Editor’s note: This story was updated on Nov. 6, 2020 to clarify Open Connect’s caching.
Cable television costs about $150/month. Even with its latest price increase, Netflix (NASDAQ:NFLX) costs $14. Basic math makes Netflix stock attractive.
You need a broadband connection to get it. But broadband is now a necessity, not just in America but throughout the global middle class. Figure that costs $50/month and Netflix is still a bargain.
This simple math has made Netflix the most powerful force in TV history. It’s worth more than any TV network, even worth more than cable giants like Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T).
Walt Disney (NYSE:DIS), even with its theme parks, cable networks and vast studio history, was worth $226 billion as trade opened Nov. 5. Netflix was worth $219.5 billion. Since the start of the year Netflix stock is up 53%. Disney is down 14%.
It’s fair to say Netflix is the better stock, and the biggest competitive threat Disney has ever faced.
Bigger Problems Than Disney
In some ways, Netflix has left Disney in its rear-view mirror.
Its biggest threats today are Alphabet’s (NASDAQ:GOOGL) YouTube and Amazon (NASDAQ:AMZN) Prime. Both these competitors are worth about $200 billion on their own. Both their parents make Netflix look pint-sized by comparison.
Netflix, Amazon, and YouTube are the big three networks today because they have a direct connection to the customer. Basic YouTube services are free, and Amazon Prime is bundled with free shipping. Only Netflix is taking a separate charge from the customer budget.
Despite this, Netflix had 195 million paid subscribers at the end of September, according to its quarterly report. This disappointed investors when it was announced.
Disney bragged that it had 60.5 million subscribers to its Disney Plus service when reporting earnings in August. CEO Bob Chapek thought this worthy of celebration.
Netflix’ Secret Sauce
There are two technology forces that make Netflix a better bet than Disney.
The first is Open Connect, a network topology Netflix announced in 2012. It was developed because “last mile” providers were (rightly) complaining of the cost of video traffic. Open Connect caches Netflix close to subscribers. This reduces last-mile costs, which are declining anyway as networking matures.
Second is how Netflix chooses what to produce. Traditional studios like Disney negotiate fiercely with creators over things like artistic vision. Netflix uses data.
Netflix’ subscribers tell it each day not just which shows they like but which types of shows. It’s not just ratings. Netflix executives can learn, at a glance, not just how much viewers like detective shows, but what kinds of detectives they like, and what kind of mysteries.
Netflix then signs producers under contract with precise notes on what to make. It can give these producers huge audiences for things Disney may not even imagine to greenlight like Tiger King, watched by 65 million people. A great network TV show may draw 10 million viewers.
Netflix movies get similar results. The top Netflix film, Extraction, was watched 99 million times in its first four weeks. That’s comparable to Avengers: End Game, Hollywood’s all-time biggest hit. Extraction cost $65 million to produce, Avengers $365 million.
The Bottom Line on Netflix Stock
Disney and Netflix aren’t in the same league anymore.
Disney has been relegated, like all the cable companies, and all the movie houses, like a European soccer team. It will take years for Disney to create Netflix’ connections to its global audience, or its ability to serve that audience what it wants.
The big three networks today are Netflix, Alphabet and Amazon. If there’s a fourth name in the frame, it’s Apple (NASDAQ:AAPL) TV. Like Amazon, Apple owns a cloud and can replicate Netflix’ technology. It also has the cash to pay for creators, even the production units of Comcast or AT&T.
Next to this, Disney is a sailboat surrounded by supertankers. Netflix at least has an engine.
At the time of publication, Dana Blankenhorn had long positions in AAPL and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
