🔒 Big guns are coming for Netflix

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LONDON — The online video-streaming service Netflix, which many or should I say most of us access for a binge watch of a favourite series or movie has had little competition over the last years. It has been the reigning media stock in the S&P 500 Index for six of the last eleven years and its gain so far in 2019 is 37%. But serious competition is coming with the announcement that Walt Disney, Apple and AT&T, which now owns WarnerMedia will begin to roll out their own Netflix-like products. And just to give you an idea of what that means; in the case of AT&T, it now has HBO in its stable which is a major draw card for viewers of “Game of Thrones”. When Apple announced its streaming service, it brought in Steven Spielberg and Oprah Winfrey for the launch. Some may say Netflix is so far ahead, it is like Usain Bolt at his best smiling for the cameras as he breaks another world record. But Laura Martin, a senior entertainment analyst at Neeham & co told Bloomberg’s Lisa Abramowicz and Paul Sweeney that Netflix could be in for serious competition
 – Linda van Tilburg

My concern about Netflix is that they’ve been monopolist with other people’s programming for most of the last seven years and now they’re going to get companies competing with them that not only have deeper pockets, but also have a lower marketing cost and a lower content cost because they own their own libraries. In the case of Disney and Warner Bros, which is now owned by AT&T, they have 50 years of programs that they’ve already paid for and amortised so it’s a lower cost of content because Netflix has to pay cash for all their original content. And then each of those companies have sister subsidiaries that they can advertise for free. Disney owns ABC. They can put their own 30-second spot telling you that Disney Entertainment exists. Netflix has to buy every single spot of paid media. So, both of those companies have a lower cost-to-content and a lower marketing cost. In the case of Apple, which spent 90 minutes sort of talking about their new streaming service: they do $50bn/year free cash-flow. Netflix spends $13bn and has to borrow $3bn of it. If actually, Apple started spending $13bn, you wouldn’t notice because they’d still have $40bn to buy in shares or pay dividends.
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Well, which raises a question because this is speculation that we’ve heard from a number of people. Could Apple end up buying Netflix? Could Netflix actually get some sort of cash infusion from a third party?

Maybe. I think it would be more likely that in the end, Apple would try to do it itself at the highest brand level and it’s much more likely that the brand consistency would be with the Walt Disney company, which they could buy and they’re similar brand strength. As you know, Bob Eiger is on the Apple board and Steve Jobs was on


So, it’s more likely that Apple would buy Disney.

And the problem with Netflix is the day you buy Netflix, you lose – Reed Hastings and Ted Sarandos – so I don’t know what you think the value of Netflix is without those top five managers that founded it 25 years ago, but it’s a lot less because those people are extraordinary and they won’t be employees because they’re going to be with billions of dollars.

So, let’s go back to that Walt Disney deal – probably the biggest M&A trade we’ve seen in the media space in a long time. I never thought I’d see Rupert Murdoch sell this company. Do you think Disney now has the assets to compete against Netflix, Amazon, Facebook, and the Apples of the world? I’ll point out that Disney has an investor meeting – April 11th where presumably, they’ll unveil some more details about their steaming business.

Yes. I do think it’s large enough because actually, content creation is a core competence of Disney. I do think you need 24/7 programming. What we’ve seen with WWE, which went first into the over-the-top streaming, is you have to have 10,000 hours in your library when you launch. Disney had all Triple A titles but it didn’t have any 10,000 hours. Now, they have that 10,000, so I think they have a really legitimate streaming service and a lot of the content that everybody’s watching on Netflix is coming off and moving to the Walt Disney Entertainment Channel, while Netflix is raising their price to you.

So, the concerns about Netflix are legitimate and there’s something that we’ve heard from other people as well. The question is: how does an investor value those risks? Right now, we’re looking at Netflix shares that are valued at $369 – give or take – and I’m just wondering where the correct value should be, given some of these pressures. They’re really coming more online now in a way that they never have before.

Well, the number that I think is the most telling is that Netflix trades at 10x revenue. Apple trades at 16x earnings. So, if you have to back one of them
 Anything that goes wrong at Netflix and you’re 10x (and the next closest thing is 8x and that’s Facebook) so it’s going to stop at 8. Disney trades at 3. So, it’s just really overvalued.

It’s interesting. One of the things about Netflix that I think has been driving the stock over the years has been the subscriber growth. So, the question is: 100m and some odd subscribers globally – that seems like a big head start, even for an Apple or a Disney. Do you think there’s room in the streaming market for multiple streamers? I mean, how many cheques are people going to be writing every month?

I think that’s actually the best question in media right now because the average home gets three over-the-top services (including skinny bundles). If you think that number stays at 3, then what happens is the incumbent Netflix, which has 60m US subs, must be losing subs to Warner or Apple, or Disney, which means its US sub-growth goes negative. Now, can you sustain a ten-multiple of revenue when your US subs are negative? Even if you can grow your international subs faster to offset, which you might not be able to
 I don’t think a growth investor can take a negative sub-growth even if it’s just in the US.

But these are a lot of ‘if’s’, right? There’s a question of the cost point too and the fact that Netflix has developed  a lot of original programming that a lot of people really like. It’s not that they’re completely reliant on Disney subscriptions. What do you think? Is there any kind of early indication of how many individual packages customers are willing to pay for?

Well, I think there’s a logical consumer behaviour. There is no incentive for you to sign up; for longer (more months) for Netflix so when Birdbox comes out and it’s a hit, you can pay $10, watch it all, turn it off, go to the Walt Disney company, watch all the stuff you want to watch, turn it off, go to Warner Bros for $10, watch it, and turn it off. You know that the marketers in the room are going to give you a discount if you buy a bundle. If you take 3 months or 6 months, they’re going to try to lock you in for longer because that’s a better business model. Netflix gives you no incentive not to come, watch what’s hot and leave after 30 days.

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