NYT Publishes Skeptical Missive on $NFLX

The article was like 100,000 words strong. I wanted to blow my brains out for even beginning to read the damned thing. In summary, the New York Times article doesn’t have the balls to outright say Netflix is a huge disaster waiting to happen, because the world of streaming teevee and movies is unpredictable. However, they did make note of NFLX’s absurd $1 billion negative cash flow and dependence on debt markets to keep the charade going.

Here’s a snippet.

One of the most prominent Netflix skeptics is Michael Pachter, a research analyst at Wedbush Securities, a Los Angeles-based investment bank. In his view, Netflix’s true advantage in the beginning was that it had the entire game to itself, and the networks, not realizing how valuable streaming rights would be, practically gave them away. He had a “buy” on the stock from 2007 to 2010, he told me. But, he added, referring to those years when Netflix had streaming all to itself, “If it’s too good to be true, then it will attract competition.”

Now, he said, the networks and studios are charging higher fees for their shows, forcing up Netflix’s costs. Netflix doesn’t own most of the shows that it buys or commissions, like “House of Cards,” so it has to pay more when it renews a popular show. In addition to the money it now spends on content, it also has more than $12 billion in future obligations for shows it has ordered. The only way it can pay for all of that is to continue adding subscribers and raise subscription rates. And even then, Pachter says, the networks will extract a piece of any extra revenue Netflix generates. “It is naïve to think that Netflix can raise its price by $2 a month and keep all the upside,” he said. “I defy you to look at any form of content where the distributor raises prices and the supplier doesn’t get more. That’s the dumbest thing I ever heard.

“Netflix,” Pachter concluded, “is caught in an arms race they invented.” He compared Netflix to a rat racing on a wheel, staying ahead only by going faster and faster and spending more and more: As its costs continue to go up, it needs to constantly generate more subscribers to stay ahead of others.

And if that doesn’t happen? If subscriber growth were to stall, for instance, then Wall Street would stop treating it as a growth stock, and its price would start falling. Slower growth would also increase the cost of taking on more debt to pay for its shows. The company would be forced to either raise subscription prices even higher or cut back on those content costs or do both, which could slow subscriber growth even further. Netflix’s virtuous circle — subscriber growth and content expenditures driving each other — would become a vicious circle instead.

Personally, I watch several Netflix shows. I watch House of Cards, Peaky Blinders, Marco Polo and I’ve watched Sherlock and Luther through it, though I believe they’re both BBC owned shows. I’m not paying attention to the balance sheet now, mainly because I haven’t really cared. But I do recall when NFLX got smoked several years ago, after they errantly hiked prices and the stock plunged. For a while there, it looked like the company was facing bankruptcy.

Hopefully they can keep growing and learn to balance their budget. Otherwise, they might Blockbuster themselves within the next decade.