Gaming looks promising
Foreign operations scale and leverage working
Sports...kind of
And other catalysts...
Gaming
In this quarter alone Netflix has (1) Hired a VP of Gaming, (2) Acquired a gaming studio and (3) launched mobile gaming in foreign countries.
We’re all still trying to wrap our heads around what gaming means to Netflix business, revenue, stock price, etc...but the moves they are making signal they are serious, focused and moving fast -- typical Netflix MO. Just yesterday, Netflix announced the acquisition of Night School Studio, an independent video game developer best known for its critically acclaimed debut Oxenfree.
On Tuesday this week, Netflix launched five (5) games to users in Italy, Spain and Poland (two games were launched in Poland a month back).
You can see on the menu below left that “Play Mobile Games” appears as a row on your mobile device screen.
By all accounts global gaming is BIG. This VentureBeat piece expects the gaming market to surpass over $200 billion in the next couple of years and estimates that 90% of gaming occurs on a mobile device. Co-CEO Reed Hastings has notably commented in past earnings calls that Netflix competes against Fortnite (and sleep) more than Disney. Point is, gaming is big, not going away and is synergistic for Netflix.
Possibly Netflix's most significant competitive advantage is their ability to focus and execute fast; it will be very exciting to see what they can do in this space over the next couple of years. I expect A LOT.
Foreign Scale and leverage (ex. Squid Game)
Squid Game, a Korean based dystopian bloody thriller involving participants in a life or death game, recently launched September 17, and according to FlixPatrol is the #1 title in 78 countries (as of this writing its estimated by some accounts to be #1 in 90 countries with 95% of viewing occurring outside Korea). According to co-CEO Ted Sarandos earlier this week "Squid Game will definitely be our biggest non-English language show in the world, for sure” and added that “there's a very good chance it's going to be our biggest show ever."
Money Heist, a Spanish original series about a criminal mastermind and his thieves pulling off the biggest Heist in history, is the second most watched series behind Bridgerton and is the MOST watched foreign language show.
At the end of last quarter Netflix had 209 million global subscribers: 135 million or ~65% are outside of the US and Canada. Netflix is investing heavily in foreign studio and production space in the UK, Europe, Latin America, Asia and specifically Korea, where earlier this year Netflix announced the acquisition of production/sound stages.
I am not a high-brow foreign film aficionado, but a few of my favorite Netflix shows have been foreign productions:
- Ragnorak: Thor origin story from Norway.
- Better Than Us: Future AI robot story from Russia.
- Lupan: sophisticated thievery in France.
- Luis Miguel the eponymous series from Mexico (my wife’s obsession).
The punch line here is the majority of Netflix's future growth will be in foreign countries and they are many years ahead of legacy media in terms of building and leveraging that platform and infrastructure. Squid Game, a relatively low-budget production, has or will capture the attention of more than 82 million Netflix accounts (that is the number of accounts that have watched Bridgerton); a return on investment (easy measurement is $ cost of production per hour watched) enabled by their scale that no other entertainment company can currently achieve.
Sports…kind of
Formula 1
Netflix’s inside and behind the scenes look of Formula 1 racing “Drive to Survive” is entering its 4th season and the CEO of McLaren Racing told reporters that the Netflix show was “the single most important impact for Formula 1 in North America.” And the average F1 TV audience in the United States has risen from 547,000 in 2018 to 928,000 in 2021, according to the New York Times.
I’ve always believed Netflix needs to move into sports, but understand the challenge of monetizing that venue given their non-advertising model. F1 may be different because it is (a) a sport with no time-outs (b) a sport they could leverage their tech expertise on (imagine being able to switch between different drivers or pit-crew cameras on demand) and of course (c) they’ve already amassed a large F1 global audience.
Now, finally, Reed Hastings during interviews last week in Germany revealed “A few years ago, the rights to Formula 1 were sold. At that time we were not among the bidders, today we would think about it.”
Golf
Netflix will carry forward the uber-successful “Drive to Survive” model to the game of golf according to reports by GOLF.com. This means Netflix would follow a number of yet to be disclosed PGA Tour players behind the scenes in their personal life, practice and tour rounds.
Approximately, 25 million people regularly golf in the US and 60 million globally. Not huge numbers, but consider only a few 1000 probably race cars in the US regularly and juxtapose that with the viewership Netflix has driven.
Point being these are interesting around-about ways for Netflix to enter sports without being beholden to a “live” advertising driven model. Netflix story-tells the drama behind the live action; and we humans love drama!
Other catalysts -
Kids: So I mentioned the Squid Game to my kids on Monday of this week because I saw/read that it had reached #1 on Netflix. My youngest of 12 years told me she had already binge watched 3 episodes and learned of it on TikTok! My parenting can certainly be called out here, but two major points (1) kids are addicted to Netflix and won’t be leaving and (2) social media and in particular TikTok is driving viewership to Netflix.
Disney admits to headwinds: Bob Chapek revealed at a recent investor conference that Disney+ growth will be in “the low single-digit millions” this quarter. The street was not happy with this. It's somewhat of a reality check that it's hard to grow internationally. It just gives a little more credibility to what Netflix has achieved.
Acquisitions. Netflix is showing more appetite for acquisitions, acquiring IP Roald Dahl Story Company, which including stories like Charlie and the Chocolate Factory, James and the Giant Peach and the BFG.
Tudum: Netflix revealed that their sizzle real fan event Tudum, attracted a massive number of global views and social media exposure.
Seinfeld. Netflix begins streaming on October 1 all 180 episodes of Sienfeld, the show about nothing. Enough said.
Emmy’s. Netflix won 44 Emmys this year, tying a record set by CBS in 1974. Not that big of deal for viewers, but helps attract Talent to work with Netflix and is a proxy for quality of content.
Conclusion
Exciting times for Netflix, no doubt. Hopefully they hit their numbers this quarter and give a decent guide to Q4 or we will see a short term hit to stock price. If they continue to execute on the streaming side and are successful in gaming; then this is a very good long-term investment.
BTW, Reed and Ted combine for about 45 years of C-level management at Netflix. Let that soak in. I would NEVER bet against this management team!
Disclosure: This is not stock buying advice and I'm not recommending you buy NFLX as each person's situation is different.
Ping me with questions at sean@hathawayfinancial.com