Yet Another Value Podcast - Javier from Blind Squirrel discusses Netflix $NFLX

Episode Date: May 4, 2021

Javier Lovato from the Blind Squirrel comes on the podcast to discuss his post on Netflix, including why Netflix's scale is a massive moat, why the "Netflix doesn't do have quality" debate is wrong, and why Netflix is years ahead of their competition.Blind Squirrel's Netflix Write Up: https://blindsquirrel.substack.com/p/netflix-focus-and-executionChapters0:00 Intro1:25 Why is Netflix a good investment?7:25 Netflix's relationship with creators14:05 Where is Netflix's Game of Thrones21:50 Does Netflix's weak Q1 indicate competition is gaining on them?39:30 Why'd Netflix stop disclosing churn?41:35 Netflix cost of capital and share repurchases48:15 Opportunity cost of Netflix versus Disney, Spotify, or legacy media51:30 Does Netflix need to get into video games?

All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have Javier Lovato. Javier is the founder of the Blind Squirrel Substack. How's it going? Yeah, pretty good. I'm excited to be here, and I was looking forward to. Hey, I'm happy to have you. You're our first guest coming at us from Spain, so it's good to expand the international opportunity. But let me start the podcast the way I do every podcast, and that's by pitching you my guest. I only stumbled on you a month or so ago. You put out a write-up on the company we're going to talk about today, Netflix, and I read it. And when I was reading, I was thinking to myself the whole time, this is so good. Like, if you covered up the title and you just gave it to me, I'd be like, oh, you know, one of the tech experts, like Matthew Ball or Ben Thompson over Extra Techery, one of they, they just put out a new, like, updated thesis on Netflix. But no, it was this blind squirrel substack that only had three posts so far. And I was like, this is incredible.

This is a great piece of work. As soon as I read it, I knew I wanted to have you on. I reached out to you, I've been telling you, please, come on. So I'm just really happy to get to have you on. I think people, everyone should go check out your substack. It is awesome. It reminds me, if you keep up with it, it reminds me of like an early scuttle blurb or something, which I've got huge respect for. So that pitch out the way, let's turn to the company we're going to talk about.

That's Netflix. I'm sure everyone knows it, tickers NFLX. Disclosure, I think you have a position in it. But I'll just open it up by asking you, why is Netflix a good investment right now? Well, first of all, I want to thank you for the endorsement there. I think your work is amazing and thank you very much. I appreciate that man, I appreciate that. Okay, first of all, I think it's a really compelling opportunity given

the whenever we, I mean, we tend to have a more leisure time and increasing amount of time and we spend that time over video, social, you know, social networks and video games and you know, you have the opportunity to own a piece of a company that's providing thousands of hours of content to millions of subscribers every single day and you don't really depend on any given title so it's more like a platform like play you don't it's not a hit-driven business because any given so it's not going to turn because they don't like one title or the other and it's more insulated from you know I mean, they're always dynamics playing out in terms of we want more short-form content.

There's TikTok and that stuff. But we've always watched TV. We've always watched entertainment and storytelling is intrinsic to human being. And I think we'll always be attracted to that form of entertainment. Perfect. No, that makes sense. And all of that makes sense. But I guess the underlying your whole theme is,

that Netflix, I think, and I don't want to put words in your mouth, correct me for wrong, but I think a big piece of your theme is Netflix has this huge scale advantage, right? And I think it would come in a few places. A, because they've got a lot of personalized date on you, they can offer you titles and kind of fill up your viewing time better than anyone else. And then B, I think their international scale, you know, you think about something with like Lupin, right, which was a breakout international hit and that was filmed locally in France. And it's stuff over. And like the smaller services aren't going to have those international hit, so it's going to be much more different. I was wondering if you could dive into those two

different pieces of kind of the scale argument for Netflix. Sure. So first of all, a scale. I mean, you are, it's close to 210 subscribers, 210 million subscribers in the world. And you're basically huge, huge company. You can spread the cost of failure of any given title between a huge describe base. So you can make bold bets. I mean, what I mean by this is you can invest in content that wasn't previously feasible or wasn't, you know, was thought it was too risky. And you can do that because you can spread the cost of failure among a huge subscriber base. Then you basically can afford to pay up more. But, well, there are huge capitalized companies, tech companies that can't pay up for content, so even though you can still pay up more and you'll always have that scale advantage.

I think, you know, I think scale is not based in, you know, paying more dollars for splassy titles or for, you know, big marquee names, titles like Jane Fernstone, that stuff. And I think the most relevant, you know, features of scale is that Netflix is always present on the conversation, the global conversation. So, like you sell titles like Lupin or, you know, titles like Bridgetown. I mean, they are part of our lives. I mean, if your co-worker is talking about the witcher of your co-workers is talking

about, your friend is talking about and no Richard Tone or that kind of titles, I mean, you'll be attracted to that kind of service and you want to watch what everyone is watching. So I think that's interesting. And there's another point I'd like to make. I think we just think about the creators, you know, the people who, the actors, the directors who, you know, do the movies, they are attracted to Netflix because this is a service that provides them a platform where they can, they couldn't previously produce content. So you have low budget films like below zero in Spain is produced by a director

