In June 2004, Netflix announced the first price hike in the company’s history for its standard DVD subscription service (+10%, from $19.95 per month to $21.99 per month). But just five months later, Netflix reversed course; as a result of a “changing competitive landscape” (a resurging Blockbuster, along with incursions by Walmart and Amazon), the company announced in November 2004 that the price would be lowered to $17.99 (they also introduced a lower-tier that allowed subscribers access to two DVD’s at a time for $11.99 a month). As noted in a 2005 CNN Money article, that was an ominous signal: “
Great post and thank you! How do you get comfortable with valuing the company on EBIT, given the disparity between earnings and cash flow (perhaps even less likely to resolve in the near term now given sub headwinds may force more content spend to maintain their market position)? I'm also still not sure where I sit on the idea that current content amortisation costs represent "maintenance" content spend and would love your take!
Hi Max - I view this as mostly a timing issue. When you go through a period like 2015 - 2021, where annual cash content spend for Netflix increased by nearly 4x, clearly that's going to create some distortions. As the growth rate slows over time, those two metrics will converge. (FWIW, I'd also note that NFLX's FCF margin has improved by ~2,000BPS over the past five years.)
"still early days in pretty much every market around the world. We're ~20% penetrated in broadband homes and there's 800 million to 900 million broadband and / or pay TV households around the world outside China… We don't see why we can't be in all or most of those homes over time if we do our job.”)" from my observation these countries in general have lower per capita income and piracy remains a big issue/headwind for the industry.
Wafi - Good point (and as a Disney shareholder, I've learned this lesson firsthand from looking at Disney+ Hotstar). I think that likely materializes as a decades long opportunity for the global leader in SVOD, but to your point, that must also come with the recognition that you're starting from a very small (revenue) base. Thanks for pointing this out!
Really appreciate the comments here and agree with most of what you have said. The main issue I am having is thinking through the fact that the industry as a whole seems to be shifting into a permanently more capital intensive model (not to mention the fact that while a sub model may be better it certainly entails a push out on cash returns vs. the traditional 'window' paradigm). How are you getting comfortable with the eventual cash conversion? What drives the improvement in that change in FCF conversion for you?
In terms of permanent industry shifts, my view is that the sub-scale players have a very difficult hand. As noted in the post, their decision-making should change / evolve given the widely accepted conclusion that long-term opportunity is now less attractive (at least if they accept that premise; even if they don't, I still think they have a tough time justifying their current efforts, which is why they've been somewhat timid with their investments).
On the cash flows, I think this is largely a timing issue. Said differently, the gap between content expense (P&L) and cash spend will narrow as the market is saturated / the content growth rate slows. No clarity on the specifics, but that will happen over time. (And it now sounds like that will come sooner than was once assumed.)
Marvellous yet again. Really admire your ability to cut through the numbers and lather on the qualitative perspective with the data in support.
Thanks Conor! Glad to hear you enjoyed it.
Great post and thank you! How do you get comfortable with valuing the company on EBIT, given the disparity between earnings and cash flow (perhaps even less likely to resolve in the near term now given sub headwinds may force more content spend to maintain their market position)? I'm also still not sure where I sit on the idea that current content amortisation costs represent "maintenance" content spend and would love your take!
Hi Max - I view this as mostly a timing issue. When you go through a period like 2015 - 2021, where annual cash content spend for Netflix increased by nearly 4x, clearly that's going to create some distortions. As the growth rate slows over time, those two metrics will converge. (FWIW, I'd also note that NFLX's FCF margin has improved by ~2,000BPS over the past five years.)
Thanks for the thoughtful question!
"still early days in pretty much every market around the world. We're ~20% penetrated in broadband homes and there's 800 million to 900 million broadband and / or pay TV households around the world outside China… We don't see why we can't be in all or most of those homes over time if we do our job.”)" from my observation these countries in general have lower per capita income and piracy remains a big issue/headwind for the industry.
Wafi - Good point (and as a Disney shareholder, I've learned this lesson firsthand from looking at Disney+ Hotstar). I think that likely materializes as a decades long opportunity for the global leader in SVOD, but to your point, that must also come with the recognition that you're starting from a very small (revenue) base. Thanks for pointing this out!
Really appreciate the comments here and agree with most of what you have said. The main issue I am having is thinking through the fact that the industry as a whole seems to be shifting into a permanently more capital intensive model (not to mention the fact that while a sub model may be better it certainly entails a push out on cash returns vs. the traditional 'window' paradigm). How are you getting comfortable with the eventual cash conversion? What drives the improvement in that change in FCF conversion for you?
Hi Ulyduck996 - Great questions.
In terms of permanent industry shifts, my view is that the sub-scale players have a very difficult hand. As noted in the post, their decision-making should change / evolve given the widely accepted conclusion that long-term opportunity is now less attractive (at least if they accept that premise; even if they don't, I still think they have a tough time justifying their current efforts, which is why they've been somewhat timid with their investments).
On the cash flows, I think this is largely a timing issue. Said differently, the gap between content expense (P&L) and cash spend will narrow as the market is saturated / the content growth rate slows. No clarity on the specifics, but that will happen over time. (And it now sounds like that will come sooner than was once assumed.)
Thanks for the thoughtful questions!