Netflix raised prices – Bullish or bearish?

If you live in the U.S and are planning to subscribe to Netflix, get ready to pay more. The company announced a few days ago that all plans for audience in the U.S would see a price bump with immediate effect. The basic plan will increase from $8 to $9 per month. The standard and the 4K package will cost new subscribers $15.5 and $20 per month respectively. The Verge has a handy table showing all the hike prices that Netflix rolled out so far:

Netflix's price hikes in the past
Figure 1 – Netflix’s price hikes in the past. Source: The Verge

After the news broke, I saw a lot of people on Twitter bullish about Netflix’s outlook. The rationale is simple: if your customers are sticking with you AFTER you raise prices, it means you have a great business. The key underlying assumption is that Netflix viewers won’t churn or, in other words, leave. To back up this assumption, these bulls provided a chart from Antenna which allegedly shows Netflix has the lowest churn among premium streamers.

Netflix's alleged churn rate against competitors'
Figure 2: Netflix’s alleged churn rate against competitors’. Source: Antenna

The problem is that when your entire thesis is based on a chart, you have to make sure the data is trustworthy. Unfortunately, I find Antenna’s data confusing and ambiguous for three reasons. The first reason is that there is no methodology or explanation of how they acquired this data. Take the churn chart above as an example. What does weighted average churn rate mean? What is churn weighted against? What does passive churn mean? Did they survey users or did they base this chart on credit card usage data? If it’s survey-based, how big is the survey pool and is it representative of the U.S? Plenty of questions with zero answer.

Furthermore, Antenna’s charts seem to contradict one another. While they indicate that Netflix has the most loyalty among streamers, somehow Netflix’s market share in terms of subscribers has been declining for the past few quarters. How does that happen? If Netflix’s churn was lower than that of its competitors, the company’s market share should stay the same at the very least or go up. Some may argue that Antenna may favor other streamers in a sense that if one person subscribes to both Netflix and another service, the other service will claim this subscription. Well, this argument brings us back to my first issue mentioned above: no methodology! How do we know if this argument is true?

The last issue I have with Antenna is the inconsistency of the reported data. In Q2 2021, Antenna claimed that Netflix has a market share of 29% (Figure 4). However, in their latest report for Q3 2021, Netflix’s share declined to 30% from 32% in Q2 2021 (Figure 5) . The two reports seemingly have the same methodology and feature the same number of streamers as well as the composition. My question is: what changed? How did Netflix’s Q2 2021 share go to 29% in one report to 32% in another?

These issues really call into question the assumption that Netflix’s churn is lower than its competitors.

But for the sake of argument, let’s assume that Antenna data is correct. That also means Netflix’s market share has been declining gradually. The 4-quarter rolling average net adds for US and Canada has gone down significantly since Q4 2020. Yes, Covid-19 pulled forward subscribers, but that also signals as many in the U.S are vaccinated, the macro environment is no longer favorable to Netflix as it was at the onset of the pandemic. When the number of new adds decreased despite all new releases in 2021, why does management think it’s a good idea to raise prices? Do they have any tricks up their sleeve? Or is the new price hike aimed at increasing revenue with the hope that subscribers will stay regardless?

I don’t know at this point whether this is a good strategic move for Netflix. I guess we’ll have more information this Thursday when they hold their earnings call. What I do know is that I don’t share the bullishness that many fans of Netflix stocks quickly showed after the price hike was announced. We just don’t have enough reliable information.

Netflix's 4-quarter rolling average net subscriber adds for U.S and Canada
Figure 3: Netflix’s 4-quarter rolling average net subscriber adds for U.S and Canada
Figure 4: U.S Premium SVOD Share of Subscriptions. Source: Antenna
Figure 4: U.S Premium SVOD Share of Subscriptions. Source: Antenna

Weekly readings – 15th January 2021

What I wrote last week

Some tips for data analysts

State of Mobile 2022

Book Review – The Body: A Guide for Occupants

Business

Why Apple’s iMessage Is Winning: Teens Dread the Green Text Bubble. “Among U.S. consumers, 40% use iPhones, but among those aged 18 to 24, more than 70% are iPhone users, according to Consumer Intelligence Research Partners’s most recent survey of consumers.” I think some reading this article may get it backwards: folks use iMessage because they like iPhones first and foremost. They don’t buy iPhones because of iMessage. It’s frivolous that competitors demand Apple to open up iMessage to Android for the sake of open communication. Think about it this way: if you own a restaurant and have a secret recipe that is the appeal of the place, will you want to openly share it with your competitors just so that they become more knowledgeable and the food culture becomes richer?

Is Clubhouse dead? Not if you are in South Asia. To be honest, I didn’t have it in me to imagine that South Asia would be the saving grace for Clubhouse. Would it ever reach the valuation that venture capitalists dreamed of? I don’t know, but if I had to bet, the coin wouldn’t go that way. Being popular is one thing, making money is another. We’ll see

How Shein beat Amazon at its own game — and reinvented fast fashion. “Through its manufacturing partners on the ground in China, Shein churns out and tests thousands of different items simultaneously. Between July and December of 2021, it added anywhere between 2,000 and 10,000 SKUs — stock keeping units, or individual styles — to its app each day, according to data collected by Rest of World. The company confirmed it starts by ordering a small batch of each garment, often a few dozen pieces, and then waits to see how buyers respond. If the cropped sweater vest is a hit, Shein orders more. It calls the system a “large-scale automated test and re-order (LATR) model.” The secret is Shein’s internal software, which connects its entire business from design to delivery. “Everything is optimized with big data,” Lin said. Each of Shein’s suppliers gets their own account on the platform, which spits out information about what styles are selling well and can also quickly identify which might become future hits. “You can see the current sales, and then it will tell you to stock up more if you sell well and what you need to do if you don’t sell well. It’s all there.””

