Hastings to Facebook: What It Really Means

Maybe you thought Netflix (Nasdaq: NFLX  ) was getting uppity when CEO Reed Hastings joined Microsoft's (Nasdaq: MSFT  ) board of directors. Then you'll be shocked to hear that Facebook just added the man to its own board.

"Reed is an entrepreneur and technologist who has led Netflix to transform the way people watch movies and TV," says Facebook CEO Mark Zuckerberg. "He has built a culture of continuous rapid innovation, something we share and work hard to build every day."

A new director here or there is usually not huge news, but this one's a game-changer for both Facebook and Netflix.

For those who thought that Facebook was gearing up to kill Netflix with its own movie-streaming platform, this announcement drives an iron spike through the heart of that worry. But that much was obvious from the start. Facebook's pay-per-view rental model is very different from a Netflix subscription; the two play to entirely different audiences.

If Facebook is threatening anybody in the media space, it'd be the other pay-as-you-go movie outlets, including Comcast (Nasdaq: CMCSA  ) and other on-demand cable services along with Apple (Nasdaq: AAPL  ) and the rental options in the iTunes movie store. By the way, those guys don't play in the Netflix sandbox either and just might be the next to invite Hastings for coffee and a board seat. And now Hastings steps aboard to help Facebook figure out how to play that game -- a powerful weapon in the company's arsenal.

So Netflix loses a perceived threat, which is worth a modest intraday share-price bump. Facebook gains an advisor with experience taking online businesses public and plenty of digital-media expertise. And Hastings becomes a strangely direct connection between Microsoft and Facebook. That might not mean much -- after all, Microsoft is a well-known investor in the social network, so there's an existing link -- but Hastings could become a force of alignment between Redmond and Zuckerberg. It's something to think about.

Is Reed Hastings all done branching out, or will he land on more of these highly public board seats? Add Netflix to your Foolish watchlist, and you'll be the first to know.

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. See his holdings and a short bio. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, and Microsoft, creating a bull call spread position in Apple, creating a diagonal call position in Microsoft, and buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 23, 2011, at 4:51 PM, TMFZahrim wrote:

    Brain freeze alert: Netflix obviously also gains access to an operation that knows a thing or two about social networking -- something Netflix has tried and failed to implement before. So it's more than just losing an imagined rival. Forgot to add that to the article somehow.

    Anders

  • Report this Comment On June 23, 2011, at 5:03 PM, MutualFundMonday wrote:

    Anders, what don't you do a Google search on what a Board of Directors does for a large corporation? Then you'd realize that Hastings will be barely spending any time in the Facebook office throughout the year.

  • Report this Comment On June 23, 2011, at 7:06 PM, MKArch wrote:

    I wonder if it occurred to anyone but me that the reason NFLX has the subscription streaming sandbox all to themselves is because it's an unsustainable business that will implode once they saturate the U.S. market some time over the next few quarters. With a near 50% churn rate they will rapidly lose total subs once new sub additions comes back to earth. Since 2008 they've signed up ~40 subs out of ~83M potential broadband households in the U.S. and Canada. They have to be near saturation and look out below when that happens. The virtuous cycle reverses in a death spiral. IMO there's a reason why they have the sandbox all to themselves and it's not because AAPL, GOOG and AMZN are afraid to take them on. All three could afford to blow NFLX out of the water on content spend per sub and just take subscription streaming from NFLX if they wanted the market. BTW access to social networking doesn't change a 50% churn rate or add potential broadband households to the U.S. and Canada.

  • Report this Comment On June 23, 2011, at 10:11 PM, chadscards1274 wrote:

    Two points:

    1. I don't know that Netflix really loses a competitor as Facebook and Netflix basically compete for people's time. Facebook is and can be an obsession to the tune of I last hear about an hour of use a day for the average "Facebooker". At current there is really only one competitor to Netflix and that's Hulu.

