Netflix thoughts -- part 2

From a unit economic perspective

Bears love to cite headline figures and comment that Netflix is overspending on content relative to peers. However, simple math suggests that this is simply not true on a per unit subscriber basis. 

Netflix has ~150 million subscribers and intends to spend 15 billion on content. This translates to ~$100 per subscriber.

Disney, including Hulu, has about 45 to 50 million subscribers, and spends about ~$10 billion on content, once sports right are removed. This translates to ~$200-220 per subscriber

Amazon Prime has about 25 to 30 million active subscribers and spends about ~$4.5 billion on content, about $150 to $180 per subscriber. 

Doing this paints an entirely different picture -- Netflix is actually spending the least among peers. Moreover, this only shows the content cost per subscriber, and not other costs which also scales meaningfully. 

This calculation also does not account for the fact that Netflix can afford to charge the most given its vast content library and strong slate. Netflix is able to generate ~$130 per year per subscriber, while Disney + plans to charge only ~$70 per year per subscriber (albeit to increase in the future). 

This analysis tells us that Netflix has the best unit economics among peers, and will get even better over time as it scales.

'Infinite capital'

The follow-up argument is that peers are well capitalized and are willing to burn capital regardless of outcome. 

For one, I believe this has always been a naive argument. Corporations have limited resources and have to choose to allocate capital among multiple business units. The fact that peers have not committed to a massive capital investment, and only a toehold position, suggests these large corporations understand economics and know going into a price/content war with Netflix will ultimately be fruitless if not detrimental as investors of Apple or Google will price their stock significantly lower if they decide to burn $15 billion a year in a content war. 

Moreover, even if capital is not a constraint, it would still be difficult for peers to build the necessary scale to compete with Netflix given the network effect (albeit weaker) in the system.

With a 150 million subscriber base that is rapidly growing, Netflix is the widest content distributor in the world. Content producers that want to keep creating content want to work with Netflix. Do anyone still remember YouTube Premium? YouTube's inability to build a viable competitor even with the capital backing of Google just goes to show how hard it is to get going in a meaningfully way.