Fintech Startup Checkout.com Scores $40 Billion Valuation in Latest Share Sale. “Checkout.com plans to use much of the new capital to fuel an expansion into the U.S. Last summer, the company hired Céline Dufétel, chief financial officer at money manager T. Rowe Price Group Inc., to do the same job for Checkout.com. Many of the company’s top executives and investors now reside in the U.S. It also plans to enlarge its business catering to cryptocurrency companies. Exchanges such as Coinbase Global Inc. and wallets like Novi from Meta Platforms Inc. use Checkout.com to move customers’ money into and out of digital currencies. Crypto and financial-technology transactions account for more than half of Checkout.com’s payments volume, Ms. Dufétel said”.

Netflix Needs New Subscribers. Its Korean Playbook Is Its Secret Weapon. “Bound by certain social taboos and rules on what could be shown on public broadcast TV, mainstream networks in Korea typically passed on most of what they got pitched. The resulting flow of rejected ideas created an opening for Netflix. Because it is a paid private service, Netflix enjoyed more leeway in terms of what it could show its viewers. Netflix began harvesting ideas considered too edgy for the broadcasters and building a slate of programming that leaned into sex and violence, as well as prickly themes, such as social inequality and politics. In 2020, the company turned its first annual profit in South Korea while reporting sales of $356 million. South Korea is now one of Netflix’s largest markets in Asia, trailing only Australia and Japan. The company has more than 5 million subscribers in South Korea, according to Media Partners Asia. To date, Netflix has spent more than $1 billion on programming in Korean, one of its largest content investments outside the U.S. Along the way, Netflix’s status has flipped. Once shunned by the local creative community, Netflix is now courted.

Other stuff I found interesting

My first impressions of web3. We should accept the premise that people will not run their own servers by designing systems that can distribute trust without having to distribute infrastructure. This means architecture that anticipates and accepts the inevitable outcome of relatively centralized client/server relationships, but uses cryptography (rather than infrastructure) to distribute trust. One of the surprising things to me about web3, despite being built on “crypto,” is how little cryptography seems to be involved!”

The Architecture of Tomorrow Mimics Nature to Cool the Planet. I am at loss for words to describe my support to integrate our civil architecture and planning into nature. A city without trees or nature is lifeless and frankly unappealing to me. Why not integrating nature into our architecture? Well, if you haven’t noticed, nature has been here long before our buildings ever have

This Ad-Free Google Search Alternative Is Actually Worth Using. It’s actually pretty good on iOS. The ad-free experience is refreshing

Another masterful article by Morgan Housel. It’s full of interesting short stories with wonderful punchlines and wisdom in the end

Stats

On average, each owner spent $1,400 and $900 in annual expenses in 2021 for dogs and cats respectively

“An estimated 29.2 million general-purpose credit cards were issued to people with credit scores of 660 and below last year”

Apple Books has 100 million users each month.

“Digital tickets in Wallet helped venues and their guests create safe, contactless experiences, and last year, customers used 30 million NFC tickets in Wallet for events across music, sports, theater, and more across the US and Canada.”

Global mobile ad spend is forecast to reach $350 billion in 2022

“There are now 110 million monthly active Android TV devices in the world”

Weekly reading – 18th December 2021

What I wrote last week

Is Menadione, a synthetic version of Vitamin K, safe for pets?

Good reads-0on Business

Netflix Cuts India Prices in Struggle for Biggest Foreign Market. The fact that Netflix slashed prices by 60% in India shows that the streamer feels very threatened by Disney+ and Amazon Prime. I have a lot of love for Netflix, but I don’t think the company is as invincible as many Netflix bulls make it out to be. If it were indeed invincible, then why would it cut prices that much? I often see Netflix bulls make fun of Disney+ ARPU because it has been growing its subscriber base by keeping the price low, especially in India. Now that Netflix lowers prices itself, I can’t imagine this will do the company’s own ARPU any good

U.S. appeals court denies motion to file amicus brief from Coalition for App Fairness. “U.S. courts–and especially appeals courts–normally have a permissive approach toward amicus briefs, above all in high-stakes high-profile cases like this one. It rarely happens that they tell stakeholders they are unwelcome to join a proceeding as “friends of the court” contributing potentially useful information. Here, however, a filing by the Coalition for App Fairness (whose three key members are Epic, Spotify, and Match Group, which is best known for Tinder) and four of its members (Match Group, Tile, Basecamp, and Knitrino) has been flatly rejected by the Ninth Circuit. As a result, the CAF now faces a credibility issue in any other App Store cases around the globe in which it may try to support Epic or even another one of its large members. Even if other courts ultimately allowed the CAF to join other cases, Apple would point to the Ninth Circuit decision, which at a minimum would diminish the credibility of anything the CAF would say on Epic’s behalf. The CAF has now been stigmatized as part of an Epic anti-Apple initiative designed to raise issues regardless of whether those were “organic or manufactured” as the evidence shows.” Even though I have shares of Match Group, Tinder’s owner, and Spotify, I don’t support their effort here. Yes, having to pay commission to Apple cuts their revenue and profit down, but that’s part of doing business on a platform you don’t own.

The DMV Is No Longer a Bureaucratic Purgatory, DMV Says. Information Technology is not just an item on a checklist. It’s the driver of innovation and business growth, even for a government agency known for its terrible services like DMV.