    2. To MKArch's point, the problem with this thought is this assumes that Netflix will only offer it's services in the US and Canada. The ultimate question there is why would Netflix limit itself to only these two countries? The follow up logical question is does the 83M stated potential broadband households remain a set number or is that growing every year? In addition NFLX does not have 40M subs yet that I know of the last I checked it was closer to 20M. So we know then they not only have more people they can sign up, but the number of broadband households is growing and they have international growth potential as well. To be fair NFLX is richly valued even on next year's earnings at this point, but if we are going to argue that NFLX is going to have to "look out below" we need to argue facts.

  • Report this Comment On June 24, 2011, at 8:50 AM, MKArch wrote:

    MH,

    There are a whole host of reasons why international expansion will be a lot harder and slower than the U.S.- Smaller markets with existing competition, bandwidth restrictions, lower income levels, competing with piracy and local content too name a few. I think broadband adoption in the U.S. and Canada is something like 75% and if it is still growing it's not enough to matter to NFLX.

    Here's NFLX problem in a nutshell. In 2010, they signed up ~16M new subs but lost ~8M for ~8M net gain. So far in 2011 they are on a pace to lose ~12M subs which means they need to sign up 12M subs just to break even. In Q1 they signed up ~6M and lost ~3M. Right now they have ~24M subs to hit analyst estimates of ~28M for the year they'll have to sign up ~14M (~10M just to offset losses) over the next 3 quarters. That might be doable but that's ~20M subs signed out of ~83M broadband households. In 2011 they'll have to sign something like 16M subs just to break even.

    They are running into the law of big numbers on the sub additions side. When run out of new adds existing subs continuing to walk away in droves is going to bring their total rapidly backward. If they can't scale their content costs back with sub losses they will be in trouble. If they have to cut back on content quality to keep content costs in line they will accelerate the death spiral. There's a reason why Reed Hastings won't provide standard churn metrics after 2011. There's a reason why AAPL,GOOG and AMZN aren't competing in the subscription streaming sand box when they could blow NFLX out of the water on content per sub spend and just take this market from NFLX if they wanted to.

  • Report this Comment On June 24, 2011, at 10:24 AM, MKArch wrote:

    Economics is not my background but I do remember the first lesson in my economics 101 course in college was that success breeds competition. Somehow or other the analyst covering NFLX want to believe (or want retail investors to believe) that NFLX has mystically turned this fundamental maxim of economics on it's head and their success drives competition away. In the end NFLX is nothing more than a glorified middle man of tv re-runs and old movies and *IF* AAPL,GOOG or AMZN thought subscription streaming was the fantastic business that the analyst and financial press is making it out to be right now they could easily afford to provide much more content per sub than NFLX can afford to provide and just take this market from NFLX with higher quality content. Again there is a reason why they aren't doing this and I can guarantee you it isn't because it didn't occur to them that content is king and they could outspend NFLX if they wanted to.

  • Report this Comment On June 25, 2011, at 1:46 PM, TMFZahrim wrote:

    @MKarch,

    that would make sense if business was all about winning the market-share war -- richer businesses could squeeze NFLX out by spending exorbitant amounts of money.

    But to do so would lead to large losses whereas NFLX has figured out how to run this business at a profit. Could AAPL, for example, kill NFLX at the drop of a hat by spending a few billion? I guess so. Would they do it? No, because it wouldn't help the bottom line. Makes no business sense to spend for spending's sake, or just to win a trophy for the breakroom.

    Anders

  • Report this Comment On July 01, 2011, at 6:39 PM, MKArch wrote:

    Anders,

    AAPL wouldn't be spending for a trophy they would be spending to take what pundits want to believe is a fantastic business away from NFLX. IMO the reason why the obvious competition isn't even trying to take NFLX on even though they could easily take the market if they wanted to is because it's not a sustainable business. Their 50% churn rate being a glaringly obvious problem for the sustainability of the model. NFLX lost ~8M subs in 2010 they'll lose ~12M this year look out below once they run out of new subs to take the place of the droves of existing subs keep walking away. I'm pretty sure this is what's keeping AAPL, GOOG and AMZN from going into subscription streaming and not the inability to find the right number on content spend between enough to take market share from NFLX but not too much to be uneconomical (if the subscription streaming business really was all that).

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