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Brad Toy

I would like to see them do a similar deal with Breaking Bad.

Mike

The WSJ story says they're also near a significant expansion of their deal with NBCU.

Dulcie

any of the CW/WB shows

Gillespie Ben

im a fan of this deal BUT with the 6th season they will be offering extended directors cut for online purchasing, will this deal give netflix the uncut shows or the edited for time one? and id also like to see netflix grab rights to community and the Cleavland show. unedited.

Mike

Recent CBS shows since Hulu can't get them.

Mrmanmac

IDK.... Seems to me like alot of money for one series. Mad Men might be a good show (I haven't seen it) but I don't think there is a single series out there worth that kind of money. They should have offered it to HBO for the Soprano's just to see if they could get that guy Bewkes to blink.

Dan

STAR TREK. All mutations. Even Deep Space Nine.

jjfromnyc

this is great news - i dropped cable a while ago and can't get MAD MEN - i would also love to see TRUE BLOOD on NetFlix streaming - i just realized NetFlix is streaming "Body of Proof" with Dana Delaney, as it's currently running - i really hope this becomes part of the norm

GK Chesterton

Mad Men is a show the media and influential people like to talk about, so Netflix will get a lot of publicity (free advertising) from this high profile deal. It's as much about that as anything. "Did you hear about Netfilx buying an exclusive on Mad Men? No, I didn't, well I was thinking of subscribing, I suppose I better do that now. Oh yes, you should. Anyone who is anyone subscribes to Netflix; you don't want to be left out do you? All the cool people subscribe to Netflix."

Kir

CBS shows, True Blood, Breaking Bad, Boardwalk Empire, and Big Love. So excellent they are getting Mad Men; its great publicity as well as good for us consumers.

Crow550

AMC....Isn't The Walking Dead on AMC? I'd dig that. ;)

twitter.com/Heffer

@GK - Lol, that's exactly what I'm doing tomorrow at work.

"Did you hear about the Netflix/Mad Men deal?"

Posting up on Facebook now.

FearNo1

That is alot of ca$h to spend on one show. I hope this does not mean rates are going up. I watched Mad Men a couple of times. It seemed slow and boring to me. I never understood what all of the hype is about.

Marty McFly

I love Mad Men. Great great show. Already have the series on blu-ray but I guess it's pretty cool it'll be on streaming.

Gob Bluth

A million per episode??
So Netflix is shelling out about 91 million dollars to show Mad Men? (13 episodes per year, 7 seasons)
I mean, I love the show but really? I have a feeling that subscription rates will be going up again within the next 6 months.

Nate

I had yet to see confirmation that Netflix got the streaming rights to Miramax's titles, but according the WSJ article cited above they have. Sub-rates are going to have to come up soon. EPIX, Miramax, this deal, a possible new Starz deal... lots of dough leaving Netflix.

Amanda

I would like to see CW/WB shows too. Some of them Netflix now has "unavailable" on DVD such as Felicity.

Alfonso Fanjul

I dropped cable a while ago and can't get MAD MEN - i would also love to see TRUE BLOOD on NetFlix streaming - i just realized NetFlix is streaming "Body of Proof" with Dana Delaney, as it's currently running - i really hope this becomes part of the norm

things

@ Crow550....yes! And Breaking Bad!

TZ

@ Gob

Subscriptions Rates SHOULD GO UP.

Imagine the quality content you could stream if you paid even $15 a month

$7.99 is an absurdly low price for the amount of content you can currently stream.

things

agree with TZ...keep it coming and I will for sure pay more. I feel like I am stealing at $7.99

Dan

For those that feel like it is a steal at current pricing.... It is a great value now. However it is like an introductory rate. To get a mass of buyers to enter into the new technology.

Guaranteed you won't feel that way in the future when the rates increase. You will be back venting here.

jolly

Netflix Business Model Is Not Sustainable

Read through the transcript of Netflix's (NFLX) most recent conference call and, in terms of keeping things close to the vest, the company makes Apple (AAPL) look like a firm that provides a live webcast of executive retreats. Netflix offers an endless stream of short answers that are light on specifics. When an analyst dares to "ask" about expenses -- and oddly, few of those types of questions get through -- the response amounts to: No worries, we've got it covered.

As an investor, it concerns me that Netflix conference calls, particularly the last one, tend to be light on, if not void of, talk about the surging expenses the company pays now, puts off to a later date, and can expect to incur going forward.

