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Weekend thoughts: $NFLX and password sharing as a sign of brand strength?
This week, Netflix posted a disastrous earnings report. Subscribers dropped by 200k (against guidance to add 2.5m! Though, to be fair, a small part of the miss was driven by kicking Russian subs off), and they forecast a loss of 2m subs in Q2. In response, the stock dropped ~35%, and Bill Ackman sold his position at a quick loss roughly three months after purchasing it.
Netflix blamed the surprise subscriber loss on a bunch of different things: competition, macro, etc. But one of the things they blamed it on was password sharing:
Second, in addition to our 222m paying households, we estimate that Netflix is being shared with over 100m additional households, including over 30m in the UCAN region. Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets - an issue that was obscured by our COVID growth.
That line reminded me of a thought I’ve toyed around with a few times: does how freely you’ll share your password to a particular service have some type of signal about the service’s moat or TAM?
Let’s exclude super personal things; no one is sharing the password to their bank account or email. It just doesn’t make sense; if I gave you the password to my bank account, you couldn’t get value from it through any legal means (you could get value from stealing all of my money!).
So I’ve been thinking of it more along the lines of consumer subscriptions. What consumer subscriptions are you willing to share with other people? People share their Netflix passwords like candy; I’m on my best friend’s account, and in return he has access to my HBO account.
But I don’t share my amazon password with anyone. And they could get some theoretical value from it (watching prime, or maybe the two of us sharing free shipping?). I don’t share my amazon password in part because I don’t want other people having access to my order history (I buy an embarrassing amount of fiction books and candy) or the ability to order stuff for themselves, and in part because i assume most people already have their own Amazon account.
What about Spotify? Maybe I’m living in a bubble, but I don’t know many people who share Spotify log ins. You can create your own account and join someone else’s family plan, but I feel like that’s not super common (perhaps because Spotify takes steps to stop it, or perhaps because I just haven’t asked enough people).
Peloton? Yes, most people have a Peloton account because they have a bike, and I don’t believe you could password share to multiple bikes…. but there’s a burgeoning “digital only” Peloton subscription (people who don’t have bikes or treads but sign up just for the app). Again, maybe I just haven’t asked enough people, but I’m not aware of a ton of digital only subs who are sharing passwords.
YouTube? I pay for YouTube premium to skip the ads, and I don’t share that with anyone. Maybe it’s because I’m lazy… but maybe there’s something a little personal about your YouTube algo? I’m not sure; I know I wouldn’t care if someone saw my Netflix history and saw some embarrassing shows on there, but I probably wouldn’t love it if someone loaded up my YouTube algo and saw my recommendations (there are a lot of Glee highlights in there). Also, the YouTube algo is good; I wouldn’t love it if someone watched like 15 videos on there and messed with my recommendations. (side note: have you ever seen YouTube for someone else’s account? Saying it’s like opening a completely different website is an understatement; it’s like getting portalled to an alternative earth and viewing their YouTube.)
Anyway, I’m not sure where I’m going with all of this, but it’s something I’m going to keep thinking about. I wouldn’t be surprised if there’s a trick to spotting early moats / growth stories in consumer subscription services based on how likely people are to share passwords.
Last summer, all anyone wanted to talk about was TAM and NPS scores. Now that everyone’s favorite growth compounders have fallen by 50%+ in the past six months, no one seems to care much about growth stocks and high NPS scores or anything.
But everything has its day in the sun, and I suspect that some of the growth compounders that have been demolished over the past six months have gone from quite overvalued to wildly undervalued, and that finding growth companies early will continue to generate strong returns going forward. So I’m going to keep thinking about ways to find spot early compounders, and password sharing could be one of them.
PS- as I write this, Netflix is trading for ~$215/share. That gives it an EV of ~$106B. That’s roughly the same as WBD’s EV at their current share price of ~$20.50/share (though WBD’s market cap is much lower than NFLX’s thanks to a hefty debt load). LTM EBITDA for NFLX is ~$6.9B; LTM EBITDA for WBD is over $10B and that’s before ~$3B in merger synergies. NFLX is shrinking subs; we know HBO is still growing. Obviously there are a lot of other complexities (a huge chunk of WBD’s earnings are from the legacy bundle), but WBD’s price just seems wrong to me versus Netflix (though there is the question of “should anyone invest in a media company” given their history of value destruction and increasing competition from AMZN, AAPL, and alternative entertainment like Video Games, Tik-Tok, and social media).