Monday, December 22, 2014

Why Netflix is Overpriced

Netflix is first to market - and will be last in the marketplace.

Netflix had quite a run on its stock price - and some investors are selling out.   And it is funny, but some folks think they are idiots for selling.   After all, the stock price went up, right?  That means it's good, right?

Wrong.  It means if you bought low, now is the time to sell.  With a P/E ratio of nearly 90, the stock is clearly overpriced - the company is making money, but you'd have to wait 90 years to make your money back on this stock.

Why are people hyping the stock price and why are others selling out?

Well, the first problem is the nerds of the world.  They sit in front of their computer screens and think that anything on a computer, related to computers, or on their desk or in their pocket, is a good deal.   So they "invest" in anything internet-related like Groupon, Zynga, Zip-Car, Linked-In, Facebook, Netflix, Uber - all the nerd stocks.   And most of these have already tanked or will tank.   Very few will turn out to be even mediocre investments.

Netflix, I think, will either be bought up once the share price crashes - or will go under.

Why am I so pessimistic?   Well, history bears me out.   Ridden in a Wright airplane lately?   Flown on one of those new deHavilland jets?   Of course not.  They were first to market and now are last in the marketplace

Boeing, second to the game, has a lion's share of the business.   Well, that is, until they decided to be first to market with an all-composite airplane.   Right?

So historically, Netflix, as the first online movie-streaming service, will fade from view. 

And why is this?  Well, there are few barriers to entry in this business.   One problem with all Internet models is that any jackass with a server can copy the business plan in a heartbeat.   If you can offer the same service for less money (or have more attractive features) you can steal the thunder from the people who started the business.

I used to use Vonage, which charged me $20 a month for VoIP phone service.  I use netTalk now, for $20 a year.   How long can Vonage survive at that rate?   And yet at the time they came  out with the service, I thought, "this company is going places!"   netTalk benefits from all the painful lessons Vonage learned about 911 service and thus avoided those messy lawsuits (where people died) just as Boeing learned about fatigue stress from deHavilland's comet -for free.

So others will enter this business - that is a given.   And they already are.   YouTube is offering limited pay-per-view movies, and a lot more are just free.   Hulu is making a play for online viewers as well.  Many networks are offering their own online streaming (CBS, HBO, Comedy Central, for example) for free, with ads, or for a monthly fee.   Some television shows even have their own web pages.   There is no reason why Netflix should have a monopoly at all.

And increasingly, they don't.   The selection of films on Neflix is, well, getting thin.   They had a huge library to choose from when they signed a contract with the all-but-defunct STARZ network, and was able to show their huge film library online.  That contract expired, and the back catalog of Netflix has shrunk considerably.   Things are available online one day - and gone the next.  (And STARZ decided to launch its own streaming network)

Netflix has countered this with an annoying user interface designed to tell you what you want to watch - and make the library seem larger by listing each film four or five times.   Fewer and fewer full-length movies appear, and more and more television shows are showing up.   Recent movies?  No.  Good movies?  Rarely.

And for the movie aficionado, Netflix is horrible.  They cut off the credits at the end and  of course, commentary and bonus items are not available.

Will Netflix die?  Maybe not entirely, and it won't happen overnight.  Like Radio Shack, Sears, and J,C, Pennys, they will linger for a long, long time.  Many people will pay the monthly fee for years before they realize they no longer are using the service, but have morphed over to something else.

Of course, they could survive with their "original network programming" - which is part of their gambit to stave off the studios (who are reining in more and more content for themselves).   But then Netflix just turns into another network - albeit online.   I am not sure I would pay $8.99 a month just for House of Cards.

The problem for the consumer is, of course, which network do you watch?   If you are paying $8.99 a month for Netflix and then $5.99 for Hulu and then a few bucks for PPV movies on Youtube, or pay to watch CBS online or whatever, pretty soon you have a bill that is larger than your current cable bill.  Subscription fatigue sets in.   So what do you do?   Go back to renting movies?  Go back to mailing DVDs every month (their DVD library seems to have shrunk as well, though).

It is an interesting question.   For me, I will continue to watch (and pay for) Netflix for the time being.   But increasingly, I find the content more and more narrow and there is less and less worth watching.   Watching re-runs of old cable-TV shows is not what I signed up for when I started with Netflix.   

Eventually, I may just get tired and watch something else - like the first alternative that promises a greater film catalog than Netflix has - and a better, faster, and easier-to-use user interface.