The People vs. Netflix

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It really hurts not to agree with Spielberg in his crusade against Netflix at the Oscars but this “battle” is simply pointless. Just like the one regarding film festivals with Venice in first line and magisterially handled by festival director Alberto Barbera.

Roma – as many other so called “originals” – was not directly financed by Netflix but instead by Participant Media and Esperanto Filmoj (Alfonso Cuaron’s own production company) for a total budget of $15 million and then picked up for a considerably higher price tag and distributed by the Los Gatos company, theatrically first and then SVOD. The number of screens an indie film plays on is, on average, lower than this specific case. While Netflix has not publicly disclosed box-office figures for Roma, sources deduced that the film made $90,000–120,000 from three theaters in its opening weekend, 23–25 November, and a total of $200,000 over the five-day Thanksgiving frame, including selling out theaters in Los Angeles and New York City. Had the results been officially reported, its approximate venue average of $66,600 would have ranked among the best ever for a foreign-language film. In its second weekend of theatrical release in the United States, the film expanded to 17 theaters. In its third weekend, the film made another estimated $500,000 from 100 theaters, for a running total of $900,000. Despite being released on Netflix on Friday, 14 December, the film expanded to 147 theaters and grossed an estimated $362,000, for a four-week total of $1.4 million. It made another $300,000 the following week and $150,000 the week after that. By its ninth week of release, the film had made an estimated $2.8 million. In the weekend following the announcement of its 10 Oscar nominations, Roma grossed another $175,000 from around 80 theaters, pushing it past $3 million, the first foreign language film to do so domestically since Ida in 2013. In total, the drama was theatrically released in over 20 territories globally with 70mm presentations also being planned during its theatrical release.

Data show clearly and extensively that this process is not hurting the theatrical experience while it is instead lowering the risk and allowing beautiful but “difficult” films to recoup quickly – the obsession has to stop. SVOD subscribers are actually more likely to be moviegoers. Netflix spent an estimated $50 million for their Awards campaign but since Venice everyone knew this movie was going to be at least nominated. It would have won Best Picture if there was a way to opt out of the foreign language category.

Regarding this last point, shall the The Academy change the rules making room for other movies when a foreign language film is nominated for Best Picture? Cold War in this year’s case, which dominated at the European Film Awards. This would also allow a foreign language film to compete effectively for Best Picture.

The Academy of Motion Picture Arts and Sciences has given Academy Awards to foreign language films since 1945 and has invited the film industries of various countries to submit their best film for the Academy Award for Best Foreign Language Film since 1956.

The Academy defines a foreign language film as a feature-length motion picture produced outside the United States that contains primarily non-English dialogue.

Crouching Tiger, Hidden Dragon and Roma received ten Academy Award nominations, the highest number of nominations ever garnered for a foreign language film. The foreign language films with the most awards are Sweden’s Fanny and Alexander and Taiwan’s Crouching Tiger, Hidden Dragon, with both winning four awards, including the Academy Award for Best Foreign Language Film.

No foreign language film has been a recipient of an Academy Award for Best Picture, although ten foreign language films have been nominees for the award:

Grand Illusion (France) 1938
Z (France/Algeria) 1969
The Emigrants (Sweden) 1972
Cries and Whispers (Sweden) 1973
The Postman (Italy) 1995
Life Is Beautiful (Italy) 1998
Crouching Tiger, Hidden Dragon (Taiwan) 2000
Letters from Iwo Jima (US) 2006
Amour (France/Germany/Austria) 2012
Roma (Mexico) 2019

Now let’s all wait for next crusade when Scorsese’s The Irishman will be released next autumn.

About that #NFLX debt

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Immediately after releasing the financial results for Q3-2018  Netflix has announced and priced a new issue of $1.9B debt in senior notes – rated as junk bond – to finance new investments in content and other long-term assets such as the new production facility in Albuquerque.

