“We are just a learning machine. Every time we put out a new show we are analyzing it, figuring out what worked and what didn’t so we get better next time,” says Reed Hastings, CEO of Netflix (NFLX)
When I hear nonsense like that, it drives home just how much the market has bought into the NFLX stock hype, and how little anyone pays attention to the facts.
Look, I love Netflix. I love the service and much of its original programming is outstanding. NFLX stock, however, trades at 330 times next year’s expected earnings, makes almost no money and has nonexistent free cash flow.
But statements like that drive me nuts. I spent 12 years in Hollywood and am still actively analyzing what goes on there. Data analytics with content can assist in programming, but at the end of the day, the only thing that matters is whether a given show or movie has a good story with good characters and is sharply executed.
You can claim that a show about a woman in prison has elements X, Y and Z and therefore it was a hit, but that’s like saying that because Guy Savoy’s artichoke and black truffle soup with toasted mushroom brioche and black truffle butter is amazing because it consists of backyard artichokes, a few mushrooms from Whole Foods (WFM), a brioche from the local french bakery and some mushroom-infused butter.
It isn’t. It couldn’t possibly be. It never will be.
That’s because television shows — much like Guy Savoy’s soup — cannot be replicated using the basic ingredients. It requires a showrunner with vision, a captivating premise and precise execution.
But I digress.
Look, Netflix is not going to kill cable stocks. Neither will content providers like Apple (AAPL), Amazon (AMZN) and Google (GOOG, GOOGL), or Hulu. The reason is pretty simple.
While they put out a lot of content, cable destroys them. They can’t compete from a capital standpoint against all the other studios. What they create is gigantic compared to the other outlets, even when combined.
Cable companies — and their satellite provider cousins — produce massive amounts of original content. There are literally hundreds of networks producing zillions of shows. Well, not zillions, but when The Military Channel starts producing original content, you have to know there’s a reason for it.
Hey, we all know the massive cash piles that Apple and Google and Amazon are sitting on. But content production is a very risky game no matter what “Mr. Data Analytics” says. That’s why studios engage in portfolio theory and stick to brands, like comics, that have brand awareness. There’s a reason there’s a superhero show on every darn network at this point.
Those companies are making big money with their core businesses, and content is only one slice of that pie.
That takes us back to NFLX, which has shallow pockets and makes no money. So there’s no way that NFLX can put out a hit on cable stocks and hope to succeed.
And don’t give me that crap about cord-cutting. I pay less in one year getting my provider’s most expensive package, with all the channels, than I would if I purchased all of my shows a la carte via streaming. It wouldn’t even be close.
So, no, cable stocks and satellite are here to stay. They may not be huge growth businesses anymore, and that’s why DIRECTV likely sold out to AT&T (T) and the others are consolidating. So I wouldn’t exactly buy cable stocks right now, but I wouldn’t buy NFLX stock, either.
As of this writing, Lawrence Meyers was long shares of AAPL.
