HYH Interview: Netflix and Streaming with Masa Capital

Welcome back everyone for the first HYH post of the year!

We’re kicking it off with another interview - miss my first interview? I interviewed RTB, aka RaisingTheBar47 where he laid out his pitch on deflation and NAILED the fall in natural gas prices before it went down.

I want to thank the great Masa Capital - @MasaSonCap on Twitter for getting into it today. Masa has been following me on Twitter since the early early days and has always never been afraid to speak his mind and go against the tide – especially when it comes to Netflix. As an Anon FinTwit account focused on TMT stocks, Masa has become an important voice among Media FinTwit. Ever since we first met online, he’s been railing against Netflix and calling it Debtflix (calling the content trash and making an ode to the junk bond market Netflix tapped into to fund content spend). Masa was validated and given serious kudos on FinTwit back in 2022 as Netflix shocked the street by losing subscribers. Obviously, I recommend following Masa and think you’re going to learn a ton from hearing him out today. Let’s get into it.

Disclaimer – This is not legal or financial advice of any kind. Nothing contained within the newsletter should be understood as investment or financial advice.

1) I recall you constantly tweeting about how you hated Netflix stock during 2020/2021 – can you talk us through your thoughts on what you were seeing before 2022 that was really souring your taste on Netflix?

First off, thank you for inviting me to be part of this series. I’m happy to share my thoughts with your audience and in a different format than Twitter!

My three main issues were valuation, competition and execution. On valuation, the company famously burnt over $3 Billion of cash in both 2018 and 2019, funded by the junk bond market (hence my Debtflix nickname!) Meanwhile, the Street consensus, after their peak cash burn years, was generally for a $2-$3 Billion annual step-up in FCF, in perpetuity. I didn’t agree with that - I thought it required either a similar amount of subscriber and ARPU gains indefinitely, which seemed unlikely given upcoming competition and TAM limitations, or them drastically cutting back on content spending growth, which while potentially giving them a short-term benefit, would hurt them competitively in the long-run. In my view, a $200B+ valuation for, at best, $5B of FCF in several years, in a fast changing industry, didn’t make sense. Indeed, NFLX may still not generate FCF in 2022 and while they are guiding to growth in 2023, that is coming with content spending being flat to down, which they likely will have to ramp back up eventually.

Second, competition was and is coming in fast and furious. HBO Max, a supercharged HBO infused with Warner Bros. TV and movies, is the first real competitor to Netflix in my view and launched in the US in mid-2020. Disney was destined to steal viewership share when it launched Disney+ in late 2019 and has grown Hulu nicely with acquired FX and Fox content. Following the CBS/Viacom merger that closed in late 2019, ViacomCBS (now Paramount Global) rebranded CBS All Access as Paramount+, combined legacy CBS and Viacom content into one streamer and ramped up originals. Even NBC got in the game with Peacock, on which they’re guiding to lose $2.5 Billion of EBITDA in 2022 and have The Office - previously the top viewed show on streaming - the Olympics, Sunday Night Football, Universal movies, WWE content and a lot more.

We went from, in 2018, investors and industry observers thinking Netflix would become “the future of all TV” and wondering if even Disney would join the streaming race to, by 2021, every big media company having a streaming competitor and aggressively ramping content spending. And this is not limited to the US, as competition is coming in hot and heavy internationally as well. This included most of the streamers above expanding to most countries and also local streamers like Univision's Latin America streamer. To sum it up, I thought the market - as well as Netflix management! - was underestimating the future impact of competition.

Third, I didn’t like their execution, both on content and strategically. On content, while Netflix clearly has some winners, they also have many failures too, on both the TV and movie side. Back in 2019, I started tracking every US-based show that each streamer was producing and saw that most of the Netflix content did not look high quality, which turned out to be the case. After the “Debtflix Demolition” as I call it in 2022, various media outlets reported that Netflix was finally changing it up and focusing on quality > quantity.