The Guardian has more than 1 million recurring supporters. I hope the likes of Business Insider can pay attention to this. The Guardian doesn’t have a paywall. It simply asks for donations from readers and relies on its journalism to woo subscribers. Putting content strictly behind a paywall doesn’t increase the likelihood of acquiring a subscriber. It actually creates some frustration and annoyance.

With $5 more every month, you can add Disney+ and ESPN+ to your Hulu Live TV+ subscription. An interesting move. I don’t believe that Disney double-counts its subscribers, meaning that a multi-service subscriber can only be counted once. However Disney counts it, I doubt that the move is purely about increasing the subscriber base for Disney+, its flagship streamer. I also don’t see how the new plan can increase Average Revenue Per User (ARPU). A standalone Disney+ already costs $7 a month, higher than the additional $5 that Hulu Live TV subscriber has to pay to get it. Hence, this move is perhaps to make Hulu Live TV+ more appealing and increase the overall revenue.

A good blog on Bill Foley, one of the best yet less famous investors in history

Other stuff I find interesting

A nice story on the new F1 world champion, Max Verstappen. If you want to know what it took to be the best F1 driver in the world, have a read. It requires talent for sure, but talent alone is definitely not enough.

52 things I learned in 2021

The Office Is an Efficiency Trap. “The setup of the Bürolandschaft was designed to follow the natural lines of communication, decrease inefficiencies, and, as an added bonus, cost less: No real hierarchies meant no expensively furnished offices for management. One huge room was far easier to heat, cool, light, and electrify. Yet the design, however well-meaning in theory, was a disaster in practice. In Germany, Scandinavia, and the Netherlands, the experience of working in an open office design was so miserable that in the 1970s local worker councils effectively mandated their removal. But not in the United States, where, as the architecture critic James S. Russell notes, Americans “characteristically reworked” the plan into “something cheaper and more ordered.” The “curvilinear informality” of the Schnelles’ design was formalized into workstations with shelves, cabinets, and dividing panels—what would eventually devolve into the cubicle.”

The World Wants Green Hydrogen. Namibia Says It Can Deliver.Now Namibia is positioning itself as a leader in the emerging market for another hot resource: green hydrogen, which is made using renewable electricity. With bright sunshine 300 days a year and vicious winds that rip along a nearly 1,000-mile coast, renewable experts and government officials say the southwest African nation has outsize potential for renewable energy production.” The next decades will see Africa rise in importance on the global scale with its young population and vast natural resources. China will surely be there to make strategic moves. The question is whether Western governments will do anything about it.

Stats

ETF inflows top $1 trillion

While NBA pays $2.5+ billion for the rights to stream Premier League, Major League Soccer brings in just $90 million a year from ESPN and Fox

In November 2021, 87% of all new vehicles sold in the U.S were sold at or above sticker price

Only 20% of the U.S energy in 2020 came from nuclear. A missed opportunity, I’d say

Between 2013 and December 2021, AirBnb has processed $336 billion in payments on their platform

U.S Online Grocery Sales hit $8.6 billion, $7 billion of which came from Delivery and Pickup

Weekly reading – 23rd October 2021

What I wrote last week

PayPal in talks to buy Pinterest

Book review: Richer, Wiser Happier: How The World’s Greatest Investors Win In Markets & Life

Good reads on Business

Jokr and Personalized Instant Commerce. The article lays out useful data and information on Instant Commerce, especially Jokr. However, I am still a bit unsure about the unit economics of these delivery services. Last-mile delivery is hard and expensive, especially at scale. The consumer stickiness is naturally low and requires constant incentives to nurture. Competitors are everywhere. Plus, the good-old brick-and-mortar alternatives generally offer sufficient value and people, like myself, like to go out once in a while for some fresh air.

Netflix Loses Its Glow as Critics Target Chappelle Special. Netflix has started to encounter what the likes of Facebook and Twitter have for years: content moderation. The company can’t please everyone; so in this case, it’s natural that one or two stakeholders are disappointed with the Dave Chappelle show. The management team believes that the show brings net benefits to Netflix and acted accordingly. Agree with them or not, you should see where they are coming from. On the other hand, some employees reserve their right to disagree with that decision and be disappointed. That happens to even within families, let alone strangers that merely work at the same place. What remains to be seen to me are 1/ how would this affect staff turnover and talent management at Netflix; 2/ how would Netflix users think about the show?

Inside TSMC, the Taiwanese chipmaking giant that’s building a new plant in Phoenix. “TSMC makes key components for everything from cellphones to F-35 fighter jets to NASA’s Perseverance Rover mission to Mars. Earlier this month, it announced plans for a new factory in Japan, where it will produce chips with older technologies, for things like household devices and certain car components. TSMC is also Apple’s exclusive provider of the most advanced chips inside every iPhone currently on the market and most Mac computers. TSMC alone was responsible for 24% of the world’s semiconductor output in 2020, up from 21% in 2019, according to the company. When it comes to the most advanced chips used in the latest iPhones, supercomputers and automotive AI, TSMC is responsible for 92% of production while Samsung is responsible for the other 8%, according to research group Capital Economics. ”

How YouTube Makes Sure Its Hitmakers Don’t Stumble. YouTube spends tens of thousands of dollars on the top YouTubers to grow their content and ecosystem. Their in-house digital agency also offers guidance and consulting services to these personalities so that they can sustain attractive videos and high viewership. This kind of support, along with YouTube or its parent company’s resources, makes it difficult for other competitors to match.

Squid Game’ success shines a light on how cheap it is to make TV shows outside the U.S. “The total cost of making “Squid Game” was just $21.4 million. Episodes of Disney+’s Marvel shows, such as “WandaVision” or “The Falcon,” cost Disney $25 million per episode — more than all nine episodes of “Squid Game”“. I’d also prefer local characters being played by true locals to by Americans.

