Let's Know Things

This month we talk about CNN+, Netflix, and FAANG companies.

We also discuss inflation, market saturation, and market caps.

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Transcript

The acronym FAANG was originally popularized back in 2013 by the host of the TV show Mad Money, Jim Cramer.

It refers to Facebook, Amazon, Apple, Netflix, and Google; the first letter of each of their names making up the acronym, and was coined because of the overwhelming dominance these five companies enjoyed on the stock market, their price fluctuations, mostly upward, tending to pull the rest of the market with them, leading to a long period of up up up movement for US-based stocks, and US-based tech stocks in particular.

The original iteration of this acronym was actually FANG with one A, and Apple was added as a second A in 2017.

The reason for that absence and then later addition is that the other four stocks in this handful, Facebook, Amazon, Netflix, and Google, enjoyed market capitalizations—which means, basically, the value of the company based on the amount of stock shares they have available, times the value of each share of stock—that were massively higher than comparable companies in other industries. And those, by some estimations, at least, out of proportion valuations were the consequence of a privilege enjoyed by tech stocks in general, but especially those that operated online in some fashion.

The theory was that while you could have a truly successful and wealth-generating business by making refrigerators or running nail salons, the economies of scale are limited when you're dealing with things like human beings and atoms, rather than algorithms and pixels.

Stuff in the real world is limited by physics, while stuff in the digital world can potentially scale up nearly infinitely, to the point where the costs of operations diminish down to near-nothingness, and the profits, continue to increase ever-upward, as more can be made, cheaper, for more people—their reach is practically infinite, same as their economies of scale.

The success, by some metrics at least, of companies like Facebook, Amazon, Netflix, and Google seemed to support this assertion, as, for instance, Google has been able to increase their ad income dramatically since they were founded circa the dotcom revolution at the turn of the century, and their costs have plummeted, allowing them to scale on the relative cheap, while companies selling ads in the real world did not enjoy the same free-fall in their liabilities; there are only so many printed newspapers and phone books that can be made and distributed, and only so much billboard space available.

The same was true of Netflix, when they shifted their operations online, after years of functioning as a DVD mail-order subscription service. It was pricey to get up and going, to move to an online streaming model when no one had done that, at that scale, previously, but they made the investments, and that allowed them to function with far lower overhead moving forward, and as they scaled, they created something of a moat around themselves, protecting their accumulated customer base from outside incursion because of how much it cost to get up and going; they created new value by moving in this direction, then, but also scaled up their profits, which in turn allowed them to further invest in new content, speedier online delivery for their streamed TV shows and movies, compared to their competitors, and other such benefits, again, because they moved online faster and had a model that worked with those digital-oriented mechanics—and this created a beneficial cycle that further deepened their protective moat.

The prices of these companies' stocks tend to fetch higher prices than their incomes and monetary stockpiles would otherwise justify, then, if they were building fridges or running real-world, service-based companies, because it's assumed they can keep scaling in this way, continue pushing their costs downward and customer or audience-based upward, and thus, continue pushing their profits higher and higher.

Apple was eventually added to the mix when they started fleshing out their online services division, and functioning a bit more like a modern, online tech company, rather than an IBM or other old-school tech company, selling only computers and other tangible devices.

Today, this acronym is a bit dated, in part because two of the companies have changed their names, Facebook becoming a subsidiary of the Meta umbrella company, and Google becoming a subsidiary of Alphabet.

Many money-world folk are also considering adding Microsoft to the mix, as they've, in recent years, reclaimed their position as one of the most profitable and wealthy companies in the world, after pivoting to online services, like Apple did, and in some ways even more successfully so than Apple because of their immensely successful cloud service offerings.

Over the past week or so, though, it's also been proposed that Netflix should be removed from this list. Not because their economies of scale have changed, or their potential to keep lowering their expenses, necessarily, but because they've lost a huge chunk of their valuation, and are facing barbarians at the streaming video gate from all directions—meaning their position as the dominant element in the industry they more or less created, online streaming, is under threat, and their previous highs on the market may thus never return.

What I'd like to talk about today is Netflix, CNN, and the contemporary shape of the online streaming wars.

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There are two articles I'd like to unspool for this episode; the first comes from The New York Times and is entitled:

CNN+ Streaming Service Will Shut Down Weeks After it Launched

This piece documents the very brief life and quite sudden and, to some at least, surprising death of a premium video streaming service created by the relatively recently merged media company Warner Bros. Discovery.

CNN+ was meant to follow what's become something of a playbook for major, generally well-regarded media companies and their pursuit of revenue beyond traditional cable bundles and advertisements.

In general, you have some kind of freebie option available for the mass audience, usually ad-supported, and then you have a collection of higher-end productions kept behind a paywall. And that paywall is generally brought down by becoming a member and paying something like $5-10/month for access.