who is not really known in Spain and this film has like 50 million views on Netflix so that's huge because due our platform to the world you're basically democratizing the way that content creation is now produced because if you just think it for a second

our tastes in content what's trending what's not what we used to watch in cinemas or big franchises are mostly U.S., basically every single big franchises. It's American, Star Wars, I mean, most of the bigger franchises are American. Why? Because there wasn't, there wasn't, you know, a way that, you know, local producers could invest big budgets into producing big, you know, big titles, and now they have the opportunity,

and this is unleashing a huge amount of creativity around the world. I mean, you have, for example, Klaus, which is an animation movie, it's created by a Spanish animator, and this type of animation haven't, you know, haven't been produced in Spain for years, and now it's feasible to produce this type of content. because there's a player, Netflix is investing in this type of content, and it's make it available, this content to every single individual. Perfect. So let me dive into a couple points you made there.

I want to dive into specific points, but I think this all relates back to one of the bare points we're going to talk, which you always hear Netflix doesn't have any quality shows, they only have quantity. And we'll discuss that specific point in a second. But you mentioned the Netflix water cooler thing, and then you mentioned creators like working for Netflix. Let's start with creators, you know, one of the, I 100% agree, right?

Like, if all else is equal and I'm a creator and a platform with 100 million people comes to me and a platform with 10 million people comes to me, if the money's the same, even if the money's cheaper, I'm probably going to go with 100 million because, you know, how many shows have gotten lost because they're on some small streaming service, right? So I agree with that. But on the other hand, I look at a lot of Netflix creator partnerships deals, and I feel like they have to be disappointed by them, right? Like, I think about the, I think it's Ryan Murphy, the guy who did Glee, an American

horse or and all that. A politician was really disappointed on Netflix. Prom was just awful. I think Nurse Ratchet or whatever didn't do that well. So there's that Kenya Barris, the guy who created Blackish, 2018, he did this big buzzy leave where he was leaving Disney to go to Netflix. I don't even know if he put out a show for Netflix. And I think he left to go to Viacom.

So I look at a lot of these buzzy partnerships they've had. And I agree with you. I think creators should want to work with them. But when I look at those buzzy partnerships, I say they don't seem to be going well. They seem to be producing bad. content. So what's going on with those when I push back at that part of the both years? So first of all, Netflix started to sign exclusive agreements with producers and directors

in, I think it was 2017 in a meaningful scale. So that takes time to scale. And you just think it per a second is huge because you have a service that barely had any original content in 2012 and five years later, five years later, they started. signing exclusive agreements with producers but not just producers the biggest producers of the world yeah yeah it's completely it's completely insane because uh you know back then Netflix for example Netflix movies late was sustained by Adam Sandler movies and you know that's right but now you have the rock and and just announcing movies late so it's incredible so You said that, moreover, I want to add that not every single creator would go to Netflix.

I mean, I think that upcoming actors, upcoming directors are the one who benefit the most from this type of companies. Why? Because if you are established as a director, Jennifer Einstein or whatever, you may go to the highest bidder. You don't really care. But if you are, there's a huge number of actors here in Spain and directors who have completely changed their, careers, their trajectories, because they were featured in a popular Netflix show. So if you take, for example, I'm not view seeing that, but elite is a really popular show here in Spain, so in Netflix show, similar to Gossip Girl, that kind of stuff. I'm not view, well, it was a huge success, and it has completely changed the career of the actors in both. There's a popular slide

The representation that I really like The amount of Instagram followers I love it when they show that, yeah It's really good And another example, for example I don't have you heard of this one But Abigail Cohen Who is the

Who performs in Wins The Last Wish is another Netflix series I mean there's an Instagram post You can go up and look for it Crying in the middle of the night because their TV service was top 10 in the U.S. So that's the kind of influence that Netflix.

Let me push back on one thing here, right? So I don't just agree with Netflix's star creating skills, right? But I do think there is something Netflix goes. And I love that slide where they say, hey, look how many Instagram followers, one of our breakout stars got. But that's not different than a breakout star in any medium, right? Like I'm sure the people who were starring, I watch a little network TV at this point. I don't know.

But the Aeroverse over on CW, which Netflix helps makes extremely popular, right? But the Aeroverse on CW, those guys have huge followings, tons of fans, tons of Instagram followers and stuff, right? And that's just on the CW. And I'm sure there are, you know, if I looked at Fox's shows or ABC, you know, the ABC, what is it? Fresh off the boat. All those people were like breakout stars and breakout stars and breakout hits. So how much is Netflix actually, like, I don't think there's anything that says Netflix per se is driving more breakout stars per show. show than everything else, or, you know, because of their skill, maybe they would be, would,

but how would you push back on that? I think what you may is that this is, Netflix is doing it at a global scale. I mean, this kind of linear TVs, you'd only, these stars would only get, you know, fame on a national scale. But in the other side, you have national actors who barely speaking English and can be, you know, can be famous, you know, at Japan or countries that you never think it was going to be possible. So that's one of the main points I like to make. And, you know, the other is that there are benefits, there are benefits in capturing the most amount of viewership.