Is Best Buy undermining its storybook turnaround? I don’t think it’s a good idea to mess with a formula that works. Especially, that formula is around customer services and satisfaction. If I were a Best Buy shareholder, I’d send the CEO and the Management Team this article with a lot of questions.

Business Breakdown episode on Uber. If you are interested in gig economy and especially Uber as a business, have a listen. Whether you are a bull or a bear, I think it’ll be worth your time

How Many Users Does Facebook Have? The Company Struggles to Figure It Out. “A separate memo from May said that the number of U.S. Facebook users who are in their 20s and active at least once a month often exceeds the total population of Americans their age. “This brings out an elephant in the room: SUMA,” the memo’s author wrote, using an internal abbreviation for “Single User Multiple Accounts.” The author added that the issue could render Facebook’s ratio of users active each day “less trustable. Facebook said in its most recent quarterly securities filings that it estimates 11% of its monthly active users world-wide—which totaled 2.9 billion for its flagship platform in the second quarter—are duplicate accounts, with developing markets accounting for a higher proportion of them than developed ones.”

Other interesting stuff

Your Guide to the Third-Party Cookie. A very useful primer on the key factor in the digital advertising world. I have been on both sides of this issue. As a marketer, I can see why companies want to get as much data as possible to hone their targeting and make the best use of their ads dollars. On the other hand, as a consumer, I absolutely hate the feeling that somebody follows me everywhere across the Web. Privacy has been on the rise and will continue to be. iOS users now have a choice to voice their opinion on the matter with ATT. I don’t know how this all will shake out, but I would think that marketers would do well if they pivoted from 3rd party tracking.

Belgium’s shift from nuclear under fire as gas price surge strains Europe. It is baffling to me that countries are moving away from nuclear energy for gas-based power.

The Greek region too remote for maps

New Viking artifacts may mean that Christopher Columbus might not be the first one to discover the America continent. I guess it’s time to keep the holiday yet change the freaking name

Stats

Gas bills this winter can be at least 30% higher than last year

Weekly reading – 31st July 2021

What I wrote last week

I wrote down a few thoughts on Netflix

Business

A great Business Breakdown episode on Petco. If you are not too familiar with the company or the pet supply industry, it’ll be worth your one hour.

Singapore Airlines Doubles Down on the E-Commerce Trend by Carriers. “In November, Singapore Airlines [SIA] CEO Choon Phong Goh described Pelago during an investor call as “a brand new business that’s been set up within SIA” with a goal of “extending the SIA experience from the skies to the ground. While airlines have upsold passengers on extras for years, what’s new is the hands-on approach to sourcing and marketing the content instead of using affiliate deals.”

Beijing orders Tencent to end exclusive music licensing deals in a first for the country. I am very reluctant to invest in Chinese companies precisely because of this.

Finance Chiefs Are Still Trying to Replace Excel With New Tools. Excel is a very powerful tool and we are not completely working without it at least in the next two decades. However, the over-reliance on Excel is damaging in a sense that it prevents companies from upgrading internal tools that can provide better collaboration and data interoperability. I am speaking from experience because that’s one of my personal frustrations at work.

How Gap’s new loyalty program ties together its multiple brands. I visited both Gap and Banana Republic recently. I couldn’t recall a nice experience in terms of finding out information about the rewards program. I suspect it is due to the staggered roll-out of the new rewards program and Omaha, Nebraska isn’t high on the priority list. Nonetheless, consolidating multiple rewards programs, making it simple for customer to understand and offering real values sound like music to my ear. Their offerings are still not best in class. For their sake, I hope they continue to upgrade the rewards benefits.

Reebok got the better of Nike 30 years ago but fell into oblivion. This is the story of how Rebook’s fall from grace happened. The article put a lot of emphasis on Adidas’ mismanagement of Reebook. That happens all the time. Executives promise the sun and moon in M&A, but failures are more common than many care to admit. I don’t know whether without Adidas, Reebok would have still been able to compete with Nike. That’s far from certain. Anyway, another business case study that many can draw lessons from.

Apple makes its M1 Mac case to enterprises. One of my bull cases for Apple is its potential in the enterprise market. Apple’s hardware is well-positioned to really attack this. Up to now, I don’t see a whole lot reported on its market share or Apple’s concrete strategy to go into this space. There is a lot of TAM to tap into here.

A nice profile piece on Bessemer Venture Partners. I like them because they seem very grounded, thoughtful and prudent with other people’s money. There are some firms that, in my opinion, tend to be too optimistic, to the point of being delusional in some deals. Plus, Bessemer publishes their investment memos that I like to read a lot. You can still be wildly successful while being different from the majority.

What I found interesting

Finland ends homelessness and provides shelter for all in need. Some food for thoughts for folks in America: is having the richest companies and individuals along side with grave inequality represented by a lot of homeless people better than a bit less wealth yet greater equality? As a reminder, Finland’s GDP Per Capita is higher than America’s

World’s cheapest energy storage will be an iron-air battery. The startup claimed that their revolutionary battery would cost only 1/10 as much as lithium batteries do. If that’s true, it will be huge.

