“It’s all about global scale.”
John Malone, Chairperson of Liberty Media, on CNBC commenting on modern media companies like Netflix, HBO etc.
John Malone is a name I’ve heard many times over when it comes to be one of the best investing and business minds. In the quote above he was talking about a great state of the market (circa late 2019) in the direct-to-consumer companies, like Netflix, versus the “linear” media companies and incumbents like HBO. There’s also those hybrid services that have taken off like NBC’s Peacock who straddle cable and DTC offerings. It’s a great interview and it’s worth learning how his mind works if you’re interesting in general investing and media investing in particular.
I’ve written previously about one key investing mental model is to look for products and services having become “the standard”. The key piece of being able to become the standard is that increasingly it needs to have global mindshare. It’s almost table-stakes as digital screens have become ubiquitous in modern living.
Having a recognizable global brand is key to getting to that scale, as Malone points out. In the case of non-linear media companies like Netflix that have fast-followers like Disney+ or Apple TV+ coming up the rear, I think it’s even more important that the next step to avoid the “Red-Queen Effect” is what Netflix’s co-CEO and co-Founder Reed Hastings has recently called, culture zeitgeist.
Here’s what Hastings has said about their Netflix’s aspirations:
“In addition to titles with big viewership, we also aspire to have hits that become part of the cultural zeitgeist. In 2020 alone, we had Tiger King, Bridgerton and The Queen’s Gambit. Not only did 62m member households choose to watch The Queen’s Gambit in its first 28 days (making this show our biggest limited series in Netflix history), but it ignited sales of chess sets and inspired the next generation of chess prodigies.”
Netflix’s Q42020 Letter to Shareholders
This is a notable for a few reasons.
One, in the case of The Queen’s Gambit (which is highly recommended), it has had appeal beyond just the content itself. It drove second and third order effects that inspired people to play or pick up chess again.
It had global appeal. Increasingly, it’s driving conversations with people that are in different parts of the world including in different countries that traditionally would have had different (and staggered) times of consuming that content. Even film release windows were a moving target and didn’t allow for the global audiences to talk about the same film on the same weekend.
Two, being part of the global, cultural zeitgeist is increasingly also about FOMO. Casual conversations become about knowing universal cultural topics to talk about including those that are popular content titles like Gambit or Tiger King. Think of how many more conversations have you had that start with, “Did you watch…” or “What did you watch?” in the last year.
Lastly, for all-you-can-eat like service offerings like Netflix or Prime Video that also have their own original shows, I increasingly think that it’s akin to gambling or venture capital for the masses. Making a small investment (in the case of a relatively small monthly downpayment) pays for a way to have this optionality of finding and being part of a great conversation about the next great story, be it a tv series or movie. How much is that worth to the average person, to be part of the culture zeitgeist?
Inverting it (as Charlie Munger would suggest), how much are you willing to give up or lose, by being left out of a conversation with friends or colleagues?
I think Netflix has this ability to create, distribute, and has the mindshare to allow for zeitgeist to form when there is a hit show with multi-country appeal.
Summing it up and using Netflix’s own words (and interestingly from the very first sentence of their ‘Culture’ webpage):
Entertainment, like friendship, is a fundamental human need; it changes how we feel and gives us common ground.
Netflix Culture
Content becoming global zeitgeist is both an offence and defence. Ben Thompson said it best when explaining the outcome of Netflix’s 2019 sleeper hit movie, Bird Box:
“Bird Box and other successful content does triple duty for Netflix:
– For current customers, Bird Box provides two hours of entertainment and a pass into popular culture. It is a cost of goods expense.
– For prospective customers, Bird Box makes Netflix more attractive for the same price. Or, to look at it another way, it lowers Netflix’s customer acquisition cost. It is a marketing expense.
– For marginal customers, Bird Box is a reason to stay on the platform. It lowers Netflix’s customer retention cost. It is an operating expense.”
Netflix Flexes, Stratechery
Post-script: Even for shows that don’t make it to global zeitgeist, one needs to watch the mediocre shows first to have the bragging rights to be able to argue about which shows one didn’t like. Either way, you need to earn the right to be part of that cultural conversation by investing your time, even if it means watching shows that aren’t anywhere near “hit” potential. This investment is what makes it feel like gambling or venture capital.