On the strategic side, I wanted them to boost their IP and library, because they had none. Part of the spending described above was to build out a library in 10 years rivaling what others had done in 100 years, but that wasn’t fully needed on their own - they could’ve bought someone, such as MGM which Amazon later scooped up. I thought they were wasting $ putting movies directly to streaming and not in theaters. Also, I thought advertising, or at least being closer to being ready for it, would have made sense.

I believed all of those issues would come to a head in 2020. Of course, that’s when the pandemic struck, and Netflix benefitted immensely as the dominant streamer with the most content - we all remember Tiger King helping us get through March 2020. So while those themes were still present, they just took a little longer to develop after the pandemic boost, meaning the NFLX stock upside in 2021 was met with much more downside in 2022 when much of the above thesis played out. I still believe Netflix is overvalued and that analysts underestimate competition and overestimate Netflix’s relative position, but at least its not being valued at $300 Billion anymore.

2) You definitely got some pats on the back after Netflix tanked in January & April post earnings – how’d that validation feel?

As Bill Belichick would say, we’re onto the next trade. Yes it felt good, because for a while there the #NetflixBearGang was quite small! And I had many arguments on twitter, at work and at industry conferences often with people thinking I was mostly nuts doubting Netflix's long-term viability. But more importantly, in my view, it’s simply a lot more fun to be covering media these days. Ever since cord cutting - customers dropping the big bundle of channels - started in the mid-2010s, most mediaco quarters were judged by the rate of cord cutting, and then for Netflix, how many subs they added and guided for next quarter vs the Street estimates. Now there’s so much more to look at! Each of the major companies have various strategies in streaming and are on different timelines in adoption, and also have various strengths and weaknesses in their linear and studio assets. There’s more opportunity to generate alpha in this environment, in my view, than before, and that's always welcome.

3) Can you talk about how street expectations on cash burn (especially by Netflix) changed over time? Are all the streaming companies being treated fairly given their appropriate content spend? Are any streamers being treated unfairly by the market?

Yeah, I love talking about this, because I think the commonly referred to “legacy media” companies - those with linear TV and studio assets - are getting a raw deal. Netflix’s first big original content was House of Cards in early 2013, and they still might not be FCF positive in 2022, a full decade later! Meanwhile, by mid-2022 the Street was already calling for DIS, WBD and PARA to scale back their still ramping streaming ambitions, and before they even fully launched in some countries.

Notably, I’m not alone on this point either. At recent conferences both the PARA and FOX (Tubi) CFOs called out how their current equity valuations were getting negative credit for their streamers as the Street was valuing them on an EBITDA multiple basis including significant negative streaming EBITDA. They argue (and I agree) they should be getting a benefit, not a negative, for their streamers since they're building at least some value.

I simply want a fair and consistent game. Legacy media was criticized for years for getting into streaming late and not being all-in; as soon as they went all-in, they were called out for losing too much money. I understand that some of this is a paradigm shift resulting from the end of a decade of QE/ZIRP and a new desire in markets for profits, but I think in general the analysts covering the space thought too long-term on NFLX and are now far too short-term on the others.

4) Warner Brothers Discovery has had a rough time since getting spun off from AT&T – what is going wrong there and how do you think the synergy part of the story will play out?

I’m a big fan of what they’re doing at HBO Max, and I wrote about this in much more detail a couple years ago. During the last year of AT&T’s ownership, it’s now clear that HBO Max was operating under the Netflix model, chasing subs growth over anything else. This was fine when inside of a massive AT&T conglomerate - AT&T’s Wireless business did 4x WarnerMedia’s profits - it was not following the new company taking leverage up to 5x as Discovery paid AT&T to buy WarnerMedia. It’s now obvious as well that some spending simply wasn’t smart. CNN+ famously got very little viewership, but that shouldn't have been much of a surprise considering there's no track record of a small-scale news-focused streamer working, plus CNN the linear channel has been losing viewers for years. Plus, direct to streaming movies were expensive and, according to new WBD management, not moving the needle at all for HBO Max.

So that was the bad. But now let’s discuss the good: WBD has incredible assets. If you were doing a draft of studio assets - production/library/IP - you’d want in the Streaming Wars, I think HBO, WB TV and WB movies would be 3 of the top 4 picks, with the other being Disney’s movie studio. HBO of course is known for their top tier, cultural zeitgeist hits. Now you pair that with WB library shows like Friends which are top watched shows in all of streaming, and WB movies that drive substantial signup and viewing on streamers, and you have yourself a great service, even without anything Discovery content can add.