Even more troubling is Netflix's conference call format. It does not occur in real-time with analysts on board. While other companies use similar methods, Netflix use of a Q&A session only, conducted via email, smacks as curious, at the very least. The protocol appears to give the company the ability to preselect questions and craft ideal answers only to the ones they choose, as opposed to having to answer potentially tough questions exposed and on the fly. Regulators ought to banish this approach, as it provides little value to investors. Netflix's last call amounted to nothing but a dog and pony show.

What's even worse is how they attempt to make what, for all intents and purposes, is a canned Q&A session appear live. In Netflix's earnings press release, the company notes that it "will host a live Q&A session" where VP of Investor Relations, Deborah Crawford, "will read the questions aloud on the call and" CEO Reed Hastings and CFO David Wells will "respond to as many questions as possible." For good measure, the company even throws in the following head fake to feign a "live" call (click to enlarge images):


As always, I reserve the right to be wrong or off-base. I am not one of these guys who lives and dies with being right. I simply go on the information that's out there and available to me. I could have missed something. I welcome clarification as to how the company conducts its conference calls. From what I can logically glean, it appears that they sift through email questions and then go "live" in a somewhat, if not wholly, rehearsed back and forth between Crawford and Hastings and Wells. Was Reed really talking to Mark in that clip? Or was he picturing Mark as he looked at Deborah from across the room? To blame the new format on saving us from management's "boring" discussion before questions, technical glitches, or noise from a speakerphone insults our collective intelligence.

Why the lack of willingness to delve into the numbers and talk expenses? Alongside revenues, investors certainly care most about the costs a high-growth company like Netflix incurs and will incur at it ramps into its next and, most likely, largest expansion phase. Given the time waste of the company's conference call, the best thing we have to go on is an annual report that consists of crafty bookkeeping, to put it mildly. Any investor who goes the extra mile with their due diligence -- and Netflix surely realizes most, even ones with substantial amounts of capital to invest, don't -- can figure out that Netflix's numbers just don't add up. They'll need a Herculean surge in revenues to keep up with growing expenses.

In its most recent annual report, Netflix explains how it accounts for the costs it incurs to stock its streaming content library (you'll need to click the excerpt to make it bigger):


Pay close to attention to what Netflix says in that excerpt because it's critically important to the company's ability to maintain such a high valuation. Or, more aptly, to keep up with what will be an exponentially rising valuation over the next several quarters, assuming it's price per share does not plummet. I'll go as far to say it's vital vis-a-vis Netflix's chances to maintain a stock price above $100 going forward. Let's take a look at the numbers associated with each of the area's Netflix's speaks of in the above-referenced excerpt.

Current content library, net. 2009: $37,329M, 2010: $181,006M, Increase: 385%

Acquisition of streaming content library. 2009: ($64,217M), 2010: ($406,210M), Increase: 533%

Amortization of content library. 2009: $219,490M, 2010: $300,596M, Increase: 37%

Accounts payable. 2009: ($1,189M), 2010: $139,983M.

Other non-current liabilities. 2009: $16,583M, 2010: $69,201M, Increase: 317%

Footnote 5 (straight from the 10-K; emphasis added):

The Company had $1,075.2 million and $114.8 million of commitments at December 31, 2010 and December 31, 2009, respectively, related to streaming content license agreements that do not meet content library recognition criteria.

The Company also has entered into certain license agreements that include an unspecified or a maximum number of titles that the Company may or may not receive in the future and /or that include pricing contingent upon certain variables, such as domestic theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether the Company will receive access to these titles or what the ultimate price per title will be. However such amounts are expected to be significant.

Prepaid content. 2009: $26,741M, 2010: $62,217M, Increase: 133%

A look at year-over-year revenue shows an increase that pales in comparison to the rise in costs associated with content acquisition. For instance, total revenues grew from roughly $1.7 billion in 2009 to $2.2 billion in 2010, an increase of 29.4 percent. Net income ticked up by 39 percent, from $115,860M in 2009 to $160,853M in 2010. And to top it off, Netflix's average monthly revenue per paying subscriber declined 8.3 percent, from $13.30 in 2009 to $12.19 in 2010. The company blames this on growth in its lower-priced subscription options.