If you are the platform, the de facto platform, so you just start Netflix, what's from Netflix, and you then go to the other platforms if you want to add something specific, but you don't turn Netflix most of the times, 80% of the content comes from Netflix suggestions, from the screen, and that's hugely important because it allows, you know, you don't really know what are you going to watch, but you're sure that you'll be entertained. And that's one of the main aspects.

That's in a global scale and difficult to achieve. It's perfect. And let's bring back. So you mentioned the water cooler, what I call the water cooler thing, right? Where Netflix drives the cultural conversation. And there's a great, I love the clip you have in your article where in 2020 of the 10 most search shows globally, I think Netflix had nine of the 10. And then of the most searched movies globally, Netflix had like half of the 10 or something. Right now, 2020 for movies might have been a little different. But it shows Netflix shows are reverberating throughout the world at a rate that's different. everyone else is. But on the other hand, I think a frequent pushback is, where is Netflix's Game of Thrones, you know, like something like Game of Thrones, just breaking, completely breaking, or all the Disney Plus shows, you know, I feel like Netflix shows are probably watched more, but I, this might just be me personal. I think the buzz around the Disney Plus shows. So I think a big pushback here would be like, yes, Netflix shows are popular. You look at Bridgeting, you look at The Witcher, but I don't think any of them have hit the same level as, you know,

Is that a of a traditional... No, not yet. Yeah, so how would you think about that? I agree. I agree with you. Not yet. But I think, as a quote, I really like, quantity helps with quality.

Yeah. So that's powerful because at the end of the day, where's the next Star Wars going to come from? Probably with Netflix. Why? Because you are just producing so much content on a global scale from global producers. I mean, and creativity and,

quality is not exclusive of the United States. It happens on a global scale, but that wasn't previously feasible. That wasn't creators all over the world, didn't have a platform where they could, you know, they could display the talent. I think eventually they will come up with something as big as Disney shows. I mean, Disney has a bigger advantage of, over creating and monetizing franchises over Netflix, because if you think for a second,

you have a company that is designed for creating and monetizing franchises. You have the parks. You have the, you know, the, every single aspect of the company is focused around cultivating and nurturing their franchises. And I think they could eventually come up with Disney-like, shows, but it will take time. I think you just post for a second. Eight years ago,

not only didn't have any original content. So you just think for a second because movies and shows take a lot of time to use three or more years. So they are now investing into their 2023 or 24 hours late and it takes time. So I think eventually

I think eventually they will come up with this type of content. You mentioned Disney's design to produce franchises, and we'll definitely talk to Disney Plus in a second, but one of the things that I think gives Disney a critical advantage is the theme park ownership, right? They use the theme parks. Do you think at some point Netflix needs to own theme parks or kind of live experiences, I'll call it?

I think they will have, or they could eventually span towards that area. But I think comparisons with Disney are not are not relevant I would compare Netflix to YouTube I mean there are probably a similar playbook Netflix wants to own not only your franchises because I mean you just think for a second

okay Star Wars is popular and most of their Disney franchises are very popular but the bulk of our time is not I mean Netflix wants to own the book of our time not just the big franchises the blockbusters

Netflix wants to own the comedy the content that is called not quality because there are times that you don't want to spend you know what's super entertainment super created in-depth content and you just want to relax and what's content that is not as good that you enjoy it. So I think they are following the aggregator's approach

they want to own premium content and they didn't have to spend that way. they could, but I didn't think they need to. Yeah, and to me, the thing that always people screen, oh, they don't have the quality. And I look at them, and I kind of look at some of the shows that Netflix has revived. You know, you look at you, you look at Cobra Kai, a couple others that other networks canceled, literally canceled. And Netflix picks them up and turns them into international smash hits. And I look at that and I say, other networks are, you know, they've got these hugely valuable shows.

they can't get an audience and then you put it in Netflix and their breakout hits like to me that just speaks to how big the power of this platform do you want to do you want to add anything on to like the yeah the revival go ahead yeah i think um i think quality is subjective you cannot judge quality because for example they are linear in here in spain it's not it's almost that among people feel they're so similar to i don't know if you watch this or too hot to handle. It's kind of like a reality show in Netflix. Well, you laugh, but they're this huge following among this type of shows.

And Tunis love this type of content. They love it. And, you know, they, is that quality? You could argue it's not. But if there are hundreds or millions of people watching this type of content, you'll eventually have to do this. And super unlikely Disney or other type of competitors will span towards these artists and I think it's a really important part of television so this is not only drama or

you know fiction or you have to own this type of content and also I think tastes or global tastes are a function of what was previously available on a global level so that's hugely influenced by US content and tastes have to be educated through creation and through discovery and you main, you might not know that you are a huge terror fun, but if you eventually get some, you know, Japanese terrorist movies, this is completely strange, but Netflix allows this type of discovery of creation similar to Spotify, many, many aspects. You may, you may not know that you like this some kind of, some kind of music, but eventually, well, it's kind of interesting, I really like this and, you know, it allows you to try out new things, and you

new genres and categories, I think that's a huge asset. Yeah, 100% agree. You know, one of the cool things about Netflix is if you go on and like, as a Netflix bull, you might not want to hear this, but me and my best friend share a, share a Netflix account. You know, we got that password sharing good. But like, if I go on my profile and then I go on his profile, it's almost a completely different circle. It's completely different.