Yet, streaming still loses $ for them - the more important short-term story is synergies. We know there is plenty in the linear business, since Discovery executed synergies in the Scripps-Discovery deal several years ago, and all the big media companies are cutting costs without deal synergies to achieve. A lot will also come in streaming. There are tech (two tech stacks to one) and marketing benefits as well as content synergies. With their new streamer launching in 1H23, the idea is to combine HBO Max’s in-demand content that generates sign-ups with Discovery’s cheap, highly bingeable “comfort food” shows that reduce churn. I’m looking forward to seeing how that plays out, and it appears the market is too - WBD stock is on a nice winning streak to start the year.

5) Disney bringing Bob Iger back on was pretty shocking, as is the Nelson Peltz activism – what do you think the path forward looks like with Iger? Beyond being a better communicator than Chapek, are there any key strategy changes expected?

I think much of what Chapek was planning to do, what Iger will do, and what Trian wants them do, all look pretty similar. Disney has been spending aggressively to launch their streaming product across the world. As those start-up costs get behind them in many countries, combined with price hikes from a low “priced to get subs” starting price and a TAM-expanding advertising tier, streaming cash burn will naturally improve, likely substantially and quickly. This was happening regardless of the CEO.

But what can Iger do? Content matters. Chapek was a Parks guy, whereas Iger liked to be involved with creative decisions. There are a couple he can strive to improve in my view. Star Wars has been mismanaged; remember that previously Disney wanted to own the December holiday schedule with a Star Wars and Avatar movie switching off every year, and that hasn’t happened. They should approach Star Wars with a better long-term plan like Marvel has done plus actually make content that fans enjoy. The same goes for Pixar - there’s been a lot of misses there recently. I would also like to see ESPN renew its NBA deal and put more exclusive games on ESPN+, bolstering signups and the value of the Disney bundle. And one area that Peltz is right is that there’s plenty of costs to cut - the whole industry is doing it now, not just DIS - and Iger, with his track record and sensibility, likely has room to be more aggressive than Chapek could've been.

6) I’ve increasingly been leaning towards the camp that Apple and Amazon can outspend the traditional streamers and be significantly stronger players five years from now – how do you think increased competition from Big Tech is going to change things over the next few years?

It’s a great question and I don’t think anyone really knows. With the current non-tech streamers, we have a pretty good idea of how they’re doing financially. The companies can massage some financials, but they report quarterly earnings and sub numbers for their streamers and hold themselves to previously given guidance - WBD, DIS and PARA have all set long-term subscriber and streaming profitability guidance.

With the tech companies, we have little idea how many subs they have and what the financials look like. So it’s difficult to assess how their streamers have been performing. Apple seems to be producing high quality content - I call them HBO 2.0 - and I’ll give a personal shoutout to Severance as my favorite new show lately. Yet, they barely show up in the Nielsen ratings. Amazon clearly spends a ton on their streamer, most recently with LOTR and Thursday Night Football - and they purchased MGM - but what is that spend actually getting them, and is there a limit to it? So while these streamers are adding to competition, both in creating content and for consumer money and attention, we still don’t know how serious they are, and they might not either especially in a fast changing economy where Big Tech is cutting jobs for the first time in years.

7) What do you think happens on the sports side? It seems like Amazon and Apple are increasingly willing to spend big bucks to get sports deals done, and Google recently agreed to the Sunday Ticket deal.

Another really interesting topic right now. The NFL infamously has said that they’re all about reach. Yet, they went against this for Thursday Night Football last NFL deal, choosing money (Amazon) over reach (keeping TNF on a broadcast network). And what happened? Ratings declined 40% YoY. 

