Netflix: Thoughts On Spielberg And Merchandise Models

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Netflix: Thoughts On Spielberg And Merchandise Models

seekingalpha2021-06-25

Summary Netflix stock remains a great long-term idea as the company gathers more subscribers, although growth rates may temper. The company has two news items recently attached to its story that are ...

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LuckyLucky
·2021-06-26
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·2021-06-25
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Butt3rc00ki3
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One involves a hopefully redoubled push into the world of merchandising; the other involves Steven Spielberg. Both are pretty big news for shareholders, although the merchandising will probably carry more weight for some.\nI am going to briefly weigh in on both of these items. Netflix stock itself continues to be a long-term holding. The streaming industry seems to remain in a growth phase, and as other competitors come online, the fact of the matter remains that Netflix has subscriber-scale and will continue to gain subscriber-scale, although growth rates may disappoint during some quarters as time goes on (when you get this big, it's not going to be a straight line all the time). Valuation is rated negatively on theSA system, so pullbacks are your friend when it comes to adding to the shares.\nThe Merchandising Angle\nAdmittedly, I thought Netflix would have been at a higher critical-mass in terms of consumer-product sales by now, but that's okay; it takes time to catch up to Disney (DIS) on this one.\nBack on June 10,SA reportedon the company's new electronic-commerce shop. There weren't many details - essentially, it's a site where things tied to Netflix would be sold. Some IP was mentioned:The Witcher, a couple anime programs, and, of course,Stranger Things.\nAs time goes on, we will presumably hear more about the company's merchandising endeavors, but the bigger point here is the concept of CEO Reed Hastings continuing to keep ancillary sales in the forefront of his mind. While streaming revenue obviously is the core business, and investment in high-quality content is the ultimate driver of that success, diversity in the top line will become more crucial as the company seeks to offset the expensive nature of content production.\nThisarticleoffers up more perspective. The merchandise meant to be sold on the site at this time is, according to the author, composed of a \"bespoke\" approach as opposed to \"mass-market.\" In other words: the company wants to go slow and collect data on what works and what doesn't on a more collector-targeted model of merchandising. Sure, that makes sense...start a company site so that more of the profit can be kept as opposed to straight licensing deals, but in doing so, there is a curve of experience that must be traveled.\nMy advice would be to keep that learning curve at low duration and to concentrate on the mass market. Incremental sales are important, but they work best in conjunction with programs that are meant to sell millions of units. That might lead to growing pains, but focusing on higher-profile IP such asThingswill help to cross-promote the service and the new consumer business in a similar way to Disney's modus operandi.\nBeyond synergy, the main goal of selling consumer products should be, of course, revenue/profit. Headlines a couple of years ago, like thisone, touted the possibility ofThingsreaching $1 billion in sales at some eventual point. I am assuming it will happen, and believe this should be the key area of investment for the company's current retail plan. Hastings should, in fact, be obsessed with selling merchandise tied to this IP and to reaching the billion-dollar level. It will prove to Wall Street that the company can effectively hedge (to some degree) its streaming service against other lines of business.\nThis leads to another discussion topic that is nevertheless related: when will the company make a more significant move into video games? Yes, streaming video games may not be in the cards in the near future, but producing physical video games for sale would help the company grow a consumer-products segment. Just ask Disney. Then again, maybedon't(necessarily) ask Disney. That company famously invested capital in development studios and the Infinity toys-to-life line, only to see it all collapse and the company to revert back to a licensing model. Navigating the technical world of game development is obviously tough, but Netflix is a technology company already, so it may have some advantage here.\nIf Netflix created platformer-type games for modern consoles, as well as roleplaying titles, based on high-profile IP (again,Things), then it probably could scale consumer products at a faster growth rate.Thingsalready has been given the video-game treatment, but I believe the franchise has only scratched that surface, and that the company as a whole would do well to focus on physical releases of games.