Should Netflix Still Be A FAANG?

 

For the last several years, securities analysts have come up with an acronym that covers what they considered to be companies that were long term growth stocks which, barring minor dips, would be superb long-term holdings.

 

The term that was coined was FAANG which stood for the following blue chip high growth companies:

 

Facebook (now Meta)

 

Amazon

 

Apple

 

Netflix

 

Google (now Alphabet)

 

Recent events may made me question, as a media analyst, whether Netflix still belongs as a member of that exclusive club.

 

 

How can this be? You may remind me that a couple of years ago in MR I stated plainly that Netflix had won the race in streaming video (See Media Realism, 2/11/19, Can Any Competitor Catch Netflix?) Well, a beauty of markets, particularly those that are relatively free, is that they are always changing.

 

Netflix is beginning to face some serious competition from Amazon, Apple TV, and Disney +. Millions are beginning to customize their video needs and, with their recent price increase, some may not include Netflix in their future plans.

 

Face it. Virtually all streaming services received a positive boost from the hellish lifestyle environment that COVID 19 gave us. Being more housebound, we watched more video and shared more favorite video ideas with friends and family. As COVID wans (we all hope), that tailwind will erode. Keep in mind that by the end of 2021, Disney + had already shattered their pre-Covid projections for subscriptions in 2025!

 

So, all services could see a slowdown in growth. Netflix received some raised eyebrows when their 8.3 million subscriber growth in 4^th quarter, 2021 was below the 8.5 million generated in the same quarter of the previous year. Still growing, for sure, but not at a FAANG type juggernaut pace. Streaming will likely take up a smaller percentage of people’s time, once we are free to socialize and travel as we did in the pre-Covid era.

 

Inflation is now at the highest levels in the US in 40 years. Money is going to get tight for many people. Do you really need to pay $15.47 per month for standalone Netflix? People may become more selective on their streaming options and Netflix could lose a few steps.

 

All streaming services suffer from “churn”. Customers order for a few months to see a specific series or two and then promptly cancel. This might hurt Netflix more than others as they do not have a balance sheet as strong as their competitors.

 

Consider both Apple and Amazon.  Apple had as much as $248 billion on their balance sheet a couple of years ago. They could lose a billion plus per year on Apple TV forever and it would not impact the company much at all. Or, how about Amazon? Their programming is getting deeper and the transmission issues of a few years ago are gone. Another sleeper with Amazon is that some minor research studies showed that many Amazon Prime subscribers did not realize that Amazon Prime Video came with their Prime subscription.

 

Anecdotally, I found this to be true. I vividly remember telling a group how much I enjoyed a certain offering on Amazon Prime Video. An earnest young lad lamented that he did not have the service. “Of course, you do, a friend chimed in. It comes as part of your Amazon Prime sub.” He smiled and said, “Wow, I get it for free.” It was my turn to smile. I wanted to tell him that only sunshine and air are free in this life, but I stressed the Prime Video was baked into the cost of his subscription. So, Amazon is getting more users as Amazon Prime grows and more people around the world use the delivery service.

 

Each year, Netflix spends a fortune on developing programming. It has run as high as $12 billion. That is a lot for any firm to handle but, keep in mind that Netflix is a one trick pony. They did not make a profit for years and many assumed that they would be another Amazon who merely plowed all revenue back into development but eventually turned the corner and profits soared. Well, Netflix is not Amazon.

 

Disney is perhaps the greatest entertainment company in history with a film library of their own work going back to the 1930’s plus ownership of ESPN, ABC, theme parks and seven movie studios. Netflix does not have nearly as many revenue sources as major competition.

 

Okay, so am I saying that Netflix is going to dry up and blow away soon? Of course not! One option might be to accept advertising. I fully realize that such a course of action sounds as if it is heresy for a firm that has been advertising free. Yet, millions might allow advertising within limits if the monthly subscription cost drop sharply (maybe 40% of current cost).

 

Also, moving into other venues such as news items or foreign sports might work as they are now in most countries across the globe.

 

My favorite media analyst, Laura Martin of Needham has discussed how the share price of Netflix has taken a big haircut from $700 to around $395 as I type. The price to earnings ratio has dropped as has its growth multiple to the entire market. She now says that “Netflix is not a growth stock anymore but a media stock.” That is a statement that this old media analyst can relate to very easily. So, perhaps the day is coming soon when the N in FAANG should be eliminated or replaced.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

 

 

 

 

 

 

 

 

 

 

The Wisdom of Crowds and the Growth of Streaming Video

 

In economics, there are many ways that analysts will tell you how markets behave. One is known as The Wisdom of Crowds. To exhibit “Wisdom of Crowds” most would say that a market needs to satisfy the following conditions:

 

1)  People involved in that specific market are quite diverse in their access to information

2)  They have opinions which can be quite independent and often do not follow the crowd or defer to others

3)  They are decentralized (sometimes globally in today’s world) so they often use local knowledge or interest

4)  Their choices or judgements tend to aggregate into a decision which appears collective although not planned.

 

Watching video growth in recent years and the broadcast and cable decline, I think a case can be made and not a big stretch at all, that the Wisdom of Crowds has accelerated the growth of viewing habits around the world.

 

To understand this, let us back up a bit. When I first entered the communications business in the early 1970’s, TV viewers did not have a great many choices. There was ABC, CBS, and CBS plus PBS and a handful of independent stations in relatively large metropolitan areas. Programs survived in Primetime (8-11 pm, EST) if they could garner a 30% share of viewing. The death rate of new programs was brutal. I did an analysis early in this century which found that approximately 72% of new programs died in the first year of telecast.