It's completely different. I've got on slide in the in the report in the write-up. that you know discovery and creation has evolved throughout years and if you just

look at this slide it's just screens are completely different the recommended movies are completely different you have a horror fan and even the clip

you know the clip that he gets on the Witcher clip he's son the Witcher clip and it's more terrifying and it uses horror fans

to watch the movie And instead, the other account gets on a more generic clip of the series. I think that's incredible. That's, I think it's not very commented, but user experience and creation and discovering Netflix is vastly superior than other competitors that don't even have these capabilities. And this lead, I think, is only going to increase in next decade. Perfect, perfect.

Well, that's actually a great segment to, you know, I think outside of the, I think we've addressed the quality and quantity argument, but I think the new big bear case. And I generally don't talk about quarter of their earnings on these podcasts because I want them to be somewhat evergreen and more focus on longer term. But I do think the quarter of the earnings in this case is useful. You know, Netflix reported earnings a couple weeks ago. Subscriber ads was way below what I think people were expecting. I think they kind of pulled down their target for the year. and I think people are starting to say two things. Well, their subscriber ads are hitting a new low right now,

and that's just happening as all the competition that we've been talking about for years is kind of popping up, right? The Disney Plus is getting ramped. Disney Plus is over 100 million subs. Discovery Plus just rants, Paramount Plus, HBO Max is ramping, Hulu, Peacock. All these services are finally here. There's finally a viable competitive space,

and I think people are looking at the viable competitive space and Netflix kind of stalling out this year on subs and saying, oh, is Netflix's advantage as big as we thought? Is the competition actually going to beat them back? How would you respond to that? Okay, so it's really funny because those competitors that you just named are mostly U.S.-based. So there's barely any competition outside. You just look at Netflix pricing power in the U.S. is the highest among other geographies. So among a huge competitive environment, as you just called, Nuffles has been able to increase price and power in the US at a 9% clip since 2013. And they just recently ruled another price in Greece in 2021.

There's a substantial price in Greece. And there barely was, there was no charm like zero. And management stated that China US was below the pricing increase. So I think that's insane and that can help you understand why I think Netflix has no competition in the international landscape and in the US is more muted. So I think there was a huge pull forward of so in 2000 training. Obviously, if you just, it could be a lot to the business. and I think the next watchers may be bumpy and I don't think

the market understands Netflix that well because whenever they disclose the subs below guidance and the company just goes down to send. I mean the next decade is going to be bumpy for sure. There's always

misses and subs but I think they're still in the good position. Most of the competition that you just named was previously in the market or the new competition is not. I wouldn't say they are viable in the long term. So the discovery is the peacocks.

I think those are zero or zeros or eventually bundle and create a competent service because the value proposition is simply not there. Okay, it's interesting you said Discovery because Discovery is actually the one legacy media player that I like. But why let me push back a little bit. So you mentioned Discovery in particular. If you want to talk to Discovery in particular, we can, or we can just talk to the larger legacy bundle.

But, you know. I wasn't talking about discovery in particular, but yeah, so. No, no, that's fine. Look, it's no, I take no offense. I'm just looking for discussion. But I do think, like, the legacy media space needs to. No, no. I mean, I mean, I mean, I was thinking that the other subscale players do not represent

a threat in my opinion I wasn't talking about I mean discovery I haven't watched discovery about it I mean I was referring to the others

of skills but that's why again don't take anything but let me choose someone different than discovery right

Viaccom which is launching Paramount Plus right and I think many media observers myself included think Paramount Plus

is going to be in for a tough time but the counter would be hey with Paramount plus we have an incredible hook to get people in

right we have the legacy cbs uh cbs channel where we can advertise it all the time plus we have nfl streaming right they'll have all the afc game streaming on paramount plus that is a big hook to get people in that netflix doesn't particularly have right and yes they yes their brands aren't that great but if you look they've got the paramount movie studios they've got a huge movie library they do have some really good franchise in there they've got star track they've got uh they've got Star Trek. They've got SpongeBob for kids. I know the challenge MTV's reality show has a pretty big following online. So they do that for your brands, right? So when you say they're, when you say they're dead, and I get like Netflix is a much bigger content spent all this, but Viacom does have a hook.

So like, I could go through every single legacy media provider and show the hook that they've had. But why do you think these guys are going to struggle so much when they've got that interesting hook? sure um i think sports um it's going to be tough to maintain from this type of companies uh i mean there's going to be a huge i think you can it's difficult to establish a competitive advantage in sports why because um this is all about the high speeder and the NFLs of the world uh want to extract the most amount of money um So, Amazon ambitions are going to go towards sports. Well, we just recently saw that Amazon is disclosed that they have secure deniful rights

for certain matches. And I think that's going to be eventually, that's going to get eventually tougher. Sports are going to be one of the artists that Big Tech is going to deploy the capital, I think. So I don't disagree with you. I think sports, they're always going to get the biggest, they're always going to get the most. rights and either somebody uses them as a loss leader, like a big tech company to get you in your platform or the sports just go direct. I don't disagree.

