Happiness As Business Model, Stock Traders Confused

Michael Hedges January 27, 2020 Follow on Twitter

For the classically trained, a business model is trained on opportunity. A customer need is filled by a product, price negotiable. The enduring challenge is identifying the need in terms of a deliverable thing or service. More recently, delivery has become the overwhelming need. Happiness is sure to follow.

Streaming video on demand service Netflix released its 2019 Q4 “shareholders letter” last week (January 21) filled with all the numbers stock traders base their day. New subscribers in the quarter rose by 8.8 million, about a million more than the company had projected. Stock traders love anything that “beats projections.” In July, after reporting less than stellar subscriber figures, Netflix shares plunger 15%. Across the globe, almost, there are 167 million Netflix subscribers.

Alas, those US-based stock traders groused and grumbled about less than expected new subscribers in the US and Canada. Only 420,000 signed up, meaning paid up; the company had projected 600,000. Oh, there is so much competition; Netflix market share has dropped to 19% from 91% just 13 years, noted Business Insider (January 24). There’s Disney Plus, Apple TV Plus, Hulu, Amazon Prime, HBO and more with Peacock soon to arrive. Netflix has 60 million US subscribers. But, complained other critics, Netflix doesn’t tally viewers correctly, tipping to that old adage about losers complaining about the measurement.

Some media watchers, perhaps many, over-intellectualize the Netflix business model. First mover advantage is often cited along with mind blowing investment in original content and the equally mind blowing debt that follows. Pricing as strategy always comes up; Netflix recently raised the rates just as new competitors arrived. But, how many media outlets each week publish lists of the Netflix “best,” “hottest,” “top,” “new” or “can’t miss”? Scads.

The following day, Netflix chief executive Reed Hastings placed the requisite “earnings call” to explain things. “We’ve got a much simpler business model, which is just focused on streaming and customer pleasure,” he said, quoted by TechCrunch (January 22). “We’re really focused on just making our members happy.”

He also reiterated, in case somebody missed it the first time, advertising is not in the plan. “Google and Facebook and Amazon are tremendously powerful at online advertising because they’re integrating so much data from so many sources,” he explained. “There’s a business cost to that.” That cost just might be unhappy customers turned off by ads or, maybe, regulator pressure on data collection.

“We think with our model that we’ll actually get to larger revenue, larger profits, larger market cap because we don’t have the exposure to something that we’re strategically disadvantaged at, which is online advertising against those big three.” There it is, again.

Netflix is a film and television producer that happens to take advantage of a very popular distribution system. It is all very Hollywood. It has worked very well for decades. Having that big subscriber base (distribution) is quite helpful in turning out chatter, leading to hits, leading to more subscribers, and on and on. Disney is very good at it. Amazon keeps trying to put distribution ahead of content. Even with extraordinary films and series on offer it is known as a delivery service. Telecoms like AT&T have a very different world view.

“Please keep in mind that success in North America doesn't necessarily translate into success elsewhere (save for Disney),” wrote investor news portal Seeking Alpha (January 24), “which is why Netflix has been pouring a lot more capital into creating more original content for international audiences.” Outside the US, Netflix has blunted the growth of regional streaming video services. In France, where Netflix has about 7 million subscribers, local broadcasters have all but given up on making a consolidating effort to compete. Netflix just opened a Paris office and doubled the number of French productions.

The latest smash hit for Netflix is the fantasy noir The Witcher based on novels by Polish writer Andrzej Sapkowski. It had its video beginning in game-land. Its theme song - Toss A Coin To The Witcher - is a Spotify hit. All producers look for franchises, big name, long running must watch series and extensions. It’s the Game of Thrones model. Or it’s the Star Wars model. Definitely Hollywood. Netflix confirmed production of an animated film based on The Witcher - Nightmare Of The Wolf.

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