Bringing it all together, between 2009 and 2010 Netflix saw its cost of subscription revenues rise by a $244.6 million. They jumped from about $909.5 million in 2009 to almost $1.2 billion in 2010. Content acquisition and licensing expenses accounted for nearly $166 million of this growth. And this does not take into account content costs that do not presently "meet content library recognition criteria" (that pesky billion dollars or so referenced above).

What's even more startling about the amount of money Netflix has and will continue to put out in the future relative to revenues is that the preceding discussion about expenses focuses solely on content acquisition costs. I make no mention of the further hole Netflix will dig for itself as it dives into its international expansion plans.

International expansion, particularly the costs associated with it, represents another area of its business Netflix executives don't seem to like to talk about much. One of the few hard numbers they have provided is an expected $50 million international operating loss for the second half of 2011 alone. Outside of this, the company does little more publicly than hinge their international ambitions on an "if" regarding anticipated success in Canada. There's no mention of how much it will cost to secure international content rights and other "infrastructure," conduct marketing activities to build the Netflix brand where it does not yet exist, lease buildings, and hire staff. Just trust them, they'll get it done.

Obviously, I expect items such as accounts payable to increase when looking at a growth company like Netflix. If they did not, I would be concerned. In addition, I understand the transitional growing pains associated with the shift from a DVD-delivery model to a streaming one. These factors, and nothing else that I have heard thus far, do a thing to ease my concerns over Netflix's ability to grow enough to justify expenses. In fact, I expect them to announce a shocking earnings miss within the next year or so or provide unexpected Coinstar (CSTR)-like guidance.

In the company's most recent letter to shareholders, Netflix anticipates 2011 Q1 revenue to come in on the high-end at $704 million. If we extrapolate that out to $2.8 billion for the year, it represents year-over-year growth of about 27 percent. If Netflix Acquisition of streaming content library line item, for instance, grows by only a fraction of the 533 percent it grew between 2009 and 2010 -- say 100 percent -- that number would fast approach $1 billion. And this does not account for new content expenses that hit the books in 2011, international charges, and other general operating costs.

I don't see any way Netflx can substantially decrease the costs it will incur to acquire content. Content creators certainly aren't in the mood to cut any deals. And if they do, it won't be with the seemingly arrogant, new kid on the block Netflix. As Hastings said himself, in one of the few substantive comments he made on the last conference call, "cable service providers," for example, have little incentive to "help [Netflix] grow."

And with just $350 million in cash on its books for 2010, up from $320 million in 2009, Netflix can ill afford to purchase a programmer such as Discovery Communications (DISCK) or Scripps Interactive (SNI) or a division of a company like Time Warner (TWX). Hastings almost brags about being a "$100 million a year customer for Warner Bros.," but he's being taken to the cleaners.

To his credit, Hastings did address the issue of content costs right here at Seeking Alpha when he warned Whitney Tilson to cover his NFLX short. But the CEO's treatment of the issue did not inspire confidence:

Moving on to the widely-discussed issue of increased content costs, it is true that we are paying more for any given piece of content than we were two years ago, and that in two years, we’ll pay more than we pay today. Part of our goal as a business is to make money for content producers and to become one of their largest and best revenue sources. Fortunately, our subscriber base is growing fast enough, and DVD shipments are growing slow enough, that we can afford to pay for the existing streaming content we have, and also get more content. We try not to comment on specific deals, like the Starz renewal, as that rarely helps us get deals done.

Investors sometimes see the content cost threat as an issue around our margins. But we have no intention of overspending relative to our margin structure, and there is no specific content that we “must have” at nearly any cost. In our domestic business we spend 65-70% of revenue on COGS (which is mostly content and postage). So if content costs rose faster than we expected, then in practice we’d have less content than otherwise, rather than less margin. This would ultimately show up in less subscriber growth than we wanted from a not-as-good-as-it-would-otherwise-be service; it would not likely show up as a sudden hit to margins. Management at Netflix largely controls margins, but not growth.

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)

things

@ Jolly....will you please STOP posting that same article over and over?

nick

Haha, totally agree---leave it alone Jolly. I'd love to see some seasons of House on Netflix streaming, however, it's one of Fox's biggest money makers (as far as licensing) so I can't imagine a deal like that coming soon.

paul

This is bad news. Not that Netflix got the show--adding new content is always a good thing. But the exclusivity part is bad for consumers. Next thing you know, Hulu Plus will get exclusive streaming of something else, amazon Prime will get exclusive steaming of another show... pretty soon we'll be stuck in a situation of having to subscribe to a while pile of different streaming services in order to access all the content we want. From a consumer point of view, regardless of which streaming service(s) you subscribe to, exclusive deals like this are bad news.

jolly

Ok I'll post this:

Barry McCarthy, CFO, responsible for signing his name to all numbers reported to SEC, joined Netflix in 1999, brought NFLX public, quit in Oct 2010 a few weeks before Q4 blow off top earnings report.