Now, do I think this is a big deal for the NFL? No. TNF is their #5 weekly game, after Sunday Night, Sunday late afternoon, Monday Night, and Sunday early afternoon. They can afford less viewing on that game for more money. There's also a strategic element to help Amazon streaming get bigger over the long-run, so they can be a larger bidder next rights deal. But I do not think other leagues can put their #1 or #2 packages on streaming. This has already been proven out lately, as Formula One declined a higher offer from Amazon but stayed with ESPN, and Amazon reportedly was big into the Big 10 but didn't win a package.

And, with all of the above, most of the top tier sports packages are now locked up for a while. The next big one is the NBA. I don’t think streaming is at the point yet where it can get a top tier league's top games without hurting the sport. Therefore, my prediction is that ESPN/ABC and TNT continue broadcasting marquee regular season games and the playoffs, they add some inventory on their streamers to help grow the Disney Streaming Bundle and HBO Max, and that the NBA carves out an additional package or two for Amazon/Apple to both generate even more $ for the league and also help grow those platforms so they’ll be even stronger bidders next time.

8) On the weirdest rumors I saw was the idea of Comcast and EA potentially merging, any thoughts on weird streaming M&A that could play out, or is it more likely two smaller players merge? Who might buy WWE?

The two major companies that are commonly seen as potentially in-play are WBD and PARA. I don’t really agree on WBD, because I think they can make it on their own. PARA is a little more interesting. For awhile now I have said that in a perfect world, one could combine PARA and NBC and then spinoff CBS to WBD, which both would need to happen to pass regulatory (one company couldn’t own 2 of 4 broadcast networks) and would be an excellent fit for WBD, because broadcast, while an old technology, is still incredibly important as a reach vehicle, specifically for the NFL. DIS, WBD with CBS, and NBC with PARA’s P+/Showtime/international assets combining with Peacock/Sky/Universal, would all be really well situated going forward. However, I don't see this happening for awhile as WBD needs to bring leverage down first, and PARA and NBC are both seeing if they can make it alone in streaming.

As for WWE, there are many potential suitors. The obvious two are Comcast and Fox, since those companies currently license their content, though Fox doesn’t have a large streaming presence. Perhaps Disney could be interested to bolster ESPN+ and ABC, though they have a lot on their plate right now. In terms of video games and content, I never really understand that one, because I don’t see clear synergies and creating video games vs creating content is such a different core competency. It’s likely telling that Activision was of greater interest to MSFT and their existing video game assets than a content company.

9) What is the conclusion on Netflix – five years from now…where are they as a Company?

To answer that question, I’ll start with what people were saying about Netflix five years prior, and how that view has radically changed. The idea was that Netflix would become the “future of all TV” - they would be the online distributor for content, perhaps in competition with Amazon and maybe Disney, but that was it. Well, since then all the top mediacos have gotten into streaming aggressively. That also makes it difficult to predict the future, because I think we’re still in the early innings of streaming - we’re clearly in a land grab mode with the industry collectively losing $billions of dollars each year. The next 5 years could be as different as the last 5 years.

For a prediction, I think Netflix will remain one of the big streamers, but after a few years of stable content spending while everyone else is growing, albeit more slowly, they won’t have as much of a content spending advantage vs others, leading to less of a subs and ARPU advantage as well. I think other streamers getting into sports, both domestically and internationally, will be a smart way to add and maintain subs, which will help them vs Netflix either as other streamers are a first mover or if Netflix doesn’t get into sports streaming at all. I wouldn’t be surprised if in the face of weakness Netflix buys some “legacy” assets - IP, library, perhaps even a whole company; PARA for example would offer them lots of content & IP and they’ve reportedly been interested in Paramount’s studio. I don't see their video game venture doing much by then.

So ultimately, I see them sticking around, but I think other streamers will have gained ground on them and some in certain countries will be seen as better. I think, following recent history, their FCF will be lower than what the Street has currently estimated as they spend more to better compete, and I think there will still be a few out there drinking the kool-aid - but it’ll be less than today!

HYH: Thank you Masa! Make sure you’re following Masa on Twitter.

Thanks for reading everyone, hope this was helpful. If you’re an anon FinTwit account I talk to occasionally that think you’d be a good fit to interview, lmk.

Will drop a new newsletter next week - until then! Best, HYH