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NetFlix' Open Internet Entitlement Hubris

It appears as if Netflix' rocket stock and nosebleed market valuation has infected Netflix' CEO, Reed Hastings, with a bad bout of dot.com hubris fever complete with hallucinations that Netflix is somehow a needy online video provider entitled to new massive subsidies under the FCC's Open Internet order.

  • In his recent letter to shareholders (see p. 9 under "Challenges)" Mr. Hastings  launches a grandiose diatribe on what prices and pricing models competitive broadband ISPs should and should not be able to charge Netflix in the competitive market place.
    • Mr. Hastings dreams Netflix is entitled to "no-charges" from ISPs for dumping more concentrated asymmetric Internet traffic on them than any entity has ever before generated, despite the fact that Netflix' proposed approach is completely contrary to the way that the Internet backbone peering marketplace has operated for over fifteen years.
    • Mr. Hastings also dreams about what pricing models and prices competitive broadband ISPs should be allowed to charge their customers.

Alarm bells should be going off among Netflix' sophisticated shareholders.

  • Netflix' CEO is naively and implicitly positioning Netflix to investors as a regulatory arbitrage model dependent on FCC regulatory favors for its growth model to add up.
  • Mr. Hastings is unwisely spotlighting that Netflix's model cannot support market pricing for key inputs, but expects to depend on the subsidies of ongoing heavy-handed FCC price regulations to succeed going forward -- the hallmark of an unsustainable dot.com-like business model.

Netflix is greedy not needy.

The irony here is that Netflix wants subsidy entitlements from the FCC when it has zero real need or justification for corporate welfare from the FCC.

Did you know:

  • Netflix has more paying subscribers, 20m, than every multichannel video programming distributor (MVPD) in the U.S. except one, Comcast with 23m?
  • Netflix has more paying subscribers than DirecTV's 19m, Dish's 14m or Time Warner Cable's 13m?
  • Netflix even has more paying subscribers than all of these MVPD providers combined: Cox, Charter, Verizon, CableVision, AT&T, Brighthouse, SuddenLink, and Mediacom?
  • Netflix accounts for 22.7% of peak Internet usage per a Sandvine report, which is about what Google-Youtube, BitTorrent and Flash produce combined?
  • Netflix's stock tripled in the last year making it more valuable than Dish Network?
  • Netflix' revenues grew 34% last year, 30% faster than Google's?

In sum, Netflix is obviously not needy yet it still seeks big corporate welfare subsidies from the FCC -- via heavy-handed Open Internet price regulations.

  • What Netflix' bout of dot.com fever signals is that Netflix believes it is entitled to subsidies from others to maintain its torrid subscriber growth rate.
  • The cold reality is that with $2.1b in revenues, $600m in gross profits, $300m in free cash flow, $350 million in cash, and by far the lowest subscription price offering in the video business by far, Netflix has the business and pricing flexibility, and the financial wherewithal to grow fast and profitably without a dime of corporate welfare subsidies from the FCC.

Shame on Netflix for its dot.com-like hubris that fantasizes that their temporary nosebleed valuation somehow entitles it to corporate welfare and to the FCC price regulating a competitive industry for Netflix' convenience.

  • What goes up must come down and Netflix's bubble valuation won't last.
  • They would be wise to build their future around sound economics and market pricing while they still can and not count on opportunistic regulatory arbitrage that is likely to crater when the FCC's Open Internet order is overturned in court.
  • If Netflix' CEO was wise, he would not bet his company's future and valuation multiple on the FCC order being upheld.
    • That's a losers bet.

 

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