Monday, January 7, 2019

Apologies if the blindfold metaphor is a bit on the nose

A couple of good articles appeared on recently of particular interest to those following the Netflix valuation story. One uses what appears to be a legitimate hit as a jumping off point to look at the murkiness of the numbers coming out of the company; the other examines the latest compensation package for its top executives. Though most of this will be familiar to regular readers, this is a good time to review a few of the essential points to keep in mind.

One. With all due respect to its remarkable accomplishments, Netflix is still at best a marginally profitable company facing increassinglyly daunting competition. In order to justify its stock price, it will have to have a reasonably good chance of doing something not just unprecedented, but beyond precedent by perhaps an order of magnitude. Under these circumstances, the burden of proof falls squarely on those making the Pro argument, but…

Two. Almost all of the data used to make this case is suspect to the extent of being often nearly worthless. All companies are selective about releasing information and will aggressively spin what they do let out, but even by that standard, Netflix has a reputation for being secretive and borderline deceptive. When you combine that with the ambiguous and difficult to interpret nature of the data and the extent to which billions of dollars of PR and marketing money have influenced traditional success metrics like awards and buzz, there is simply no way of telling what is driving acquisition and retention and how well the company is positioned for losing or having to share content from Disney/Fox, Warners, and whatever studio decides to launch a streaming service next.

Three. The top executives at Netflix have a tremendous financial incentive to keep these balls in the air as long as possible. Not only does this  improve the chances of a soft landing such as a merger with NBC/Universal or Sony (my money's on the former), but every year this continues means tens of millions of dollars in each of their bank accounts. Add to that the power and other intangible rewards associated with being on top (including the constant stroke jobs that now constitute most coverage of "Silicon Valley visionary disruptors"), and Hastings and Sarandos have every reason to cook this data to a golden brown.

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