\nSpielberg And Netflix\nNext up is the Netflix-Amblin Partnersdeal. Amblin Partners is Steven Spielberg's production company, and it is composed of investors Reliance Entertainment, Hasbro's (HAS) Entertainment One, Alibaba Pictures, and Comcast's (CMCSA) Universal Pictures. Make no mistake - the presence of all those associated companies does not change the fact that Spielberg runs the show with total control. And Netflix does not care about any of them, or whatever expertise they might bring to the proverbial table - it is the name Spielberg that means everything.\nYet, interestingly, there may be some risk here - I'll get to that in a moment. First, let's think about the positive aspects of the deal. To overstate the obvious, it's Spielberg, and that name carries value, both in terms of Hollywood talent and prestige with consumers. One could argue that the aesthetic Spielberg created with his older projects essentially drove the success of theThingsseries (him, and Stephen King, of course). In a weird sense, it's almost logical that the famous mogul would eventually find his way to Netflix, no matter what he said about day-and-date streaming vis a vis awards-eligibility (see previous news item).\nBut his somewhat controversial comments about that are probably the least interesting aspect of the deal. Netflix is making a bet - a bet that Spielberg somehow comes up with some content, perhaps a new franchise, that drives subscriber counts, or at the very least, combats churn. Most articles on this topic point to Netflix's stalwart commitment to releasing new movies/episodic on a weekly basis; Hastings clearly wants to exploit a volume strategy as a means of getting the company to 300 million global accounts (and beyond).\nIs Spielberg up to the challenge? Reported details on the deal are nonexistent as far as I can tell, but I presume he is being handsomely compensated for his time and branding. However, there is something else Spielberg clearly chases: other people's money. It's why Amblin is no longer Amblin but Amblin Partners. And it's why Amblin Partners is partnering up with Netflix because, again, no details, but there is indication that the streaming giant will finance at least some of the projects (I'm guessing it will be for all of the projects essentially, but that's a guess).\nHowever, what has been reported about the terms is confusing. It's been stated that at least two movies will be produced each year for Netflix, with Spielberg apparently not obligated to direct them. That in and of itself is not necessarily a bad codicil, as being an executive producer - and Spielberg does seem like a hands-on executive producer most of the time - still carries weight, both creatively and with branding.\nWhen I first heard of the deal, I assumed it might be for several movies and episodic series per year, and to be sure, that might end up being the case...that would make more sense, as Spielberg is notorious for having so many optioned ideas in his portfolio, and Netflix would be a perfect solution for access to capital for budgets as well as built-in distribution onthecurrent platform of the world. And therefore, Netflix finds another point of satiation for its volume desire.\nYet, if Amblin Partners is still making stuff for Universal, what exactly will be the kind of product that will go over on the Netflix side of the ledger? Will it be less mainstream fare, perhaps? Artistic experiments? Presumably the nextJurassic Parkfeature will never be financed by the streamer, but can shareholders count on the Partners to produce some new IP that will sell a bunch of toys (and thus brings us back to the first part of this article)?\nWhile Spielberg is a genius, he's made so much product over the years (mostly as producer) that much of it is bound to underwhelm on some level. And even when something seems like a can't-miss effort, it nevertheless can falter. Take Disney'sThe BFG, as an example. Spielberg directed the feature, and at the time, it seemed a return to form: a tentpole launch of a potential franchise guaranteed to hit the mainstream marketing buttons and move a ton of ticket sales and merchandise. It did nothing of the sort, asI wroteback in July 2016.\nAnd that delineates a risk. Sometimes capital invested in Spielberg won't resonate, no matter how well-intentioned from a commercial standpoint. The counterargument to that is the fact that there exists a lower threshold of acceptance of content on Netflix - i.e., since you don't have the friction of getting to a theater, taking a chance on a film that would have previously been in theaters is an endeavor of simplicity. Seriously, it goes a long way toward explaining the outsized success of Adam Sandler on the platform.\nCertainly, Spielberg's projects, whether directed by him or merely produced by him, will hit Netflix with a significant factor of awareness and acceptance. Still, if he perhaps saves some of the better stuff for Universal and theaters, then Netflix may not get the best ROI on his content. Again, it's a risk, and results remain to be seen. The goal is for viewing hours to accumulate at the highest levels for someone of his caliber, so hopefully for shareholders he plays the game the way Hastings wants him to play it (although the CEO obviously chases awards, there's no question in my mind that commerce comes first as far as he is concerned).