With all the talk of media mergers these days, there's been an ongoing debate as to whether other content producers could potentially catch up to Netflix (NASDAQ:NFLX) in the streaming races. Well, one of the founders of modern cable, John Malone of Liberty Global (NASDAQ:LBTYA), has weighed in. And his answer: Nope.
Recently, John Malone sat down with CNBC's David Faber for a 45-minute interview. While the interview was a wide-ranging look at the modern media business, there was a lot of airtime given to Netflix. Malone believes one can't help but "take your hat off and envy what [Reed Hastings] has built." Malone once advocated that cable companies should band together for their own Netflix-like service, but now even he admits it's "way too late." Here are the reasons why.
As you might be aware, Netflix was the first to seize on the global internet TV opportunity. Since the internet gives webscale content providers a worldwide platform, content providers have a much larger base they can build to. In order to capture all of those global eyeballs, however, you need to give them something they want to watch.
Netflix was the first to realize the playing field was much bigger than the traditional cable footprint, which has historically been a domestic phenomenon. Cable distribution companies traditionally had to build or buy their (expensive) footprints, and content providers could only sell into a few distributors at once, and only for a few specific countries and territories where that content could scale.
Netflix broke all those rules, however, scaling quickly to 190 countries with over 100 million subscribers, and plowing all of its earnings (and then some) back into more and more content. The $8 billion Netflix plans to spend next year dwarfs all other content producers such as HBO, formerly the biggest premium player, which is only spending $2.5 billion.
Why is scale so important? Because a lead in scale can become very profitable if you become the first go-to global service. As Malone said:
Scale is -- is very, very powerful when you're producing something that has a high fixed and very low variable cost. So when you get to a point where your marginal cost is $0, profitability is enormous as you scale up. And [Reed Hastings]'s on that-- on that track.
In other words, at some point, Netflix will stop its spending increases. But by then, it will have amassed such a huge content library that rivals may not be able to match it. Then, of course, every new subscriber (or dollar it raises its subscription) will fall directly to the bottom line.
Netflix employs a rather disruptive business model. Netflix is now striking deals directly with producers and creators, working around the studio system that has long been the gatekeeper to Hollywood. I wrote about this back in August when Shonda Rhimes and the Coen Brothers struck deals with Netflix directly, but those two huge creative names are just a couple on a long list for Netflix.
The separation from the traditional bureaucracy of Hollywood is not only good for efficiency but the freedom allows the show creators to do things differently and take more creative risks. For instance, the company's recent show Disjointed is a three-camera sitcom, but also has a heavy dose of animation, musical numbers, and even custom commercials for Lay's potato chips (even though Netflix is an ad-free service!).
Control and data
Finally, could other companies like HBO and other domestic providers achieve the same scale as Netflix by licensing their content to international service providers? Not exactly. Malone believes having a direct relationship with the customer and accumulating all the data that comes with that is immensely valuable. Netflix has been using its data algorithms ever since it launched its first big show in House of Cards, and by now it seems these capabilities have only grown.
The clear winner... except maybe for...
"Jeff," as Malone refers to him -- as in, Bezos, as in, Amazon (NASDAQ:AMZN) -- could be the only one that has a chance of overtaking Netflix, Malone says, and that's only because Amazon has "a different monetization model." Like Netflix, Amazon doesn't worry about GAAP profits either, and also has huge scale, not only in video but all of retail and cloud computing as well.
The metaphor Malone used for Amazon? The "Death Star."
If you're a Netflix investor, you should feel pretty good a guy as knowledgeable as John Malone thinks it's way too late for others to catch up in the streaming race... just keep an eye on "Jeff's company," in the years ahead.