But Viacom now has the AFC locked up for, I think, the next 10 years. So why can't I look at Viacom's AFC relationship as a loss leader to get people into the paramount world's universe? Sure. That's interesting. I think as long as they retain sports, that, I mean, fans are always going to watch this type of content. But when it comes to media, aside sports.

premium entertainment, it is very difficult that this type of companies are going to have good content. Why? Because first of all, they are not global. Tasters, as I said, are global. I mean, in the US, you may watch some 50% of whatever percent of your shows are US-based, but you may find an Indian movie entertainment, and you may find a Japanese show compelling, and you don't have that. And Nuffus has access to global creativity. That's huge. Second of all, I mean,

this type of companies do not have what it takes to further invest in developing and acquiring new content. What I mean by this is that if you are, they are going to have a tough time in securing exclusive agreements. They are going to have a tough time in locking up creativity. and because biggest creators are going to eventually run up to rough of the world, the Disney's, and it's going to be tough. And then I think this type of platforms may eventually license their content to bigger companies.

I think sports, as long as they retain sports, they will do fine. But it seems really unlikely to me that you just go to Paramount Plus to watch, you know, pretty intimate and you spend there two hours per day. It's really unlikely because Paraman content is not, can be compared with Netflix. This is not global, it has no scale. I mean, that's pretty much it.

No creation, no discovery. No. I do not, I'm not variable isn't this type of companies, but sports may be, you know, may sustain their subs for the long run, for certain period. time. You know, I think the other Bearcow's case on Paramount, and you've got a clip in there, like, you look at what Paramount Plus, all these guys are spending in terms of content versus what Netflix is spending. And remember, yeah, it's all about, it's all about the value

proposition at the end. I mean, at the other day, maybe the, I mean, the sports fan are always going to have the platform that has the favorite content. But at the end of the day, you are basically paying up 15 or 16 or whatever the last month and you are just you are just watching so much content I mean in terms of millions you just think for a second but because media and media consumption is a tricky business I think you whenever you watch for example the Witcher you don't realize the budget that that's involved in just a few hours because you just binged it's a few hours of time and that so may have cost

$200 million to make and you just binge $200 million. And that's hard. That's a hard business model. Did you hear about the Amazon their new Lord of the Ring show what they're going to be? Yeah, $500 million per episode.

Yeah. And that's, I think big tech is led towards biggest plastic titles or sports. Why? Because if you just have content, get lost, If you don't have super creation capabilities, you are not the de facto platform where people spend their time, smaller content gets lost. I mean, I think that's basically that's it. Yeah, no, this is something, I started talking about this a couple years ago, but there was this, there was the show Mr. Mercedes, which I think it's on Peacock now, but it went three seasons.

It was based on a Stephen King book. I think it got incredible reviews. it had a pretty buzzy cast, but it was on like the direct TV channel or something. I can't remember exactly, but it never broke out because even though it was getting great reviews, great everything, it was on a channel no one had. And people wonder what is king, people say content is king. And yeah, if you've got Disney plus content, if you've got Disney's Marvel IP and stuff, I guess content is king, people go find it.

But for the most part, it's actually distribution is king, right? Like if I have a 7.5 show, yeah, that's why that's why I argued. that, yeah, that's why I argue that aggregators represent a bigger threat to Netflix than other streaming companies. That's male. Their case, because if the aggregators are trying to, aggregators have the relationship with the customer, and they are somehow able to create a bundle that includes subscale players.

Now, this type of content wouldn't get lost. on these platforms, and that could represent a threat to Netflix because nowadays, Netflix relies and not realize, but has been benefits from picking up obscure shows or shows that are not performing that well. I mean, Cobra Cuy was not obscure by any means, but was not performing well in YouTube and they just pick up the show. So he has a huge popularity, with Lutherford, with Riverdale, with you, there's a ton of souls. and if aggregators control their relations with the customer, I mean, they will lose that type of advantage.

But I see, yeah, too. You mentioned aggregators as a threat. Roku in the past year bought Kui Bidi. I think they're hiring a lot of talent. So are you worried long term about Roku's ability to maybe, I don't want to say some plan, but Roku is clearly making a move to build a Netflix competitor. Are you worried about them?

Yeah, I think the biggest threat of Netflix in the next decade is going to be, are going to be aggregators. enough Rockwoodias renamed their Quibi acquired content as Rockware Reginals and they are going to invest towards, you know, further growing that content.

But it's interesting because aggregators do not own content. They just aggregate others. Well, if you want to, Roku's ambitions, Roku's long-term ambitions are

becoming the YouTube 40B, right? But the thing is that it's really hard because I think there are a lot of stuff here because, I mean, the main point is that the user experience is hard to master. I mean, in order to become an aggregator, you have to have top-level user experience. And in order to do that, any given user has to find compelling content that they like. And you have to have the compelling content and the user has to find it. So you have to have super great discovery capabilities. There's that.

Nowadays, aggregators are not really, you know, not really end-game aggregators because they just, in the Roku channel, you have the Roku channel, but there's no, for example, Disney content. You cannot, well, Fire TV, new FIRE TV operating system, for example, has features where you can just watch Disney from the home screen, and then on how to play, an athlete title starts playing, and that's basically that's what I mean by endgame aggregators. But I think the content will always be worse, this type of aggregators.