\nEvery one of these partnerships and overall deals acts like little acquisitions the company makes over time, as opposed to buying a Pixar or a Lucasfilm outright, and they aim to produce content that will produce a surplus yield of interest on the part of subscribers. Sometimes that's the best way for Netflix to measure success for any given piece of content or individual talent since the company's brand equity and overall volume of content essentially drives subscriptions... its first-mover position really affords it a lot of strength, and if Spielberg failed on the platform, it won't mean the end of the business model. That doesn't mean, though, that the company can spend large amounts of money on random deals with talent; each one must be smartly designed with an eye on return.\nI'm fascinated by the Spielberg deal and am anxious to see what the first projects turn out to be.\nConclusion\nBoth of these news items help to tell the story of the Netflix thesis: volume of content leads to increasing subscription revenue which helps to open up new revenue streams, such as merchandising. Both items include risk factors in terms of appropriate capital allocation, and even though something like the Spielberg deal is just one of many and that most don't have high-stakes attached to them, I firmly believe that each transaction must be approached with maximum analysis and should be looked upon as high-stake entities - in other words, take each one seriously and make sure not to overpay.\nWhile the company is heading toward a more sustainable free-cash-flow situation (as mentionedhere), every dollar still counts - that may be a cliché, but with Netflix, longtime shareholders know exactly what I'm talking about (and for those who may not or are new to the company, it refers to Netflix sacrificing free cash to capitalize original-content creation).\nAt the time of this writing, the stock was at roughly the midpoint of its 52-week range, with a price of $512. The low for the year of $432 compared to a high of $593. Valuation as I mentioned at the top of the article is on the expensive side, butgrowthandprofitabilityrate as high on the SA quote system. With cash flow projected to improve over time, and considering the company's dominant position in the streaming space with 200+ million global subscribers (and I think 300 million is an inevitability in the years to come), the stock should be watch-listed and considered on proverbial pullbacks.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":125587794,"gmtCreate":1624680538318,"gmtModify":1703843525614,"author":{"id":"4087558306753550","authorId":"4087558306753550","name":"LuckyLucky","avatar":"https://static.tigerbbs.com/7f6923176f885b4cc7c0299b6e1ec22e","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4087558306753550","authorIdStr":"4087558306753550"},"htmlText":"Like","listText":"Like","text":"Like","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/125587794","repostId":1172045400,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5025671,"gmtCreate":1624680599756,"gmtModify":1663230063349,"authorId":4087558306753550,"author":{"id":4087558306753550,"idStr":"4087558306753550","authorId":4087558306753550,"name":"LuckyLucky","avatar":"https://static.tigerbbs.com/7f6923176f885b4cc7c0299b6e1ec22e","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":125587794,"type":1,"supId":0,"prevId":0,"content":"good","text":"good","html":"good"}],"langContent":"EN"},{"id":122692596,"gmtCreate":1624615048915,"gmtModify":1703841772174,"author":{"id":"3582019280173050","authorId":"3582019280173050","name":"Alisterrox","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3582019280173050","authorIdStr":"3582019280173050"},"htmlText":"Good&nbsp;","listText":"Good&nbsp;","text":"Good","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/122692596","repostId":1172045400,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":122843617,"gmtCreate":1624612972239,"gmtModify":1703841723427,"author":{"id":"3581548481060535","authorId":"3581548481060535","name":"Butt3rc00ki3","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3581548481060535","authorIdStr":"3581548481060535"},"htmlText":"Like","listText":"Like","text":"Like","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/122843617","repostId":1172045400,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":122823731,"gmtCreate":1624611841623,"gmtModify":1703841696416,"author":{"id":"3571113797749536","authorId":"3571113797749536","name":"neosg","avatar":"https://static.tigerbbs.com/fc9ad7a3430e4784449db6c7be4fa003","vip":1,"hat":"https://static.tigerbbs.com/f84859c65fc2d7681e28f6b8e9b0535a","crmLevel":2,"crmLevelSwitch":1,"idStr":"3571113797749536","authorIdStr":"3571113797749536"},"htmlText":"Doo doom","listText":"Doo doom","text":"Doo doom","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/122823731","repostId":1172045400,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":33,"commentSize":4,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}