Tyler Cowen: belief

Transcript context

…Netflix went through what many would argue to be the best-executed disruptive strategy of its scale over a 12-, 13-year history than we’ve essentially ever seen. Yet, if you take a look at what may be their single biggest mistake, it was not spending their equity like a drunken sailor over the past year. They could have gone out and bought Viacom, CBS, or Paramount Global for effectively half of what the current value of Netflix is, but at the time, it would’ve been one-tenth diluter. They could have rolled up two or three of the largest video game publishers on Earth. All of those options are gone. The reason why I say this is, Netflix’s opportunity in gaming is hard. They don’t have any of the technology systems for social play. They don’t have micro transactions, which are essentially all of the upsides in gaming. They have to do a big technical transformation. That will take a decade or more. I’m not as concerned about the temporary or even enduring share price compression as the primary problem there. It’s that they’re a late entrant, and they’re used to being an early entrant. But the only flip side is, were the share price much higher — even half of what it was last year — they would be able to do pretty aggressive M&A to ensure relevance, and that’s gone. If I think about the HBO library, there’s a number of shows in it that I haven’t seen, but I could imagine, this year and next year, going back and trying to watch them, like Deadwood. Maybe I’ll love it, I don’t know, but it’s there. If I think of the Netflix library, I couldn’t name a single show of that kind. Is that a mistake Netflix has made? Or have they actually pursued an optimal strategy to just toss a lot of content out there, get people watching, keep on watching, subscribe to Netflix, and not really care that it depreciates at such a rapid rate in value? It’s not a mistake, but it is a problem. I mean that because it’s not an active choice. I wrote a piece back in 2020 — this is actually when I last held Netflix stock; I missed most of the COVID run-up — called “Content, Cars, and Comparisons.” I was making this esoteric argument that accounting principles did a disservice. Why? Because we don’t have GAAP (Generally Accepted Account Principles) rules to really say how do you depreciate? What’s the useful life of content? And therefore, the average series, whether it was canceled 30 days after its premiere, whether it was outstanding, whether it was IP or not, is effectively amortized the same way. Yet, we all know that if HBO were to create a space opera, or Disney+ were to create a new spin-off space opera from Star Wars, or Netflix were to create a spin-off at the same budget, we could probably accurately guess different popularity, different relevance in the years to come. So, we had an industry problem, where all of the content spend was being capitalized equivalently. Yet the actual capital assets on a service-by-service basis as your team two were quite different. When you’re in a period of hypergrowth as we were, it’s easy to overlook that because humans love video. We were excited to have all of it, but over time we are seeing those returns start to play out. HBO would famously make the point that everyone should watch their library but no one did, but we know that Sopranos blew up last year. We know that the Sex in the Cities’ catalog blew up. We know that True Blood blew up. We’re starting to see that actual GAAP failure being proven out in new revenue growth. But to answer your question, yes, Deadwood you’ll love. Extraordinary.…

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