If there’s one thing this newsletter hates, it’s saying I told you so, and rubbing the world’s face in our status as the lone voice of sanity and truth.
It’s a terrible burden to have to make such pronouncements. Terrible indeed. But heavy rests the head that wears the Oracle’s beanie.
We TOLDITTOYOU!™ Damnit, while everyone else on Earth was declaring the miracle of Netflix, hailing the arrival of the thousand-year app, counting the days until all of world culture was placed under one or another VP on the Netflix flowchart, The Ankler alone was saying, Excuse me! . .
Of course, one spotty earnings report doesn’t the death of a new paradigm make. There are, TO BE SURE, plenty of strengths left at its disposal. But if it’s completely bonkers after one day’s news to declare the dominant company in entertainment doomed, it’s also not too early to start to consider, maybe Netflix is doomed.
Netflix As We Know It (NAWKI or NAWKY) anyway.
The possibility has certainly entered the consciousness anyway. In the past few weeks I’ve had more than a few conversations with finance types who consider the end of NAWKY not just possible but inevitable, which is certainly a change from what one is used to hearing on the topic.
So why doomed? Why is one little road bump something to get so dire and Book of Revelationsy about? Let’s connect the bullet points once again and see where this lies.
• MOCKING THE FATES: Clearly the folks on Mount Olympus took that NYT celebration of the App’s lobby as a direct challenge to the will of the gods. Their answer was swift and ferocious to behold. If yesterday’s report marks the day the gods turned on Netflix, the lobby story from two days earlier will clearly be the hubristic incitement. It is written that those whom the gods would destroy, they first make them the subject of a NYT interior design piece.
(More on the meaning of the story below.)
• DEBT IN THE WATER: Since ultimately, this comes down to a question of can they make enough money to keep the lights on, and the lights of a thousand shows on, let’s start with the debt. Thanks to the grand tech vision of world conquest, Netflix has not only been able to raise Wall Street money at fantasyland valuations that Disney can only dream of, it’s been able to finance its slate on billions of dollars of debt. But these valuations and debt don’t come for nothing. Debt must be paid, which means an increasing share of The App’s future income—money that could otherwise go into creating new content—will go to servicing the debt load. Word has it that the debt load is becoming explosive, building on itself in a way that threatens to swallow the budget.
• STREETS OF FIRE: Then there’s that valuation, the PE ratio multiples above anyone else in the business. A valuation like that isn’t based on the idea that one day they will run a nice little service among services. That is the investors’ bet on eternal explosive growth creating near-monopoly power to eventually control pricing; essentially that they will become to entertainment what Amazon was to the book retail business.
Given that, any slight downturn, any sign of weakness, is going to send the fairy tale up in smoke and have investors crying, “You were supposed to have been immortal. That’s all we wanted. Not much to ask for.”
When the fairy story vanishes, and investors head for the door, Netflix is left not only having to payout its debt with the money it earns from just selling subscriptions, like some kind of 19th Century pushcart peddler, but will thus have only have the wherewithal to produce much, much-reduced slate.
• WHAT IS A NETFLIX: Which brings us to the question, what is this service to its viewers? Netflix has a lot of good shows, even very good shows. It doesn’t have a lot of all-time great shows. It’s got a few critical darlings, but not only doesn’t it have its GoT, it doesn’t have its Breaking Bad, or Mad Men. Or its Office. And that’s after spending untold billions trying. But the more you watch the App’s churn, the more you feel that greatness is not the point. You don’t make a habit of launching a million new shows and canceling almost all of them after two or three seasons if you’re going for all-time great. The point is to dazzle viewers with a bunch of new, exciting things every darn time they fire it up. On that, they are very successful, and you look at what’s come out in the just the last week, and there is a rush of amazement.
So what happens if say its production funds get cut in half. And its productions get cut in half. That’s at least half less dazzling, isn’t it?
•LINE IN THE BRAND: To take the above a little further: after all the spending, thanks to this model, “A Netflix show” is a meaningless designation. It could be anything, most of it not very good. Many of the competitors coming down the pike – HBO, Showtime, FX and Disney most prominently – have built brand equity over the years and decades catering to specific demos and servicing them with an extremely high level of execution, far above the baseline. For HBO viewers, the term a “HBO Show” has real meaning, and if they are on board, it means they will probably like what the company gives them.
“A Netflix show” means nothing. The problem with being everything to everybody is you can become nothing to anybody while you’re spreading yourself so thin. So when the firehose of new stuff starts to slow, when people are getting better elsewhere, there’s very little in the world beyond habit to keep people from canceling that $15 a month line item on their credit card bill.
• WHERE IT STANDS: We’ve heard that something like 80% of Netflix eyeballs go to licensed content. And that The Office and Friends are vastly their biggest shows. This can’t be where they thought they would be after billions and billions spent. So Netflix is in this state, dependent on inflated valuations and debt to keep the engine pumping, in a time when they have essentially no competition in the App field.
But that is about to change. They are about to get competition—and lots of it. Not just Disney, but Comcast, Warners, Apple, Amazon, and Facebook. They are not just taking away Netflix’s biggest shows, but they are taking them to stream on their newly launched competitive services.
• FAMILY MATTERS: It gets worse. I’ve heard reports that somewhere in the neighborhood of 70% of Netflix viewing is done by families and children on family-related stuff. Given that, having the biggest, most beloved family brand in the history of the planet launch a competitor service that costs less, a lot less, has to be a bit worrisome.
No one knows at the moment how many services the typical cord-cutting household will be up for paying for. But there’s got to be a non-zero number of homes where the TV is basically the babysitter for the kids, who will get Disney Plus for seven dollars a month and say, “That’s great! We’re covered now.”
What percentage of the current Netflix subscribers is that? The point is, it can’t afford to lose any if the paradigm is to survive. Growth now, growth tomorrow, growth forever.