Tuesday, June 5, 2018

A few days ago, we ran a piece about something we call the "hype economy," -- UPDATED

 Here was the key section.
The hype economy works along similar lines. The ability to get people talking about something (preferably but not always necessarily in a positive way) is tremendously valuable by most traditional standards. For entertainers, it can bring in large audiences. For goods and services, it can drive sales and help maintain customer loyalty. For politicians, it can be votes. For public policy initiatives, it can generate and shore up support.

At some point though (and it's a point we passed quite a while back) the ability to generate buzz becomes disconnected both from the attributes which are supposed to drive it and the objectives it is supposed to serve. It then takes on a life of its own. Hype becomes the primary if not sole metric by which anything is judged. The television show that no one watches, the business with no real prospect of turning a profit, the research claim that collapses under scrutiny are all seen as successful and important as long as you hear enough about them.

A few days after that, I saw the following:

Just to review, Disney is a massive and highly profitable corporation. Through a fortuitous bit of timing, Michael Hiltzik recently wrote a nice summary to provide context for the cancellation of Rosanne.
Disney, of course, is a preeminent entertainment conglomerate comprising theme parks, a film studio, cruise ships and, oh yes, television networks. Altogether, the company collected $55 billion in revenue in 2017, and recorded a profit of about $9 billion. The company’s media network segment contributes a bit more than 40% of revenue and perhaps half of profits, according to Disney’s most recent quarterly report.

By comparison, Netflix is a fraction of the size of Disney in terms of revenue, profit, and assets (which may be overvalued – – unless they been making some very quiet purchases, the company's real content library, rather than the shows they simply licensed or a limited time, isn't that deep). And there are serious questions about the company's debt.

Possibly even worse for the company's prospects, its growth is potentially bounded by an increasingly fierce competitive landscape including such deep pocketed competitors as Amazon, Google, and possibly even Disney.

If you are buying stock in the hope that it will make enough profit and accumulate enough assets to justify the price of the purchase, then it is next to impossible to justify the price of Netflix. If, on the other hand, you are functioning in the hype economy, the market cap of Netflix is not at all surprising.

The company is capable of generating mind-boggling amounts of buzz. It's true that much, perhaps most, of that comes from the billions of dollars that the company has spent directly and indirectly for marketing, PR, and brand building, but that doesn't really matter. Hype is fungible.



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