CNN, was the third most-viewed cable news network in the US as of mid-2021, just after Fox and MSNBC, and it delivers similar content around the world via its international wing.

CNN's parent company, Time Warner, was scooped up by telecommunications company AT&T back in 2018, and renamed WarnerMedia.

WarnerMedia was then divested by AT&T, so it could be merged with Discovery Inc, forming a new mega-media company called Warner Bros. Discovery; a company that includes massive and massively profitable media properties like HGTV, the Food Network, Cartoon Network, HBO, TNT, Warner Brothers Studio, and CNN.

Just before this recalibration, the higher-ups at CNN started planning their premium, CNN+ offer; and this plan was finally announced in July 2021, and that announcement was followed by a quick succession of show and new documentary announcements, and the hiring of some big-name news personalities, like Chris Wallace, who was previously one of the bigwigs at Fox News, and Audie Cornish who was an NPR co-host.

CNN+ then launched their new offering, but it did not do well.

Fingers are still being pointed as of the day I'm recording this, so it's tricky to know who's responsible for what, but it would seem that because this planned premium offering was mostly dreamed-up under the auspices of their pre-Discovery merger days, the folks who came in to run things after that merger were not keen on it, especially since Discovery brought with it a whole lot of binge-able intellectual property of the kind that tends to do well on such networks, and the company already has a big premium service in HBO Max and was planning a new, ultimate service that contains all their stuff in one place, including CNN content; so the people who took the reins were apparently a bit annoyed about all this and possibly just let it wither on the vine, rather than truly investing in it to see what would happen.

It's also possible, though, that CNN just ran into what seems to be an increasingly common problem for streaming video platform would-be's in the current subscription and media ecosystem: potential subscribers are already full-on up platforms, are not exactly lacking in options when it comes to watchable, streamable content, and folks maybe just didn't see the value-proposition in paying for something that they might not use and which would mostly just serve to take more money out of their wallets each month, during a period of high-inflation and economic uncertainty.

Consequently, two weeks after its launch, fewer than 10,000 people had signed up for the service—which is truly abysmal for a network as large as CNN, and for the amount of money they injected into this project. Management of their parent company pointed at this number and quickly announced the cancellation of the CNN+ platform.

The second article I'd like to unspool today comes from The Economist, and it's entitled:

Netflix sheds subscribers—and $170bn in market value

As I mentioned in the intro, Netflix kind of defined the modern video streaming platform space when they segued from mail-order DVD subscription plans to online plans back in the early 2000s, around the same time the first smartphones hit the market; so something like 15 years ago, depending on which part of the world you live in.

Netflix has been on a tear since then, reducing their costs every year while also increasing their subscriber base, over time investing in their own original content and phasing out content licensed from other companies, and even experimenting a bit with choose-your-own adventure-style interactive media, and more recently, video games.

But in general, Netflix has just kept moving forward, doing more or less what they've always done, increasing their content library and their lead over their competition year by year.

That began to change a bit after Amazon started investing more heavily in their Amazon Prime service, Hulu got more direction when scooped up by Disney, which then released its tentpole Disney Plus service to go alongside it, and HBO finally consolidated a series of online platform projects into the singular HBO Max.

There are many other services of this kind, in the US and around the world right now, some focusing on anime, others on documentaries, some on horror flicks, others on free content available from local libraries.

There's an embarrassment of options if you're looking for something to stream, and that's true of video and music and podcasting content, and increasingly things like games, as well.

That means this space—video streaming, but also having on-demand access to any kind of content, on essentially any device—is increasingly saturated, to the point where folks are streamlining their subscriptions, re-subscribing when they want to watch a specific show, maybe, but otherwise just watching what's available on the one or two services they keep, and maybe sometimes borrowing login credentials from a friend or family member to access all those other services when they want to graze more broadly.

Netflix's trend line, through all of this, even as new competitors began to arise and soak up some of their potential customer-base, remained steadily up and to the right: they've been doing great both in terms of customer acquisition and retention, and in terms of their market capitalization—they've seemed like a really reliable, safe bet, almost like investing in Walmart or IBM, back in the day; and that's been true even as these newer, upstart companies have joined the fray—entities like Disney Plus might have more rapid growth in some markets, but Netflix is so far ahead, it's remained a perceptually solid bet.

In January of 2022, Netflix sent out a memo warning investors that they only expected to add a, for them, paltry 2.5 million new subscribers to their service in the first quarter of the year, and that hit their share price substantially: they lost about 30% of their stock value basically overnight, because this seemingly invincible company was maybe showing a vulnerability.

On April 19, they divulged that their numbers had actually been way worse than expected: they lost about 200,000 customers, net, rather than adding a few million. This represented their first loss in more than a decade, and triggered another selloff, this one dropping the company's stock price by about 35%, again basically overnight.

