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!
"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.
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?
Marvellous yet again. Really admire your ability to cut through the numbers and lather on the qualitative perspective with the data in support.
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!
"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.
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?