Last night on CNBC’s Fast Money we discussed the competitive threat that Alibaba (BABA) poses to Netflix (NFLX) in China. Watch here:
I am not going to get too into the opportunity for NFLX abroad, it is obviously immense. But maybe even more than here in the the U.S., the success of the expansion will depend on original content. They seem to be on a roll on that front domestically, but I doubt the content that the company has spent hundreds of millions of dollars producing for U.S. audiences will resonate with other cultures. House of Cards, or Orange is the New Black will not have the same sort of cross cultural appeal as blockbuster action movies like Avengers or Jurassic Park. Cable and Netflix TV is better than Hollywood movies right now and that is due in large part to the need for Hollywood movies to appeal (at a minimum level) to a global audience across multiple cultures. That means sequels, remakes, car chases and stuff going BANG! The sorts of movies that you can understand the plot even if it’s in another language (or the sound is off.) Not what we’ve come to expect from cable and streaming dramas during the golden age of television. So how will Netflix address this difference? Make Hollywood action style shows for global audiences? Or is a Game of Thrones type show the prescription? Either way it’s not their current roster. But I’m sure they’re already thinking about it.
I don’t have anything intelligent to add on the merits of holding onto or committing new capital to NFLX at these levels. All I can say is that the stock’s 100% gains since the lows in January, and 1100% gains since the lows in 2012 might well discount a bit of the enthusiasm about an international expansion, and may not exactly discount the potential for a local behemoth like BABA to become a formidable competitor on their home turf. It is also important to remember that there have been few if any U.S. web based businesses that have been able to compete in a meaningful way in China (AMZN, EBAY, FB, TWTR, YHOO).
But what I do think is worth noting is that one of the kings of original content, Time Warner (TWX), has a $71 billion market cap, about 2.5x expected sales of $28 billion vs NFLX’s $40 billion market cap, almost 6x expected sales of $6.8 billion.
Does that mean a content company like TWX is an attractive buy? They’re only growing sales in the low single digits (obviously off a much larger base.) But they are also expected to register about $4 billion in net income on that $28 billion in sales, vs. NFLX’s $150 million on $6.8 billion that is growing 23% a year.
Comparing the two is like apples to oranges, but I think it is important to remember that TWX’s HBO-Go property, and others like it will be staunch competition in NFLX’s dominant North American market in the very near future as cord cutting becomes a dominant trend and new platforms like the one Apple is working on evolve. If the stock market is a discount mechanism, NFLX share price could be incorporating a lot of future success yet to be achieved. If we were playing would you rather right now, my money would be on TWX.
Based on the piracy rates globally for HBO’s monster hit Game of Thrones, I think its safe to say this is the sort of content that resonates throughout the globe. And it’s not like you can wave a magic wand and have a show like Game of Thrones. If I had to choose between the global appeal of Jon Snow or Frank Underwood it’s Jon Snow (spoiler). If NFLX is unable to produce that kind of content for a global audience then it could mean Winter is Coming. TWX already has a first mover advantage on this sort of content (see NFLX’s Marco Polo if you need further evidence).