Why? Because you rely on external third parties, right? Who are the external third parties? Most of the external third parties are linear. I mean, outside of the US, who are the third parties, who provide you content, linear, linear companies, linear TV companies. These linear-activate companies do not have this mindset of investing for a long run. Maybe they cannot spread the cost of failure among a huge subscriber base.

It's really difficult to do, you know, to maybe a 300 million budget Spanish film. That's unthinkable because this type of companies haven't done that in his whole life. And then this type of companies are not bold by any means. They are not going to invest in titles that they think that are not going to be, you know, hugely popular and or mainstream. And it's going to be hard to have really special content or, you know, this mobile type of content on Netflix does all the time. They have ton of failures. But that's, that's necessary because if you are creating new content that hasn't been created before, It's necessary.

They are changing of landscapes in animation. They are completely changing, change the game. Animation had been always controlled by Disney. And it's incredible that without any meaningful IP, they've been able to create a substantial animation powerhouse in just a few years. Without relying in meaningful IP, they just rely on their creators. And the Fox Band become, you know, become a, a group of creators, they don't rely on brands and the brand is their creators.

And I think because of these type of main, these two factors, aggregators, we have a hard time, hard time displays in Netflix. But it could happen. I think the biggest threat. But I think eventually Netflix will have better content. And moreover, supply economics on value proposition. unlike user this is not you have to understand

that well you probably understand but this is not an industry with user generated content so in order to create a movie or so you have to you have to contact many people many people are involved in the creation of the show that takes a lot of long time

a long period of time years and cost a lot of money so you cannot do it by your own so aggregators don't make much sense or the body proposition is not clear because you have someone who's investing for you someone who's spreading the cost of further someone who's willing to make ball beds with a completely

decentralized culture that green lights content in a local you know local teams they don't rely because they don't rely on centralized decision in order to green light content they can rely on in a local manner, and they are able to offer all their content for a flat $50 subscription fee. The value proposition is super good for the consumer. And if you just aggregate third-party linear content, value proposition is set to be worse. Price are going to be much higher and content is going to be worse. That's what I think. Let me ask another question.

This is a surprisingly popular beer case. Years and years ago, I believe Netflix used to disclose churn, and then they stopped. And I think a frequent question is, if Netflix, if their economics are so good, if their churn is so good, why don't they disclose churn? Yeah, that's a good question. I'm not sure. Maybe for competitive reasons, but I'm not sure. But if you just look at the US, if you want to get a, you want to get a grasp of the industry dynamics and how different players have. the levers of charn. You have third-party data, of course, and Netflix is often the lowest,

the lowest end. But if you don't want to rely on third-party data, you can just look at US, because US, as I previously said, they have increased prices super high, right? I'm certainly surprised that there hasn't been any meaningful charn in the US. that's the most competitive market because outside of the U.S. there's no competition. I mean, you could argue that U.S. is an oligopoly, but there's no competition outside. Netflix is ahead of everyone else in the local scene, but I think everyone is super focused on the U.S., the U.S., the U.S., yes, but internationally, Netflix is much stronger and in the market where Netflix is supposedly, well, the more competitive market,

Well, Netflix's value proposition is comparatively weaker, there's no turn. And they have, you know, they have increased the prices on 9% claim or something like that for the past six years. So I think that's impressive. This is more like your telephone bill that you just pay, no matter what, and you don't really ask yourself if you should be paying up Netflix if they just increase the prices. I think there's a long way ahead in terms of pricing power. Let me stick with the economics of the business for a second. And this is actually diametrically opposed, right? But for years, one of the bear cases has been, look, Netflix,

and I'm going to use this term acknowledging that it's a fun. The bearer case is Netflix is a house of cards, right? The only reason that the Netflix model works is because they are a bubble. They've got the super cheap cost of capital, whether it's on the debt side or the equity side. And the moment the market stops funding their perpetual losses, the whole thing is going to collapse in a house of cards, right? So that was one side. The other side of the bear case recently, which is kind of interesting, Netflix with their

Q1 earnings announced, I think it was their first buyback ever. Maybe they did some years and years ago, but the first time they're going to become a capital returner, right? And the second bear case would be, oh, look, they're returning capital. Like the business model sucks and now they're just a levered return of capital story. The growth story's over. And it's funny because those are diametrically opposed and the second one is a newer bear case, but could you speak to both sides of that, I guess, like the cost of capital coin

that I mentioned there? Okay. So I like to highlight a quote that I really like. I think it's Jerry, Jerry Capital on Twitter, who used to say, Versa are worried about pricing power when subs increase. And when subs pricing increases are imposed and subs do not increase at a higher rate, versus worried about pricing all subs. So, I mean, I think it's funny because whenever Netflix increases prices,

soups do not increase at, you know, higher rates. And when Netflix decides to keep prices the same, subs tend to increase higher, I mean, tend to rise higher. So the first market, I think Netflix was a dangerous company. I mean, it was a risky company a few years ago, quite risky, because do you rely on others' content? You rely on licensing content from other people. You don't have your own content.