Beneath Istanbul, Archaeologists Explore An Ancient City’s Byzantine Basements

What growing avocados in Sicily tells us about climate change and the future of food. Simply both fascinating and scary at the same time, if you ask me

Stats that may interest you

In 2020, craft brewers in the U.S produced around 23.1 million barrels, the lowest quantity in the last five years

Apple TV+ has 3% market share

A strong opening weekend for Black Widow highlighted Disney’s competitiveness

In a rare move, The Walt Disney Company disclosed some details around revenue and profit made from streaming. Per Variety:

Disney and Marvel’s superhero adventure “Black Widow” captured a massive $80 million in its first weekend, crushing the benchmark for the biggest box office debut since the pandemic. The film, starring Scarlett Johansson, is the first from the Marvel Cinematic Universe to open simultaneously in movie theaters and on Disney Plus, where subscribers can rent “Black Widow” for an extra $30. Disney reported that “Black Widow” generated more than $60 million “in Disney Plus Premier Access consumer spend globally,” marking the rare occasion in which a studio disclosed the profits made from streaming.

Directed by Cate Shortland, “Black Widow” collected an additional $78 million from 46 international territories, boosting its global box office haul to an impressive $158 million. Combined with Disney Plus numbers, the final weekend figure sits at $215 million. Curbing overall ticket sales, however, is the fact that “Black Widow” still doesn’t have a release date in China, which is an all-important moviegoing market for the Marvel franchise.

A few things that jumped out to me with this report. First, Disney continues to show the ability to tell appealing stories to a wide audience. Granted, not everybody will enjoy their stories, but the revenue numbers don’t like. They have crushed revenue expectations in the past when the majority of movies that crossed $1 billion in revenue came from the studio and Endgame is still the top two successful movie of all time. Netting $215 million in the first weekend without China when many markets are still dealing with Covid-19, especially the Delta variant, is a great sign in my book.

Second, Disney has a unique ability to be flexible with how they introduce their movies. All the series such as Loki, Wanda Vision or The Falcon & Winter Soldier are exclusive on Disney+ and that makes sense. For the movies, they can reach the audience in different ways. Movies can be exclusive on Disney+ for free to all subscribers or to Premier Access buyers first and to all subscribers after a few weeks. Disney can choose to release movies in theaters first and then on Disney+. Or they can release it in theaters and on Disney+ with Premier Access; which is exactly what they did with Black Widow. The flexibility allows the company to react to the changing environment caused by Covid. Plus, it’s a great tool to maximize revenue and profit. Movie theaters will bring in nice revenue, but whatever money Disney generates from Premier Access is pure profit.

This unique flexibility is a competitive advantage that none of Disney’s competitors can copy. To convince people to shell out another $30 after already paying a membership, a streamer needs a strong brand and IP. Disney has that. Does Netflix have any movie that could do the same? I don’t think so. Even if a streamer has the necessary IP, does it have all the other ingredients needed t o pull the feat off? Like, if the streamer has a big enough subscriber base to even move the needle? Or does it have the relationship with theaters to negotiate a deal like Disney did? I think other streamers will look at today’s announcement from Disney with interest and try to explore the possibility of copying the model. So I will look forward to see how they can pull it off.

In the last earnings call, Disney reported that they had about 104 million Disney+ subscribers with a third coming from Hotstar in India. Hotstar subscribers pay much less for a Disney+ plan, hence it drags the whole streamer ARPU down. What’s interesting in this case is that Disney+ Premier Access is not available in India. News outlets such as Yahoo reported that the feature was not available in India. My friend from India confirmed it too. Given that Premier Access costs more or less $30 in every available market, $60 million in revenue from the feature means that around 2 million subscribers or around 1-2% of Disney+ subscriber base paid for early access to Black Widow.

Netflix bulls will keep pounding on the big lead that Netflix has over other streamers and, as a result, the cost advantage. That’s true. But what Disney shows is that there is an alternative way to succeed. Disney doesn’t have yet the subscriber base like Netflix has. But it has other unique assets: 1/ A dedicated fanbase to its IPs; 2/ The flexibility to make money from other channels, not just its streaming service; 3/ Its theme park complements nicely its Direct-To-Consumer segment. When you generate more money per movie than your competitors, does it matter whether it comes from your subscribers? That’s not to say Disney can neglect the task of increasing its customer base. It’s important that Disney can catch up to Netflix on this front and please investors in the short term. But it’s even better to introduce Disney+ at a low price in many markets to attract audience while making money from theaters and Premier Access. So far, I haven’t seen another company with this model.

Disclosure: I have a position on Disney and Netflix.

Take-aways from the latest interview of Disney CEO

Bob Chapek, the CEO of Walt Disney, attended Credit Suisse 23rd Annual Communications Conference and had some interesting comments on the business. If you are interested in the company or its competitors, it’s really worth a read. Here are a few highlights.

In response to the interviewer’s question on the investments on the experience side in the next 5 years, Bob’s answer was, as follows:

Sure. Sure. Well, we’ve got ambitious plans to expand our business. I had just mentioned Avengers Campus a second ago, and we’re encouraged by the great response we have there, but we’re not stopping there because, as you know, we’ve been undergoing a massive transformation of our Epcot park at Walt Disney World in Orlando. And we’ve got a Ratatouille attraction that we’re bringing in that first premiered in France. We’ve got a new nighttime show Harmonious that will be on the water there at Epcot, and it will be a huge guest pleaser. And then we’ve got our Guardians of the Galaxy: Cosmic Rewind attraction or coaster that will give us our ability to bring that whole Marvel franchise into the park. Internationally, we’re thrilled to bring Zootopia into Shanghai Disney Resort. You mentioned Shanghai.

That’s obviously a property that did extraordinarily well in the box office when Zootopia came out. So that will be a big hit in Shanghai. We’ve got Frozen installations coming into Hong Kong Disneyland. At Disneyland Paris, we’ve got the [indiscernible] of its own Avengers Campus taking off from where Anaheim has. It just recently launched Avengers Campus, and we’ve also got the Art of Marvel Hotel that we’re putting in. We’re installing Tokyo Disney Resort. We’ve got the 8-themed port over at Tokyo DisneySea.

