a quarter of its subscribers. They actually gained subscribers when you factor out what happened in Russia. And you can understand why they might be shutting off subscribers in Russia right now. So there’s a lot that can be fixed here.
And look, there were points where Microsoft (NASDAQ: MSFT) was on the ropes, there were points for Disney, Apple, we’re all on the ropes. This is still a company that has this huge archive of content. And frankly, I think they fix everything with two shows a quarter you really, really care about. Which admittedly, Disney can do that forever, without buying a single thing. But I don’t think it’s crazy to think. HBO did it for a very long time with its series of The Sopranos and Sex in the City and Six Feet Under and all those great shows. I don’t see there’s any reason why Netflix couldn’t creatively turn it around. They just have to acknowledge that that’s what the problem is.
Simon Erickson 37:07
Great question Daniels. Thanks very much for that. JT, anything else? Any other any other speakers that wanted to make a comment or ask a question?
JT Street 37:16
Yeah, as a matter of fact, we do. We have a new speaker and I just approved them. So Abdul, if you’re on, go ahead and ask your question to the panel.
Yeah, I was just, my question was regarding the problem with streaming as a whole. Because I’ve been seeing like Spotify’s (NYSE: SPOT) model. And in music, the retention rates are quite higher than what you’d see in subscription based businesses like Netflix or Disney. So do you think inherently the Netflix business model relatively to music streaming is better? And how do you relatively see these both industries? And the other thing was that, do you think Netflix catering to a single sort of part of the segment, like Netflix in part of like they’re more have content more to the left side, I mean from a political perspective, you can see people are becoming more tired of Netflix from a content perspective. So how do you like to comment on that? Thank you very much for taking my questions.
Simon Erickson 38:21
Absolutely, Abdul, thanks for the question. We might shy away from the political one unless someone wants to give a broad based answer to that one. But I’ll start with the audio versus digital streaming part of your question, which I think is interesting.
I think that this is something that has caught on for, the advertising piece of this, has caught on for audio streaming much more quickly than it has for digital streaming. And what I mean by that is you’re already seeing and hearing ads all the time when you’re using Spotify. It’s very, very simple to programmatically place those within a 30 minute podcast or a short streaming audio song or something like that. This is something that CTV is really catching on to. Connected TV is now programmatically placing ads based on the viewing habits. And you can know a lot more about people, they’re watching behavior, and you know, what it is that they’ve done in the past, in terms of the TV shows that they’re watching. You get a lot more information about something like that.
And we know that the highest rates for advertising are committed by the television, where you’re very captive, you’re on your couch, and your full attention is on the screen that’s in front of you. And so I think that may be one advantage, if we can call it an advantage, of digital streaming or video streaming, as opposed to audio streaming, like the Spotify is of the world, like you mentioned. Is if you want to pursue that ad supported strategy, like Netflix has mentioned, and so many of its competitors have already taken advantage of. I think that there’s just a huge opportunity for that in the future. Dan or Anirban, if you have any thoughts on that as well. It’s a great question.
Dan Kline 39:45
I want to just jump in very quickly. Streaming music isn’t a business. It is price constrained, where no one is ever going to be happy. There’s a reason Spotify has invested heavily in podcasts and bought the Ringer. The reality is if you’re Apple, you don’t need to make money on streaming music. So it’s a great service. But you can’t raise prices when everyone else is treating it like a commodity, the artists are never going to be happy. You can’t offer much of a differentiated experience. Whereas Netflix or any of these streaming services, look, Simon and I could come along and create Anirban TV. And if we made really great TV, and streamed it, it would work and people would watch it. You can’t do that with with music, unless you’re I don’t know, maybe Taylor Swift could do it. But pretty much nobody else has the differentiated product on their own. So there, you’re just selling a commodity and gas stations don’t make money on gas, they make money selling Snickers. So I do not like Spotify or any streaming music as a pure investment in any way. Anirban?
Anirban Mahanti 40:48
I completely agree with what Dan said. Streaming is basically like the movie theaters which make money on popcorn. I mean, audio streaming, music streaming, actually, to be more specific, ya.
So, I mean, there could be some argument for, to merge something like Spotify with Netflix. Maybe you get to do something at the fringe of podcasting, and stand up comedy and things like that, maybe there’s a way to do something. I mean, I think right now, my point is that if anything they have to do, to sort of get, is either do what Dan has said, which is they need to produce really great content. An example of that is Apple, which is spending basically little money, but can make great content.
And I think, like I said, it’s claiming that you can make great content, is your upside, well, then maybe focus on that. Because great content is not equal to a lot of content. I think that’s one way and you make compelling content, make just, few every year, that should be enough to just. And then the other thing is, I think they need to get away from the binge model, right? You don’t want to actually drop everything on the first day. And it’s gonna be frustrating for people. But one way to keep people is to basically say, the favorite show you want to watch is going to be coming next week, and then next week, and then next week, right? Or maybe you just allow two to be binged at the same time, you just drop two at the same time. Those are levers that you could pull to just, create stickiness. But yeah, if anything else, really, you have to really think out of the box. Yeah, and, I’m happy to think for them if they pay me consulting fee. But they’re not paying me a consulting fee right now. Or leave it to Ted and Reid to think about.