And you don't even, they didn't even have the scale and the amount of international presence that they now have. And I think it was Bill Miller who got pitched Netflix in the other days and who rejected the idea because he thought that it was a pretty risky business. and nowadays a couple of years ago he bought the company acknowledging that the business had changed and it's a more defensive business right now so first your first point

I think it's I think the early days Netflix was could be you know could be compared to what you just said but nowadays they have the ability they just said that they do not rely on external debt in order to sustain their operations

I mean, you just, well, everyone saw that if, if content, if cash spent is, slows down, Netflix is huge and profitable. And they can tweak a bit of gas content spent if they need to.

I mean, they're investing just ahead. And they would not probably, they would probably not do this. But I think this outlines how Netflix controls is on Destiny right now. And it's not relying

I'm on third parties in order to execute his society. So I think it's all the execution race right now. And to the other point, what was the other part? I forget. I forgot. No, I like all the points you just made. I guess the one other thing is it's just interesting to think back. I mean, Bill Miller in the early days,

until probably 16 or 17 Netflix hadn't reached what we call escape velocity. And it was like every time they raise money or did it was all about the company thing because they knew we need to hit scale before anyone else can or else we're dead. become HBO, before HBO becomes us. Yeah, it's good. The interesting thing is, like, because they were in a bet the company mode, and you look at all their competitors, like, there's no doubt HBO, Disney, all these guys had way better assets, better brands, everything.

But because they had a very profitable legacy business, they were always doing their toes into it, right? And, like, even HBO Today, like HBO Max and HBO Go, like, nobody could describe what was different. And it was insane. So it's funny, because Netflix, was always embed the company mode. Maybe they were slightly less risky than the other companies. You could never do that. I mean, I've never come up with a company that has changed its business model,

well, maybe, but has changed his business model over the decades so many times. So the first transition from DVD to streaming, second transition from license to original. Now they are securing the international expansion on top. I think the culture here is super nimble. they are super adaptable company and that's a huge asset. And the other point that you just make on the buybacks, I mean, businesses are designed to, or the goal should be, the end goal should be to return capital to shareholders.

And it's funny that people complain when Netflix starts returning capital. And I don't think I have seen some, you know, some commentaries about, well, Netflix has no other place to deploy its capital. and it's therefore seeking to, you know, has nothing to do with the capital and they decided to buy back stock in order to sustain their already elevated or bubbly valuation. But I think they are super good capital allocators. They don't want to keep cash that they don't need in the business. They are optimising the business.

I mean, they are just returning capital because they think they don't need it. They are close to invest 20 billion of gas companies. this year. I think it's 17. The justice closed in the recent call. And I don't think there's lack of options. I think content takes time. You can just deploy 50 billion of capital. Yes, it takes time. You have to build local teams. You have to build expertise around many areas, many categories, many countries. It's difficult. You can do it in a year, too. And it takes time. They will eventually scale the cost content. But in the meantime, they have become. profitable or, I mean, not profitable, but I mean, they can sustain a buyback and they

decide to do it. I think it's a great, great option. Let me talk. So obviously, Netflix, you have a position in it. And let me just, you know, everything is an opportunity cost, right? When I'm buying Netflix, I'm choosing, there's 3,000 other stocks in the world I can't buy. So when I look at Netflix, and I'll just do opportunity costs of media, right? But Netflix right now, enterprise value is $250 billion. If I went and looked across kind of the median tech space, you know, I think my comparals would be, well, I could go buy Netflix for $250 billion or I could buy Disney for about $400 billion. And I get, you know, all those great grants, Disney Plus, the parks, all that, right?

I could buy that for $400 billion. I could go buy Netflix, what some people think is Netflix 2.0. I could go buy Spotify for $50 billion. That's a lot of the price. Now, the business model is more influx, but it's a lot cheaper, right? But I want to stick in media. Discovery and Viacom are both around $40 billion. And you talked about how they've got a hard business going forward, but those are very profitable as that legacy bundle rolls off. How quickly that rolls off, who knows?

But those are very profitable. The early returns from their streaming services seem to be going pretty well. $40 billion enterprise value, less than 10 times EV to EBTA. These things, there's not a lot of CAPX. So these things print free cash flow in the meantime. So when I'm looking at all these, why, why is it? Is Netflix the place I want to put money instead of if we're just limited to those other couple companies?

I agree. I agree with you. I think Netflix opportunity in terms of future returns is definitely lower now than it was one year ago, a couple of years ago. I think valuation is more demanding right now. I still think you can underwrite 15% returns of the long run, but I think valuation is more stretch. I definitely agree. I wouldn't be comfortable with some of the, you know, the discovery, I mean, the linear companies, linear stuff. But for sure, you could own Spotify, you could own

Amazon instead. And I think they might be more compelling picks. I think validation is more stretched. But Netflix is super volatile. And now it's trading out. I have not. I haven't dollars but who knows maybe in just two months they could stock could correct a lot so I have a long-term position in it it's not huge but the thing I want to align I think most of people miss is that this is not this is still day one in terms of streaming penetration in terms of you know hours watched in terms of pricing power in terms of so there's still a huge run, a long run, towards, I think they can get to eventually 500 million subscribers. So, yeah, sure, by the way, seems more stretch.