We’ve got 2 new hotels and attractions going in for Frozen, Tangled and Peter Pan. And then we’ve got 3 new ships and a second island destination. So we certainly have a plethora of new things coming, and that’s really mining all the work that we had done prior to the pandemic and kept working on during the pandemic so that we would not have any sort of glitch in our supply chain of new attractions and experiences for our guests, so we can keep that growth engine of parks going.

Source: Credit Suisse 23rd Annual Communications Conference

That’s an impressive pipeline of investments both in depth and breadth. The company has different types of physical attractions under different brands and themes ranging from hotels, resorts to cruise lines and theme parks, from Frozen, Peter Pan to Disney & Marvel. Despite being badly hit by the pandemic, Disney’s traditional cash cow, their Parks business, is likely going to make up for lost time & money, now that folks are increasingly vaccinated and restrictions are lifted. These assets are difficult to replicate. First of all, they are expensive. Any company that wants to emulate Disney needs to ready their check books for a huge sum of money for initial constructions and yearly maintenance. Second of all, Disney competitors need to also build up a library of themes & characters that relate to consumers and entice them to visit the physical attractions. Disney has spent decades of creating, marketing and distributing content. Their brand name is known and loved by generations of consumers. Even if a competitor has the required resources to invest in content, those resources cannot buy the timeless reputation and name that Disney has.

Netflix is trying to take a page from Disney’s book. It’s building Netflix Shop where merchandise related to their originals is sold. This is the first piece of the puzzle. Netflix is popular among viewers around the world and it has some great originals. Hence, it makes sense for the streaming service to start making inroads into the retail side. However, having an online shop is very different from building giant physical attractions that represent huge fixed costs. It will take a lot more from Netflix to build an empire like Disney’s, but everything has to start somewhere.

Second, when asked about how much IP is there to mine, Bob Chapek had this to say:

Well, I’ve always learned not to underestimate our creative teams, particularly our Marvel creative teams. We’ve got 8,000 characters that we have to mine. And you say, well, 8,000 characters, who knows what these 8,000 characters are. But remember that all of our Avengers, for example, our Avengers characters, when we made the acquisition, weren’t exactly household names. Take Loki, for example. Loki was the most watched season premier ever on Disney+ during its opening week. And no one knew who Loki was even when we got started on this journey on Marvel. No one knew who Iron Man was or Wanda or Vision or Falcon or the Winter Soldier. Black Widow, Shang-Chi, nobody knew who these characters were.

Source: Credit Suisse 23rd Annual Communications Conference

I didn’t grow up reading Marvel comics. Years ago, when characters like The Hulk, Iron Man, Thor or Captain America debuted, I barely knew them, yet they are now some of my favorite. I suspect that many casual viewers will first get to know the likes of Shang Chi and others among 8,000 characters from movies or series by Disney. The ability to build characters and tell engaging stories, especially interconnected ones, over a long period of time is a creative competitive advantage that is hard to match. The last 12 years from the first Iron Man movie to End Game is evidence of such an enduring output of creativity. Does it guarantee future success and repeat of the past? No. But it’s much more assuring than records of many competitors.

Next, when the interviewer asked whether Disney would add an ads-supported plan to Disney+, Bob ruled that possibility out at least in the near future.

Yes. We’re always reevaluating how we go to market across the world, but we’ve got no such plans now to do that. We’re happy with the models that we’ve got. But again, we won’t limit ourselves and say no to anything. But right now, we have no such plans for that.

I support this position by Disney. The flagship streamer, Disney+, is already on the cheap end among streamers with the latest reporting ARPU standing at $3.99. The addition of an ads-supported plan would like drive down ARPU even more. Plus, nobody likes to have their streaming experience tainted with ads. Netflix goes to great lengths and invests a lot of resources to make sure that their viewers have the best streaming experience possible on their platform. Disney is wise to do the same if it hopes to compete with its rival. If the company wants to make money from ads, it has its own media channels to do so.

On what “new content on Disney+ every week” means:

Yes. Our plan is to do — hit that cadence this year in terms of a new product every week. And what we mean by that is a new movie or a series, meaning, a new production or library add every week. And that’s not counting new episodes, if you will, but does count new seasons. So we count new seasons. We don’t count new episodes in that. And something new can be a new movie or a new piece of content or something new added to the library. So that’s how we’re defining that. And that’s the plan right now.

Because Disney+ subscriber base is sufficiently big now, it enables the company to spread the fixed content investments across more than 103 million viewers, giving Disney a cost advantage over other streamers, except Netflix. Additionally, new content helps the company acquire more subscribers who will, in turn, add to the economics advantage mentioned above. What I am unclear about is whether a new weekly content is purely originals or whether it includes licensed IP. If it’s the former, it will be great news for Disney stock bulls, a gift to subscribers and ominous signal to competitors.

Last but not least, Bob Chapek touched upon the impact of price increases on churn:

Yes. In terms of, I guess, an objective way to look at the price value relationship, the growth rate that we’ve experienced on Disney+ sort of stands out as the headline there. But you’re right, we did launch at a very attractive price value opening point. And the first price point — or our first price increase that you mentioned in the first 16 months happened recently, and we’ve seen no significantly higher churn as a result of that. In Europe, as a matter of fact, we took a price increase twice as high as we took domestically more or less. And we — that was with — commensurate with the integration of the Star brand as the sixth brand tile. But our churn actually improved, right? So we took an even higher price increase and our churn improved because we added more content. And I think that investment in the content at attractive price point gets you strong retention, and strong retention, obviously, is one of the key factors towards overall platform growth. And — but that doesn’t mean that in the future as we continue to add more and more great content that we wouldn’t necessarily reflect that in the value that we add and then price it accordingly.