Simon Erickson 42:37
You know, Anirban I think that there’s one more comment that I wanted to make on this. This is a great question Abdul. Because, we’ve always kind of framed this as who’s winning the video streaming wars, right. And for years, Anirban had mentioned, it was kind of the competition was against your cable provider, your linear TV provider. Netflix was against your TV broadcasting that you were picking up.
And they were quick to the internet. And of course, they figured out this new way of distributing it, and everybody gave them their content, because they were figuring it out. But we always frame this, at least when we looked at it, as kind of Comcast versus, or AT&T (NYSE: T) or whoever your provider was, versus Netflix. And now the format has changed where it’s not just about the TV that’s in your room, but it’s about your smartphone or your tablet device. And now you’ve got kind of these different things that are competing for your attention.
Maybe they are video streaming, maybe they are audio streaming, maybe it’s short form, things like TikTok and Snapchat (NYSE: SNAP) and things like this, where people don’t have the patience to sit through, a longer show, but just want to have a really quick entertaining fix from something that’s short form format. You’ve got Apple that’s got the devices. And it can have a lot of controls and levers that it pulls on what it’s giving to you. You’ve got Microsoft saying that the next big frontier is going to be gaming. And that’s why it’s going out and spending $75 billion on Activision Blizzard (NASDAQ: ATVI).
I mean, entertainment as a whole is about your attention, not necessarily the format specifically. I think Netflix is fighting a lot of different battles against a lot of different competitors that also have a lot of different business models, and are also putting their money to work in different ways. And it’s kind of a fascinating space that even extends beyond just digital streaming of video content.
And so Okay, great. I think that we’re kind of wrapping this up. You know, we’re 45 minutes in here. This has been really fantastic. It was everything that I hoped it would be. I really appreciate the perspectives of Anirban and also Dan Kline, of course if you want to follow them that’s @7amahanti (AMAHANTI) is Anirban’s twitter handle. And Dan’s is @worstideasTST he’s the managing editor over there at TheStreet also really good friend of ours at 7investing. Anirban and Dan, any final thoughts as I just appreciate, my gratitude and my thanks for joining the show here today.
Anirban Mahanti 44:53
I just want to say thank you, to both of you, for hosting this. And to JT Street. And Dan, nice to connect with you again. That’s really my final thought. It’s always a pleasure to chat.
Dan Kline 45:07
It is absolutely lovely to be on with both of you and to be in front of this audience and really happy to do it. But I will say as negative as as I am here, I think there’s a lot to save. And I don’t think it takes a ton. If you have just one show that everyone’s talking about, and I think they briefly had that with Squid Game. But the reality is, it just wasn’t a show that was that good. It was just kind of a train wreck of a thing.
But if they have something that captures everyone’s attention, and they throw a lot of money around. But if I was them, I’d cut two thirds of the shows. I’d go back to the promise of, if I’m going to start a show, I’m going to finish it, I’m going to bring it to a logical conclusion. Even if like something like Sense8, which I think is how you say that, where they made a movie at the end of it, because they canceled it and wrapped it up. I think they need to do that. I don’t watch a new Netflix show until they tell me it’s coming back. That’s the same rule I have for network television, I’m not going to get invested in something, only for it to be canceled. So I think they need to really get back to just producing really good programming, which they could do.
Simon Erickson 46:12
Well, thanks very much Anirban. Thanks very much Dan. Once again, this is kind of our Past, Present, and Future of Netflix. Our own business model here at 7investing is to do very, very thorough research, and use all of that to inform our seven top ideas in the stock market. Each and every month. You can learn more about that at www.7investing.com/subscribe. Or if you’d like to reference this podcast in the future, that’s www.7investing.com/podcast.
My name is Simon Erickson founder and CEO of 7investing. JT I’m gonna hand it back to you to close this out. I appreciate everybody for being on the show here today.
JT Street 46:47
All right, Simon, thank you so much. Also big thanks to Anirban and to Dan Kline. We really appreciate your insights and your wisdom on the wild happenings with Netflix.
If you want to join us and continue this discussion. We’ve included a link to the Discord server, the 7investing Discord server in this Spaces here. You’ll be able to see it in the comments below. Follow that, join us and we will continue this discussion on our Discord server and we look forward to talking to you there.
Thank you so much for joining us and have a fantastic afternoon everyone.
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Anirban and Matthew were joined by Alex Morris, creator of the TSOH Investment Research Service, to look at seven former market darlings that have taken severe dives from...
On episode 5 of No Limit, Krzysztof won’t let politics stand in the way of a good discussion - among many other topics!