Now Deborah Crawford, VP of Investor Relations, responsible for signing her name to the actual 8-K SEC filings of the CFO's numbers, joined Netflix in 2003, quit yesterday a few weeks before Q1 earning report.

Look at the debt hitting the balance sheet. Right now.

too much.

jolly

im sure the number will be painted like hastings wants them and no one will ask Q's about them again........

Phillip

While I'm excited about the show, I am worried about how much they're paying for it. Though not for the reasons of that crazy long article... Mostly because it stops them from getting *more* content.

Lynne

Boardwalk Empire!!!

pgato8

My apologies if this is old news (from the trekmovie.com site dated 4-6-11):

"Netflix streaming every Star Trek series starting in July.

The new CBS/Netflix USA streaming deal has just kicked in and some shows have started showing up on Netflix streaming, including genre shows The Twilight Zone and Twin Peaks, but a number of other shows like Frasier, Family Ties, and the various Star Trek shows haven’t yet been made available for streaming. After seeing some Twitter questions about this and getting some emails, TrekMovie checked with Netflix who gave us an exclusive update on their plans for Star Trek.

Firstly Netflix confirmed they will be streaming every episode of every season for all five live-action Star Trek series: the original Star Trek, Star Trek: The Next Generation, Star Trek: Deep Space Nine, Star Trek: Voyager, and Star Trek: Enterprise. TOS, TNG, Voyager and Enterprise will all become available on July 1st. DS9 will launch on October 1st. TOS and Enterprise will be available in HD.

This new deal will make Netflix the first service to offer commercial-free Star Trek online streaming. In addition, it will be the first place to ever offer TNG, DS9 or Voyager with streaming and the first digital delivery for TNG ever, as that series isn’t even available at iTunes."

Ian Valenz

I think the top category to be picked up is HBO shows, followed by Showtime. Big Love, True Blood, Dexter (the first two seasons are available, but not the rest), Conchords, Mr. Show. Originating on premium channels, I'd imagine they'd be in more demand than over the air or basic cable series.

Dulcie

is there any hope for getting wb/cw shows? i know they have hidden palms (i think it's called). that only had 8 episodes.

RJM

$1 million per episode sounds high. Im watching mad men season 4 on DVD right now.


I fear this $7.99 pricing will be for a short time and as more people sign up, they will jack it to $14.99-19.99 and charge even more to those who still get DVDs by mail. (Like me)

Remember, netflix is a for profit business with shareholders. They are not altruists.

bru_c

With all the content that NF has i would gladly pay 15-20 a month...STill kicks the the crap out of cable for 60 a month.


Racket

If you want a series or a film, put it in your que, if enough people add the film, netflix will try to buy the streaming rights. Asking for films won't do it, its data driven.

jolly

C'mon! Need I say more? Some people are leaving Netflix and other people are getting hired. Some people are doing one thing while other are doing other things. Do I need to paint you a picture?

Sure, I guess you could chalk it up to dumb luck that I ate that sandwich that one time, but I only ate the sandwich because Netflix made me. See? Get off your high horse and figure it out. Time to stop believing all the things they do!

Dodge Charger parts

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.

Justin

So sooner or later netflix has to figure out cash flow? Fine. IN the meantime I'll enjoy what i have and downthe road if I have to make decisions about where I get my entertainment, so be it. It's part of being a consumer. netflix doesn't have any of us under the gun. There are no termination fees. No contracts. If you don't like it, do something else. I am not a shareholder, I don't care if they are sustainable. I care that they are trying for the consumer to be a great "add-on value". If they change, so what? Businesses must change to stay alive or they die, like Blockbuster. No business model is truly sustainable. They all change. In the meantime, I wil be enjoying my all I can eat buffet!

Evan

This was funny:

"Mad Men might be a good show (I haven't seen it) but I don't think there is a single series out there worth that kind of money."

Obviously you haven't seen it!

Also, don't doubt that when this happens, they'll show ads, ads that are targeted to a very wealthy demographic. This deal will far more than pay for itself.

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