While it’s encouraging to see the current price inelasticity of Disney+, it’s equally important to understand that we don’t have a lot of context here. Disney+ had a low price at launch and even a 3-year bundle at one point. Because the starting point was low and the increase here is not significant in absolute ($1 in the US.), even though customer reception towards the latest price increase was positive, it doesn’t guarantee the same outcome for the next raise. They could plow millions of dollars into content, raise prices yet get spurned by consumers. Furthermore, since we don’t have information on the previous churn, it’s tough to conclude whether the current churn is good. Yes, there was an improvement, but for all I know, it could be upgraded from “disastrous” to “concerning”.

In short, Disney has a lot of great assets and great things going on for them. As the world is gradually opening up with an increasing vaccination rate, it will turbocharge the recovery of a business whose cash cow was terribly affected. On the streaming side, the pandemic was a boost in what I consider largely a two-horse race between Disney and Netflix. Each company has its won advantages and strengths. It’ll be super interesting to see how the market will be in the near future.

Weekly reading – 5th June 2021

Business

Sweetgreen Bet Big on Naomi Osaka. Then It Doubled Down. As the world becomes more divided nowadays, celebrity endorsements come with a risk that companies have to make uncomfortable decisions at times. This is one of those moments for Sweetgreen and personally I am happy that they support Osaka.

Self-Driving Cars Could Be Decades Away, No Matter What Elon Musk Said. If a company or an executive claims that their company’s bright future relies on self-driving cars, take it with a big grain of salt and ask a lot of questions because that future is highly uncertain and can be decades away.

Apple’s new App Store guidelines put scammers and bounty hunters on notice. Apple just did themselves and almost everyone else a favor by being more detailed and specific about their App Store guidelines. A major criticism of Apple and the App Store is that their guidelines are too ambiguous and not enforced equally. That’s a fair criticism and since Apple wants to hold a complete unchallenged power over the App Store, they can’t expect that we expect nothing, but perfect from them. I doubt this latest development will quell much the frustration by developers, but it’s a positive step in the right direction

An interesting chat between Kara Swisher and Margrethe Vestager on issues such as a global tax, court cases against big techs and potential remedies towards the oversized dominance of the likes of Apple.

Netflix debuted an online shop that sells merchandise related to their hit shows such as Lupin. This is a natural extension of their business. When some of their shows are fan favorites and garner enough following, why not capitalizing on such popularity? After all, that’s what Disney does. You watch Marvel or Disney movies and visit the theme parks for other experiences. I don’t think this is so much about being on level terms with Disney. Instead, this is about generating more margin and revenue.

What I found interesting

Jordan, Russell, Kareem, even the King of Pop — the astonishing mentors who shaped Kobe Bryant. Everyone wants to be like Kobe, but are they ready for the sacrifices and solidarity like Kobe was? Are they willing to go above and beyond for their obsession like Kobe?

Eddy Cue On Why Spatial Audio Is a Game-Changer

Shedding More Light on How Instagram Works. According to this post from Instagram, it uses a lot of data (they call it “signals”) to determine what content you get to see. There are two sides of this. On one side, it can be convenient and good that you get to see more of what you like. On the other hand, it means that Instagram or Facebook knows a lot about you. Had Facebook had a better track record in terms of privacy in the past, it wouldn’t have been a concern. The reality is that I am not sure users really use Facebook’s platforms because they are trustworthy. It’s likely because Facebook owns the biggest platforms in the world and users only use them out of convenience. Nonetheless, appreciate posts like this one

The World’s Northernmost Town Is Changing Dramatically

How the wealthiest in America avoid paying income taxes

In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.

Stats that may interest you

Solar makes up 4.5% of the US’s electricity, up from 0.1% in 2010

Passenger EV sales are set to increase sharply in the next few years, rising from 3.1 million in 2020 to 14 million in 2025.

Weekly reading – 24th April 2021

What I wrote last week

On Apple’s new product: AirTag

Apple TV+, Netflix and the battle between Walmart and Amazon

Business

Google used ‘double-Irish’ to shift $75.4bn in profits out of Ireland. It’s good to know that 2020 was the last year that the “double Irish” loophole could still be exploited. I am curious to see the impact that the phase-out has on US corporations.

WSJ’s short profile of Korea’s “King of Ramen”

AirTag location trackers are smart, capable and very Apple

The Future of Apple Podcasts

Etsy SEO: How to Optimize Your Shop & Listings for Search

How Netflix and social media helped F1 buck a global sports sponsorship slump. F1 is an extraordinary sport and deserves to be the pinnacle of motorsports around the world. If you look below this entry, you’ll see a graphic showing how F1 cars can go into corners at a speed that we travel on a highway. On the straights, F1 cars can hit 360kmh. The technology that goes into building these cars and the skills that go into driving them are the best in the world. Yet, I still feel that F1 isn’t as popular as it should be. “Drive to Survive” and the resilience shown during 2020 really helped the sport become better known

What I find interesting

Typography at U7 station in Berlin

You can pay at Whole Foods Market with your palm now. While it is incredibly cool and convenient, I don’t think I will jump at the chance to use it soon. Amazon isn’t really known for their privacy practices. I am not too willing to give away my biometrics to them yet.