But I think there's still a long run. Streaming is definitely not bigger, less than 10% of US TV time. So, you know, you have to take into account that is still early days. Last question for me and then I'm going to give you last thoughts. You know, for years, people would ask Netflix about competition, just Disney Plus, HBO. And Netflix would always respond, like, we're aware of competition, but our main competition is not Disney Plus. It's, they would use one of two things. They would either say it's linear TV or they would say it's sleep and Fortnite and all these other options, right?

So when I look at that, the one that jumps out at me is Fortnite, right? Because I think increasingly the worlds of storytelling and video games are going to collide. So I do wonder at some point. I definitely agree with you. Does Netflix need to get into the video game? I think there's a great opportunity in the long run in order to, I mean, if you just look at Netflix, Netflix businesses in storytelling.

Video games are in storytelling as well, but it's interactive storytelling that you just, it's different, right? You create your own story, like video game, and I think there's a huge opportunity going forward. I mean, if you just think it for a second, think about more immersive storytelling. Maybe in VR, who knows? And Netflix just designs the story

and you are present. You are fully living the story. I think human nature will always be attracted towards storytelling, to watch a more passive form of entertainment because there are certain parts of the day where you don't want to play a video game. You just want to, you know,

you just want to passively watch content. But I think interactive storytelling, I think Netflix has proved that it was called Bandernats. They released some, you know, interactive storytelling in the past. I think that's a very complete opportunity and I think it's super interesting. No other, for sure, no other competitors will, I think they will probably be leading the industry when it comes to innovation. And I think that's a great opportunity to going forward. And I agree, video games or other forms of, you know, for entertainment like TikTok, YouTube, are competing more in terms of our, you know, daily watch time than Disney or Amazon Brine.

So I think that's important. Well, hey, I want to turn it over to you. Is last thoughts? Is there anything you want to wrap up or is there anything you wish we had hit a little bit harder or that we didn't hit that you wish we had hit? I'll just flip it over to you. Sure. So I think Netflix is often thought as a company as a house of cars, as you just said, that whenever competition wants to increase their offerings or wants to improve their offerings, Netflix is going to fall off. But you just think it for a second. I do not think Netflix has any competition really standard peers. I mean, they have similar companies, but no one is following the same. same playbook. I mean, no one is willing to apply by the same rules. No one is willing to,

you know, invest in so many verticals, so many countries trying to own, basically own premium entertainment. Basically, they are following the aggregated playbook. And for example, you just take Apple lost leader for their, for the bundle and splassy titles. It's really unlikely that they span locally with, you know, more obscure titles and more particles. Why? Because as I previously said, creation and discovery are hugely important assets. You need to master those in order to have local content because if you don't master those, the content gets lost. People do not find compelling content. Netflix just released fast loves. The features that allow you to further create your content and discover new content

in an easier way. They're always on the forefront of innovation when it comes to creation discovery, a top-term list, trending for you list. I mean, the other competitors barely have, you just enter Amazon Prime. They have great content, but the creation is simply not there. And it's funny because you just look why Spotify is succeed because of their creation capabilities, it's because of a very user experience. And it's funny that we could argue that big debt would destroy Netflix when they haven't been able to make it end on Spotify prospects and the business is much more defensive because you have to create your own content you have to build local teams you have to you know it's more defensive and I think overall

the next 10 decades the next 10 years are going to be real interesting when it comes to country creation I think we're going to see content hasn't hadn't been produced in in our lifettings and when we'll see you know franchises international franchises i think it's going to be super you know super fun and you know yeah i think that's pretty much it i think still the opportunity is compelling the management team still driving the i mean the forefront of the business and they are there for the next decade so i think it's a pretty compelling opportunity perfect what are you What are you watching on Netflix right now?

What's top of your Netflix queue? Sure. I'm not a huge media, you know. I mean, I do not watch a lot of media. That's why I think it's important to not extrapolate your own, your own, like your own taste or your own, your way of seeing the world towards your investment. Because I didn't have Facebook or, I mean, I didn't have Instagram. So that'd be hard.

But I recently saw Southern Rone. I don't know if you heard about that, but it's similar to the Whitton, Shadow and Bone. It's similar to the Witcher. Oh, I read the, go ahead, go ahead. I'll tell you my story in a second. I mean, I'm biased because I'm a fiction, fantasy fan, and I do like, I really like this kind of stuff, but I think it was super, super fun. Okay, so I love fiction.

I love fiction. And I read, I actually read the Shadow and Bone series earlier this year, and I was really disappointed with it. So Six of Crows is her other book where Kaz, if you, it's actually a separate book series, but I hear they incorporate them in Shadow, but I love her books with Kaz. I did not like Shadow and Bone, but my wife has been binging those and really enjoying them. But it just shows there's tons of stories out there and I heard it got good news. I was disappointed because I might have to watch it because I read it as well. Overall, I want to, before you just wrap up, I'm sorry if my English is a bit rusty and it's been a long time since I

did my long call. You know, thank you very much for the opportunity. Hey, Javi, I think you did fantastic. I didn't have a problem with it. You were, you're awesome. I really appreciate you coming on. Guys, the link to his piece is going to be in the show notes. It's Blind Squirrel Substack is the thing. His piece was awesome. I encourage everyone to go read it. I encourage everyone to follow it. And Javi, looking forward to having you on for a second one at some point. Thank you. Thank you very much, Henry. See you.