Tuesday, December 6, 2011 0 comments ++[ CLICK TO COMMENT ]++

Interview with Reed Hastings of Netflix (req: free registration)

I have been following Netflix (NFLX) as a potential investment for a few months now and I ran across an audio interview with Reed Hastings that you may be interested in. Anyone interested in the company (or the online-video/television/cable/media markets) should check out the audio broadcast linked below. Unfortunately, it requires free registration and I can't link to it.

UBS 39th Annual Global Media and Communications Conference - Discussion with Reed Hastings of Netflix

(if link doesn't work, try going here and going through the free registration)

Reed Hastings rarely gives public presentations and, although many people think he is the worst CEO in America right now ;), I think he knows his stuff. Not only did he build up Netflix, but he is also a visionary who is closer to an Internet entrepreneur than 'old media.' He just needs to signficantly improve his capital allocation skills ;)

I don't usually post about media stories requiring registration—although now that I'm not Twitter, I might tweet about them in the future—but this is such an interesting discussion. Not only does Hastings talk about Netflix itself, but some of his thoughts on how online streaming is akin to electrification of rural America in the 1930's/1940's, and how fiber to the home is going to result in very-fast, and potentially very cheap, Internet connections is insightful. I also found his suggestion that media may turn into a global business—like Facebook, YouTube—because of the accessibility of Internet quite interesting. It's a subtle point but I never realized how cable/satellite television is very localized while Internet video streaming likely won't be.

Having said all this, I still think Netflix is pursuing a very risky strategy, like many young companies do. They are spending a fortune—about $1 billion to $2 billion—on content in the hope of having customers i.e. build out the business before others enter the market. Well, if you were an America pioneer in the 1600's, you might like this strategy but otherwise, it's not for the faint of heart. Reed Hastings says that online streaming is a secular trend that will see continuous growth (sort of like mobile phones) but it remains to be seen if Netflix can capture those customers.

Reed Hastings also says that HBO Go is Netflix's biggest near-term competitor, yet my read of his shareholder letter from a month ago was that it was MVPD (multi-channel video programming distribution e.g. legacy cable television provider) that was the big threat. In any case, I agree with Hastings' point in the interview that companies like Amazon or Apple haven't shown that they are willing to spend the amount of money Netflix is spendong on content (about $1 billion to $2 billion) and hence likely won't be big competitors (I also think shareholders of those technology companies will likely block those companies from pursuing the media business since media companies tend to have lower ROE and different business characteristics).

In any case, I can see why investors bid up Netflix to some ridiculous price over the last few years. The 'big picture story' is very tempting.

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