In this segment from Market Foolery, Chris Hill is joined by Motley Fool analysts Jason Moser and Taylor Muckerman as they consider the case of Netflix (NASDAQ:NFLX), which announced this week that it will be taking on additional debt to invest in its content pipeline.
With Amazon.com nipping at its heels (and able to subsidize its video service from profits elsewhere), even a dominant media player like Netflix cannot rest on its laurels. It's also exactly the behavior we expect from the company, but the Fools have a question ... or three.
A full transcript follows the video.
This video was recorded on April 24, 2017.
Chris Hill: I think last week, we were talking about Netflix needing to raise some money.
Taylor Muckerman: And they do. [laughs]
Hill: Here we are a week later. Netflix raising $1 billion in Europe. They can use it for whatever they want, but doesn't the smart money say they're going to be spending, if not all of this money, at least the bulk of this money, on original content?
Muckerman: They'd better. Amazon is catching up to them in terms of spending on original content. $6 billion for Netflix this year, and $4.5 billion for Amazon this year. They're ramping it up. They can sell their Prime video for less than Netflix can, because they can rely on the retail and Amazon Web Services. There's definitely some competition there heating up for the over the top original content programming, and Amazon is not something I want to see in my rearview mirror if I'm Netflix.
Hill: What do you think, Jason?
Jason Moser: This was certainly expected. Netflix is a business that is going to be beholden to this very behavior for the foreseeable future. They were transparent about that. Reed Hastings has a strategy, and he's playing it out. On the one hand, we expect to see this, might as well get this financing while it's cheap. They also have a pretty healthy stock price, I guess is the best way to put it, and they could certainly get some cheap capital there as well. I think the question that I have with Netflix -- and, I think this is a wonderful business, and Reed Hastings is very bright, he saw this a long time ago and the strategy has really worked out well for him -- at some point, you have to start wondering how saturated the subscriber base becomes, and then you have to start asking the question, what kind of pricing power do these guys have? Because we are in such a competitive environment now, and there's so many alternatives out there. We were talking about this earlier this morning on the MDP team, about how 20 or 30 years ago, when The Sopranos came out for HBO, that was sort of a revolutionary program, it was sort of a step forward for television. And it was unique. And it lived a very long life, even well after it had gone off the air.
Today, I don't think these purveyors of original content have that same luxury. These franchises, these names, they don't last as long, they don't live as long because there's so much competition out there. So, something like House of Cards, for example, probably isn't going to be as relevant -- and maybe that's an outlier, I hear it's really good -- but, I don't know that it's going to hold the same sort of relevance 10 or 20 years down the line that something like The Sopranos did. I think when we start looking at this business, we have to think, "These guys are probably going to have to be raising a lot of money perpetually in order to keep churning out the original content and keeping up with all of the other players in the space." This is a fascinating space to watch, and I think Netflix is certainly the leader in it. I think they've done a lot of things right. And I don't suspect Netflix is going to go the way of the dodo bird. But looking at it from an investor's perspective, I wonder if maybe the low-hanging fruit hasn't been picked here.
Hill: But, in terms of just this deal, just the raising of $1 billion, do you prefer this move as opposed to a secondary offering? Let's just issue some more stock?
Moser: I think today I would rather see them take the debt out, because at some point, rates are going to be a bit higher, and I think they're going to tend to probably keep a pretty healthy share price. Generally speaking, Wall Street is on board with what they're doing, and it's obviously a very good business that's very customer-centric. I think, when you have a business with leadership, Reed Hastings, Jeff Bezos, these kinds of people, and they're very customer-centric, they really want to give their customers what they want, those are really powerful long-term stories, as long as they stay in line with that philosophy. I suspect that Netflix will be very successful for many years to come, just because of that alone.
Hill: Thank you, doctor. No, it's an interesting question, the example that you raised, Jason, about The Sopranos and HBO, because any time I open up the HBO Go app, I am struck by how prominent The Sopranos is, still, to this day, in terms of HBO promoting it. It is so well regarded, it has held up over time, and it is one of those "HBO classic series" that brand-new audiences are finding every year. I think we'll only figure this out as time goes on, but it will be interesting to see 10 years from now, 20 years from now, what are the things that Netflix is promoting, that they own? What is their original content that they keep pushing out to people, because it holds up over time
Moser: Yeah, that's the big question. I have never seen one episode of House of Cards, I don't know anything about the show other than it's been very well received. Maybe that's their Sopranos, maybe that's the property that holds up over time. I think those are going to be very tough to come by in the coming decade and beyond because of the amount of content. There's just so much good stuff out there, far more TV than there is time in the day to watch it, at least for most of us.
Chris Hill owns shares of Amazon. Jason Moser has no position in any stocks mentioned. Taylor Muckerman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.