Woochifer
04-09-2011, 06:24 PM
Fascinating dissection of Netflix's quarterly investor call from Seeking Alpha. It's a long article, but it has a lot of very interesting trend data and concludes that Netflix cannot continue on its current path without compromising the quality of the product at some point.
http://seekingalpha.com/article/261812-netflix-s-business-model-isn-t-sustainable
The short of it is that Netflix has seen tremendous revenue growth, which has excited investors. However, as I've pointed out in other discussions here, Netflix's content acquisition costs are skyrocketing as the deals they used to launch their streaming service have started coming up for renewal. As streaming usage has multiplied, the studios now want to get paid accordingly for supplying the content.
Also, now that Netflix has started bankrolling original programming, their expenses will only keep increasing at a much faster rate than revenues.
Another interesting point is that Netflix's cash-on-hand is only about $350 million. That may seem like a lot, but it's a pittance compared to what other media companies have. Here's the bottomline as written in the article.
In a nutshell, Hastings said content will continue to get more expensive to acquire, but Netflix will not overspend for content at the expense of their bottom line. If the company adheres to such fiscal responsibility, its product will undoubtedly suffer just as competition from a broad range of players intensifies. Netflix will ultimately face a chicken versus egg dilemma (or is it a double-edged sword?). It needs to secure more and more content to compete, but it cannot survive on the trajectory of its current and necessary shopping spree. While it really cannot afford to cut back strategically and theoretically, it will need to cut back from a financial sustainability standpoint.
As it stands, the Netflix business model of impressive growth combined with mind-boggling expenses that will only go up is simply not sustainable. Sooner rather than later, Netflix will run into a cash flow problem. Netflix has short written all over it. Two years from now, I think we will be talking about one of two things: a sub-$100 NFLX share price or Netflix Streaming by (take your pick of) Apple, Google (GOOG), Verizon (VZ), or AT&T (T).
http://seekingalpha.com/article/261812-netflix-s-business-model-isn-t-sustainable
The short of it is that Netflix has seen tremendous revenue growth, which has excited investors. However, as I've pointed out in other discussions here, Netflix's content acquisition costs are skyrocketing as the deals they used to launch their streaming service have started coming up for renewal. As streaming usage has multiplied, the studios now want to get paid accordingly for supplying the content.
Also, now that Netflix has started bankrolling original programming, their expenses will only keep increasing at a much faster rate than revenues.
Another interesting point is that Netflix's cash-on-hand is only about $350 million. That may seem like a lot, but it's a pittance compared to what other media companies have. Here's the bottomline as written in the article.
In a nutshell, Hastings said content will continue to get more expensive to acquire, but Netflix will not overspend for content at the expense of their bottom line. If the company adheres to such fiscal responsibility, its product will undoubtedly suffer just as competition from a broad range of players intensifies. Netflix will ultimately face a chicken versus egg dilemma (or is it a double-edged sword?). It needs to secure more and more content to compete, but it cannot survive on the trajectory of its current and necessary shopping spree. While it really cannot afford to cut back strategically and theoretically, it will need to cut back from a financial sustainability standpoint.
As it stands, the Netflix business model of impressive growth combined with mind-boggling expenses that will only go up is simply not sustainable. Sooner rather than later, Netflix will run into a cash flow problem. Netflix has short written all over it. Two years from now, I think we will be talking about one of two things: a sub-$100 NFLX share price or Netflix Streaming by (take your pick of) Apple, Google (GOOG), Verizon (VZ), or AT&T (T).