They've said they expect to lost another 2 million subscribers between April and June of this year, and since the beginning of 2022, they've lost about $170 billion in market value, which has earned the company the unfortunate designation as the worst-performing stock in the S&P 500 index.

The company has said they suspect they lost about 600,000 subscribers between the US and Canada because of a recent price increase, and that they lost about 700,000 subscribers in Russia, due to sanctions against the country after Russia invaded Ukraine.

But those new competitors are also likely playing a role here, as is inflation and the abundance of options, paid and free, available to everyone all the time everywhere, these days.

A recent independent report also found that, due to slow-uptake of smart TV technologies and relatively slow internet speeds across much of the world, Netflix's long-held and promoted expectation of what their total addressable audience looks like might be off; they've always said they have an addressable market of something like 1 billion homes, but this new report says the true number might be closer to 400 million, less than half, which would mean that Netflix, with its current 222 million subscribers, plus 100 million or so homes that are currently using other households' login info, is already about 80% of the way to their maximum possible ceiling—which means the tech company assumptions of massive, near-infinite future potential scale may not apply to Netflix in the way it's been long-assumed, and they may, thus, not belong in whatever the next version of FAANG companies turn out to be.

Worth mentioning, too, is that many of Netflix's competitors, these days, are companies with other monetary flywheels: Apple has a premium subscription service that they can partially fund with hardware and software and service offerings, Amazon has one they can keep aloft with Amazon Prime subscription payments, Disney has an ever-expanding expire of intellectual property-based shows and films and toys and games and so on—but Netflix, at the moment at least, is just Netflix. And though they continue to expand their library of Netflix-owned content, they've yet to show they can expand beyond their core subscription-payment model, or that people will stick around if they decide to clamp down on login-info borrowing in an attempt to bring more of those people into the paying account fold.

There's been some suggestion that, despite the company's founder always saying he would never put ads on Netflix, that the company might shift in that direction, offering a free tier with ads, much like some of their competitors, while continuing to offer the paid tier with no ads, and at perhaps an even higher-cost than is charged today.

This is still far from a certainty, but there's been public speculation about it from investors and from the company itself, so there's a good chance it'll be tested in some markets the near-future, to see if this might help stop some of the financial and subscriber-base bleeding until they can find a more stable and diverse foundation that'll allow them to get investors excited and optimistic about them, again, and possibly expand that maybe-lowered maximum-possible-market ceiling, as well, since more people around the world can afford free-with-ads than they can afford to pay for a premium service each month.

One more point worth making here, and this is true of both Netflix and the short-lived CNN+, is that part of the issue at this moment might be that we're, across most of the world, coming out of severe COVID-lockdown conditions, which may be resulting in a pivot toward all the things we haven't been able to safely do for about two years: we're not out of the pandemic yet, but by most measures, things are a lot better than they've been for years across most of the world, and there's reason to believe, and some data to back up the assertion, that wants and needs are flipping in the opposite direction from where they've been during this cloistered downtime, pivoting away from isolated services like video streaming and back toward events, get-togethers, eating at restaurants, and even seeing movies in theaters.

What this means, money-wise, is that many of the big names of the pandemic, like Peloton and Zoom and Netflix, are just getting crushed on the market, and this might be a temporary recalibration, but it might also be the tide moving out and all of us getting to see who's wearing swim trunks and who's not—it might be revealing how much of those inflated market caps we saw build up over the past two years were bubbles, and how many of them were real, long-lasting value stores that'll still around beyond these past few years of unusual and hopefully temporary conditions.

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Show Notes

https://www.economist.com/business/netflix-sheds-subscribers-and-170bn-in-market-value/21808847

https://www.nytimes.com/2022/04/21/business/cnn-plus-shutting-down.html

https://www.investopedia.com/terms/f/faang-stocks.asp

https://en.wikipedia.org/wiki/Big_Tech

https://www.bloomberg.com/news/articles/2021-05-17/at-t-to-merge-media-assets-with-discovery-in-43-billion-deal

https://www.theverge.com/2022/4/21/23035703/cnn-plus-shutting-down

https://www.bloomberg.com/opinion/articles/2022-04-21/bullish-sentiment-goes-out-of-markets-and-netflix-gets-trampled-underfoot

https://techcrunch.com/2022/04/19/netflix-to-charge-global-members-sharing-their-accounts-an-additional-fee-following-tests/

https://www.reuters.com/technology/netflix-subscribers-fall-first-time-decade-forecasts-more-losses-2022-04-19/

https://www.wsj.com/articles/netflix-stock-price-plunges-premarket-after-subscriber-loss-11650449002

https://www.wsj.com/articles/netflix-password-sharing-crackdown-how-11650488569

https://www.wsj.com/articles/madison-avenue-loves-the-idea-of-a-netflix-with-ads-11650489712

https://www.bloomberg.com/news/articles/2022-04-20/ackman-loses-more-than-430-million-on-three-month-netflix-bet

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