I recently started a daily-ish newsletter and there’s stuff in it that I’m not posting here or on Twitter, but…spreading the word about having a newsletter in 2017 is somehow much harder for me than it was in 1994. So, (this one time?) here’s something I wrote for today’s newsletter:
Good Luck, Netflix?
It is widely assumed that between cord-cutters and cord-never-ers the current rate of carnage to the cable bundle business model will at minimum continue at its current rate. And at maximum there will be a mass exodus.
That thinking is understandable and already seems priced into stocks of companies like Netflix.
But what if that thinking is wrong?
Please consider the rest of this as purely a thought experiment. It is a thought experiment inspired by data, but it is data I need to disclaim so heavily that you might as well consider that I’m just making the numbers up to stir the drink and have the thought experiment.
Nielsen has been tracking coverage for all the TV networks since eons before I was interested in TV ratings. Traditional providers like Comcast, Verizon, DirecTV were always included but since February Nielsen has been counting the new OTT services like SlingTV, Sony Vue, YouTubeTV and DirecTV Now.
I’ve been following the coverage pretty closely but one thing I hadn’t been aware of is that as a result of the changes, Nielsen subscribers can now figure out a replacement rate. That is, networks like ESPN can now figure out if you bailed on Verizon but came back in via Sony Vue.
I recently got a small glimpse of the replacement rate data. The sample size is small in multiple dimensions (time measured and number of panelists) so small that, again, all of this should be discounted as nothing but a thought experiment. To make this very clear: I have no idea yet whether the data is instructive about the current landscape and predictive about the future landscape. I doubt Nielsen subscribers with access to more data than I have do either. It’s safest to assume it’s neither instructive nor predictive.
But for thought experiment AND entertainment purposes let’s assume the data isn’t worthless and that it actually is instructive and somewhat predictive.
In that scenario currently ESPN is recovering nearly 2 out of every 3 subscribers it loses via the traditional cable bundle with one of the new OTT services. FS1 is replacing more than 8 out of every 10 subscribers lost in the traditional bundle with one of the OTT services.
As you can see, even in the above example and disclaiming the data might be worthless, Fox Sports 1 and ESPN still wind up with a net loss in subscribers, but it’s still very interesting because the rate of losses is slowed considerably.
What if the “mass exodus” is already kind of baked into Netflix’s stock price and the mass exodus never happens or it takes years or even decades longer than anyone is figuring?
If that’s even kind of true that’d probably be an awful, no good, very bad day for Netflix stock the day the market figures that out.
In a mass exodus the conventional wisdom seems to be that Netflix would thrive even with a bevy of alternate OTT providers (including whatever the forthcoming Disney/Fox OTT mashup will be).
But what if there is no mass exodus? What if 75 million homes have a traditional cable bundle for many years to come?
In that environment it’s easy to imagine the consumer marketplace adopting some kind of “my bundle + one OTT service like Netflix” behavior.
But in that model, with no mass exodus, why will the one they pick be Netflix’s instead of the Disney/Fox mashup? I don’t know what the Disney offering will be, but I know what content they have as a result of being Disney and acquiring the Fox content. It’s pretty easy to imagine it being a very, very attractive offering.
Even in that model, I wouldn’t go as far as “Good luck, Netflix!”
I’d only go as far as “Good luck, NFLX stock price!”
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