Netflix is one of the best performing stocks this year, up 225 percent year-to-date, with a $9.3 billion market cap. But it is also priced to perfection, with a lot of short sellers hoping to profit from its fall and antsy Wall Street analysts downgrading the stock. Today, CEO Reed Hastings defended Netflix’s prospects in a very public, very detailed, and very unusual blog post on Seeking Alpha. The post was in response to a specific short seller, Whitney Tilson, who last week laid out his case against Netflix in another Seeking Alpha blog post. By addressing this one short seller, of course, Hastings is trying to address the market’s jitters as a whole, and he does a pretty convincing job of it.
Tilson raised a number of concerns, ranging from the recent resignation of Netflix’s CFO to pressures on Netflix’s margins to market saturation and increasing competition in streaming video. Hastings acknowledges that Tilson “only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix. . . . Odds are he is wrong on all of them, in my view.”
Hastings then goes on to rebut the short seller’s argument (short sellers are investors who bet against a stock). I’ll summarize each of Hasting’s counter-arguments below:
- The CFO left because he wasn’t going to become CEO anytime soon.
- The First Sale Doctrine (which allows Netflix to rent DVDs after purchasing them) may be under attack, but it won’t change in 2011. And Netflix’s video streaming business is growing so fast that by the time it does have any impact on DVD costs, it won’t matter anymore.
- Internet bandwidth costs should continue to decline, and while ISPs might like to charge content providers for data, that won’t happen in 2011.
- Free cash flow has taken a hit because of the increased payments Netflix is making to media companies and content owners, but Netflix will begin smoothing that out on a quarterly basis instead of taking big hits once a year.
- Market saturation in streaming video over the Internet is not yet an issue. Market demand is still accelerating.
- Criticisms about “weak content” are not supported by subscriber’s voracious appetite for what Netflix has to offer, but Netflix is trying to get better movies and TV shows all the time.
- Content costs are going up, but postage costs are going down as viewers shift to streaming.
- If necessary, Netflix will take a hit to growth before taking a hot to margins. ”Management at Netflix largely controls margins, but not growth.”
- Netflix is facing a growing number of competitors in streaming video, but it maintains advantages in scale and brand.
- TV Everywhere could become a long-term threat, but it is more of a defensive move fro the cable companies rather than a new profit engine.
- International expansion could have an impact on margins in the short term
Let’s drill down further into some of these issues. Netflix is obviously betting big on the transition to streaming video. The more it can get subscribers to watch streams instead of DVDs, the more it saves on postage. On the flip side, video content owners are demanding more money for those streaming rights. Hastings thinks that concerns about too many streaming services coming online is overblown at this point:
Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.
And while a major new streaming competitor could come in and blow away Netflix’s lead, Hastings makes the case that Netflix has a huge competitive advantage when it comes to the number of existing paying subscribers and its cost to acquire new ones:
For a competitive firm to materially hurt our growth, they have to have some positive differentiator (price, additional content, integration, etc.), and then they have to market their service effectively. This wild-card of major new competitor offering great content and marketing aggressively is the single best near-term short thesis, but no one knows if it will happen in 2011.
The core competitive barrier for direct competitors is brand/subscriber-evangelism. Our large subscriber base is very happy with Netflix, and tells their friends about Netflix. That means that the cost of acquiring the incremental 1m subscribers is lower for us than for a competitor, and thus our net additions are higher
Finally, in terms of the quality of the movies and TV shows Netflix makes available for streaming versus what people get on cable TV, Hastings points out:
. . . at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.
The key question is whether some combination of Netflix, Hulu Plus, YouTube, Google TV and other Internet video services will some day effectively replace the cable TV experience. And if it can, whether that combination will cost more or less than the $80 or more people pay for cable today. But remember, people are already paying for Netflix, which helps Hasting’s case.
Whether or not the stock will keep going up is another question entirely. At $178 a share, would you buy or short the stock?
Did you just promise yourself you’d write a book? Many of us make resolutions at this time of the year to finally start writing a novel or a picture book for children. If you’re one of the many, you’re probably not expecting a book deal. Rather, you’re just looking to get it written and put it out there for those who are interested in reading it.
If this is you, then a print-on-demand publisher is exactly what you’re looking for. You don’t need to spend much (or any) money upfront – all you really do is publicise your book and the buyers can get one made when they want it. Meanwhile, you could be making a small amount or a large amount in passive income and it hasn’t cost you much except your time spent writing. Sounds good?
1. Lulu
Lulu is one of the larger publishers and will happily cater for many types of books. You can easily publish a novel, a cookbook, or simply create a photo book for your family. They have the ability to publish and sell eBooks on your behalf and claim to have the largest distribution channels of all online publishers. Useful free services include consultations, while paid services offered include cover design, ISBN purchasing and distribution. If you choose to sell in the Lulu Marketplace without an ISBN, your upfront costs are negligible.
You can also set your profits by choosing your own royalties and Lulu makes its money by taking a small cut from your sales. Lulu pays royalties via Paypal or cheque. Read more about publishing with Lulu here.
2. Blurb
Blurb is well known for its full colour photography-based books, however it also offers a couple of black and white text novel options. You can either use their online software to prepare a book or you can upload a pre-prepared PDF. Whichever option you choose, there’s no upfront costs.
When you sell the book, Blurb takes a small fee. Plus, you can set your own prices and thereby choose your own profit margin. Blurb offers payments through PayPal.
3. Wordclay
Wordclay offers a basic DIY publishing service which is free for publishers. If you wish to pay a modest fee, services such as editing, ISBNs and distribution are available to you as well.
Again, you can choose your own royalty and Wordclay takes a cut from your sales. Wordclay sends US cheques.
4. CreateSpace (aka Booksurge)
CreateSpace offers a DIY “no fees upfront” royalty-based publishing option to complement their regular publishing offers. They are actually part of the Amazon group of companies, so there’s no extra fees involved to distribute your book through Amazon. ISBNs can be obtained for free via CreateSpace.
CreateSpace also claim to offer the best royalties in the business — plus they allow you to choose your own royalty. Royalties can be paid by US cheque or to a US bank account.
Words of Advice
When choosing your publisher, make sure you research well and ensure it’s a good fit for you before you commit your time and money or sign any agreements. Companies such as these do have the occasional unhappy customer but it’s not the norm. Here’s a few important things to look out for:
- For non-US citizens, remember that different companies have different tax witholding requirements and that the cheque fees and your ability to deposit US cheques may de-value your earnings somewhat.
- Having your book formally listed with an ISBN will often require you to ensure the quality of your book. This may require you to purchase a copy of your book each and every time you make a change (this can include price or directory changes). If you sign up for an ISBN, read the fine print, be prepared to purchase if required and don’t make changes to your book after this unless it’s very important.
- No-frills DIY publishers will endeavour to make money from added extras such as cover art, editing and ISBNs. If you want to use these services, ensure you compare the prices between publishers and the cost of doing it yourself.
More about Self-Publishing and Writing
You might also like these articles on publishing and creating books:
- How to Actually Make Money Selling eBooks
- Become A Better Photographer with Online 365 Days Groups
- NaNoWriMo.org – Write a Novel In 30 Days!
If you’ve written your own book and have self-published, let us know about your experiences with the publishers. Who did you choose and why? Were there any unforseen problems? Were you happy with the book quality? Let us know in the comments!
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