 

Cable came along as the subscriber count grew and got some traction but the progress was slow. A key variable drummed into me from my first months in advertising was not how good programming was but what was the strength of the programming that it was COMPETING against? That simple stat largely determined the lifespan of a program.

 

CBS tried a few novel and even daring approaches in the late 1980’s. Opposite the then powerful Thursday night block on NBC, they a Vietnam war drama, Tour of Duty against top rated Cosby and Family Ties. The show won awards but delivered low ratings. They stayed with it and in year three moved it to Saturday. In 1988, they put Murphy Brown up against Monday Night Football. That show clicked and had a long and successful run. Yet, advertiser support was not as strong as you might think in year one, as the competition appeared fearsome.

 

During this era of the 1970’s and ‘80’s, a concept that was popular was that of LOP which stood for Least Objectionable Programming. A network executive coined the term and essentially said that, with few choices, viewers would pivot to the Least Objectionable Programming, but they would watch television most evenings. Yes, one could curl up with a good book, but not many did.

 

Today, all that is gone. We do not worry about timeslots as with the growth of Netflix, Hulu, Amazon Prime, Apple TV and Disney + and fellow travelers it is commercial avoidance that is hurting advertiser supported programming. The quality of the advertising free content is excellent in many cases and, if you have a few streaming options, you can virtually always find something of interest to watch.

 

So, streaming continues to get stronger. One reason, and I realize some of you might consider this controversial, is the concept of the Wisdom of Crowds. Streaming fits all the criteria necessary in that kind of market activity.

 

Let’s face it—each day we have hundreds of options from programming shot all over the world. Detective dramas may be stale to US TV viewers but check out the great work as I have coming out of the UK, Ireland, Scandinavia, Canada, Australia and New Zealand. ABC, CBS, and NBC never had to compete with such programming a generation ago except for an occasional 4-6 part series on PBS’ Masterpiece Theatre (now Masterpiece). Friends recommend a program that is streaming to others and shows get legs and often get fairly quick renewals.

 

There is a lack of censorship so these streaming foreign imports can deal with mature themes that will never see the light of day on over the air TV in the states and much of the cable universe as well.

 

I see streaming continuing to grow. The power ranking of streaming options will likely shift and I plan to address that in upcoming posts. For the moment, the Wisdom of Crowds is helping streaming video options along very well.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia @gmail.com or leave a message on the blog

The Super Bowl and Sports Betting

 

As I write this, it is February 13, 2022 better know as Super Bowl Sunday. Similar to many of you, I checked in on You Tube this week and watched commercials for the upcoming Big Game. The result was a mixed bag with some real gems as usual.

 

What has gotten my attention is the forecast that nearly $8 billion will be wagered in sports books surrounding this one event. Doing a quick back of the envelope calculation, I realized that with approximately 330 million Americans, the $8 billion works out to roughly $25 wagered for each American man, woman, and child. Digging a bit deeper, I realized that the average bet had to be much higher as babies do not bet, neither do most children and importantly, most adults stand aside and do not wager at all although many will watch the game (Nielsen generally finds that 44-46% of households tune in at some point). I like to watch the game but also look at WHEN commercials run---if you only bought one 30 second spot for $6.4-7 million, you would like to be in the first quarter in case the game is a blowout. A major advertiser with several spots gets them spread across the game.

 

Back in May, 2018, after years of lawsuits and lusty lobbying, the Supreme Court lifted the Federal ban on sports betting. Since then, a majority of states have legalized it and California may soon join the fold as a referendum is on the November 2022 ballot to okay it in the Golden State.

 

According to AGA, some 79% of those polled want legalized sports betting in their home state—perhaps tax revenues are attractive to many respondents as only 13% of Americans are ACTIVE participants in sports betting.

 

At one time or another virtually all of you reading this have participated in a $5 pool at work regarding the Super Bowl or NCAA basketball tournament. Those were harmless diversions and fun in an office environment.

 

Today, there are hundreds of ways to bet the Super Bowl. My favorite was what color ---Green, Orange, or Yellow will the Gatorade be that is poured over the winning coach?

 

According to Statista, Football gets 77% of bets placed in the U.S, with Basketball (24%), Horse Racing (20%), Baseball (17%), and Soccer (9%). Sports bettors tend to be younger with 14% of 18-29 year olds and 22% of those 30-44 actively gamble on sports. Conversely,  only 7% of geezers such as I bet with regularity on sporting events.

 

Offshore betting is fading as more states legalize the activity. Should sports teams share in the profits? The majority of people say NO—the owners make enough money.

 

All my life I have had the somewhat libertarian belief that governments should not regulate too heavily, legislate morality or tell people how to live. This week the $8 billion figure hit me a bit hard. In recent years, a number of college students told me that they gambled weekly on the NFL. To a man (no women admitted to it and I never asked anyone), they all said something to the effect of “I can handle it.” It reminded of the kids I knew around high school age who started smoking with the disclaimer that “I only smoke a pack a week.” Several died of lung cancer in their 50’s or early 60’s.

 

The DraftKings and other commercials regarding betting applications were novel at first but then became annoying and I really did not like it when an announcer would discuss a point spread during a college football telecast. A few people told me this week that they were at live games and some of the crowd booed when the quarterback fell on the ball a few times to run out the clock. Yes, the home team would win but they did not try to beat the point spread. How twisted is that?

 

Prohibition was a failure and gave organized crime a powerful foothold in the U.S. My hope is that the wide expansion of sports betting in the U.S. will not lure people into betting more than they can afford to lose.

 

If you are reading this prior to kickoff, enjoy the game!

 

If you would like to contact Don Cole directly, you may contact him at doncolemedia@gmail.com or leave a message on the blog.