It might look sensational adding up to the roughly $8B already on the balance  sheet, but Netflix’s capital structure is actually not too different from comparable companies such as Amazon: the Debt to Assets ratio, for example, is roughly .34 for both, and slightly higher than .30 for AAPL and .26 for DIS. The liquidity is actually much better than Amazon and also better than the industry: the Quick ratio, for example, which measures the company’s ability to meet its short-term obligations with its most liquid assets is 1.4 for NFLX vs .76 for AMZN. NFLX’ s Interest Coverage, which measures earnings compared to interest expenses, over the past 10 years ranges from 2.3 to about 49.4 and is currently at a not so safe but not too worrying either 4.45.

So are they burning cash? Yes, quite a lot: about $1.4B in the last 9 months (despite the debatable accelerated amortization).

But is this an operating issue? No, not at all. Cash on the Balance Sheet actually grew from 2.8 to $3B YTD, while revenue and net income are also growing steadily. Growth comes from the international markets whose value has now surpassed domestic.

Regarding its valuation, EV/EBITDA is 21x (vs 59x AMZN). And how about efficiency? More than $2M revenues per employee (vs $314k AMZN).

Profitability is also looking great with ROE (ttm) above 30% and higher than 89% of companies in its industry, and operating margin (ttm) above 10% (vs AMZN just slightly higher than 3% even though still way lower than the amazing 25% of DIS).

All in all, Netflix is doing just fine folks! Are these announcements part of a magisterially conducted PR strategy? Partially, yes because Netflix is as strong as its brand and part of its marketing strategy is to shock the public opinion and make the world (and the markets) believe they are doing the best they can to deliver – and now produce – the best content.

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For what concerns the entertainment industry and most of all the content creators, all that matters is that they will keep investing more than $3B in original content each trimester, in the “three major categories of content: licensed non-first-window content such as Shameless, licensed original first-window content such as Orange is the New Black (owned and developed by Lionsgate), and now owned original first-window content from the Netflix studio, such as Stranger Things”.

Nonetheless, they are still looking for the real competitors, but they are now being challenged by the major studios – Disney above all, from which they are progressively parting ways – and in Europe by Amazon and a handful of local operators as well as traditional players and trying to partner with them – e.g. Sky UK – rather than fight them and due to the new EU regulations which require OTT players to carry a minimum of local content.

But they are as relevant as it’s possible to be, in television as well as feature films, where they gave new life, for example, to The Irishman by Scorsese and now they are a stable presence also at some very important film festivals such as Venice. Watch next at the Oscars, where they could win in the foreign language category with Roma by Alfonso Cuarón, by general consensus of the critics one of this year’s best films.

Netflix valuation, a House of Cards?

Worldwide fans of Congressman Francis Underwood’s adventures are going nuts for the release of Season 3. Yet the market is not impressed: NFLX share price dropped by 1.68% on the same day.

In fact, analyst widely agree Netflix current valuation (Nasdaq: NFLX) depends heavily on its ability on creating quality original programming and marketing them effectively. The uncertainty on future strategy which causes high volatility and recently determined a fully recovered sharp 26.4% drop needs to be addressed more clearly.

Netflix said its 320 hours of original programming in 2015 actually cost less than most of its licensed content. “We try to make each project more efficient and effective than studio content we’d otherwise be licensing,” the company said in its fourth-quarter investor letter.

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For its part, Netflix has been transparent about its ramp-up in spending for original content that brought 45 Emmy, 10 Golden Globe and two Academy Award nominations and several wins in just two years. “We will continue to grow the percentage of our content spending dedicated to originals for the next several years,” the company said. Continue reading “Netflix valuation, a House of Cards?”

“Netflix rhymes with Wet Chicks” for Sandler, means an opportunity for all

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Any game changes and evolves, so players’ attitude, and laws and regulations need to evolve accordingly.

The primary game changer Netflix has just announced, right after declaring that the first day-and-date worldwide release of a blockbuster will happen soon, that they are going to produce and distribute as soon as 2015 four feature films starring Adam Sandler, therefore coining the term web film, which is a film meant specifically for online distribution. Continue reading ““Netflix rhymes with Wet Chicks” for Sandler, means an opportunity for all”