F1 cars can slow down by 144kmh in 1 or 2 seconds and carry over 150kmh into corners. Just think about that for a second. These cars drive into cars at the speed that is often the top you can reach on the highway

Source: F1

Stats that may interest you

Morning Brew has 3 million subscribers. It’s amazing what you can do with great writing skills and consistency

iPhone 12 models accounted for 61% of US iPhone sales in fiscal Q2 2021

Apple TV+ has the highest ratings among streamers. Walmart vs Amazon. Netflix recorded slower growth but saw 2x growth in FCF

Apple TV+ has the highest IMDB ratings for content

According to a new study, content on Apple TV+, Apple’s exclusive streaming service, receives the highest average ratings on IMDB. There are a couple of caveats here: 1/ this is on average. One size cannot fit all in this streaming area. The study reveals that Apple TV+’s content ranks pretty low in some genres. Hence, if you are a connoisseur of Crime or Fantasy content, the streamer may not be your cup of tea. 2/ Apple TV+ has a significantly smaller library than other streams. As a result, the smaller sample may favor Apple’s streamer.

Focusing on content quality is a smart move from Apple. The likes of Disney+ or Netflix already have a lot of titles to offer viewers. It would take Apple either a long time or plenty off money to acquire the rights to stream titles from other producers. Even then, they still likely wouldn’t come out on top because the other heavyweights aren’t standing still to lose their market share. Plus, I don’t imagine Apple TV+ is a profit center for Apple. At $5/month and restricted to Apple devices or Roku, I don’t think Apple TV+ reaches the scale that enables them to raise prices yet. It is an auxiliary service that makes their bundle Apple One or their devices more attractive and sticky to consumers. Services like Apple Care or iCloud, and their hardware are the drivers of margin and profit. It doesn’t make sense for Apple to try to compete with Netflix on the number of titles while diluting investments on quality. The prospect of Apple TV+, with its much smaller subscriber base, beating Netflix on their own game doesn’t seem likely. Plus, focusing more on quality resonates more with the Apple brand.

Walmart vs Amazon

The battle of these two retail titans is exciting to watch. While Walmart has been trying to improve its 3rd party marketplace & ads platform and grow its fintech segment, Amazon has also had some developments on its own:

Walmart has the advantage of low-cost grocery, a category that is near and dear to every shopper, and a network of stores scattered around the country that can act as their fulfillment centers in addition to the actual dedicated ones. On the other hand, Amazon has a more mature online presence, 3rd party marketplace and ads business. It also has 200 million loyal and, in my opinion, profitable customers in their Prime program. For the past months, each company has tried to close the gap to the other. Walmart launched a Walmart+ service, their answer to Prime, while ramping up their marketplace, including the partnership with Shopify, and ads business. Meanwhile, Amazonzz has invested heavily in last-mile delivery and cashierless stores. Even though it’s tough to match the scale of Walmart in groceries, having smaller stores and no headcount expenses will definitely help Amazon drive down the prices.

Which retailer will come out on top remains to be seen. It’s exhilarating, though, to see each iconic firm expand its capabilities and go out of its comfort zone to stay competitive. If I were a business or strategy professor, this would be one of the cases I bring to classes.

Netflix recorded slower growth but saw 2x growth in FCF

The results of Netflix’s first quarter FY2021 were out today. Revenue stood at $7.2 billion, a 18% YoY growth, while operating income was almost $1.9 billion, up 44% YoY. The quarter closed with almost 208 million paid subscriptions, including 4 million in net additions compared to almost 16 million subscribers in net add a year ago. The company attributed the slow growth in subscribers to the pandemic and a weak slate of titles. While Netflix is still confident in the 2nd half of the fiscal year, it does forecast a relatively flat weekly global net adds till the end of the 2nd quarter.

Netflix's flat forecast in net subscriber adds till Q2 FY2021
Source: Netflix

While a slower subscriber growth isn’t good news to Netflix investors, it doesn’t tell the whole story. First of all, they may actually be right that the pandemic and having no hits this quarter had adverse effects. Second of all, Netflix raised their subscription prices a few months ago; which may also be another contributing factor, especially given the intense competition from other streaming services. HBO premiered two blockbusters: Godzilla vs Kong and The Snyder Cut. Disney Plus had their exclusive Wanda Vision and The Falcon & The Winter Soldier, among other titles.

Additionally and very importantly, Netflix increased its free cash flow by 200%, despite a stunted subscriber growth. The company’s free cash flow in Q1 2021 was $692 million, up from $162 from the same quarter a year ago. In the shareholder letter, Netflix was confident that they would be FCF neutral for FY2021 and that they had no plan to raise debt in the near future. More excitingly, they are beginning to buy back shares this quarter. For the Netflix bulls out there, it’s great news. The company spends $20 billion a year on content, yet it is on track to become FCF positive; which almost no other streamer can replicate. That’s the beauty of operating at the scale that Netflix does. Their content investment is a fixed cost. The more paid subscribers there are, the lower the unit cost for each subscriber will be and the higher margin Netflix can extract. However, for other streamers, they have to invest a lot in content to grow their subscriber base. Since their current pool isn’t big enough, they are likely operating in the red with negative cash flow like Netflix used to. The question then becomes: how long can those streamers sustain that loss while trying to match those billions that Netflix pours in content annually?

Yes, seeing their growth stunted this quarter isn’t great, but it’s just one piece of the puzzle. The FCF piece that Netflix announced today is, in my opinion, equally important. One quick look at notable news outlets that covered Netflix earnings showed one common theme: Netflix’s growth. I mean, it’s not wrong, but I don’t think their headlines tell the whole story

Coverage of Netflix's Q1 FY2021 earnings without mentioning the cash flow story