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Speaker 1: Get a duplicy Now, chances are you're a Netflix customer, right,

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Speaker 1: who isn't? And it's not doing too badly for investors either,

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Speaker 1: But there has been some brutal competition and bumps in

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Speaker 1: the road, and more recently it's changed its spots and

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Speaker 1: done something it said it would never do, which is

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Speaker 1: to introduce ads. Sam Dickey from Fisher Funds is with us, say.

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Speaker 2: Sam, good evening here.

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Speaker 1: A lot of people won't realize how Netflix started, which

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Speaker 1: was it was a DVD rental company, wasn't it?

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Speaker 2: That's right? Isn't that awesome? A DVD rental by mail business?

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Speaker 2: And it wasn't until two thousand and seven actually that

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Speaker 2: it launched its streaming service, and simplistically that means you

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Speaker 2: could watch TV and videos real time over the Internet,

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Speaker 2: and astonishingly it has almost three hundred million streaming subscribers

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Speaker 2: today after starting as a DVD rental by mail business.

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Speaker 1: Now it goes fast forward to today and we have

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Speaker 1: a streaming service. But was it the first of its kind?

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Speaker 2: Yeah, it was. It's the first of its kind. But

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Speaker 2: we saw the explosion of many many of these things

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Speaker 2: in what was called the streaming war. Was it's a

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Speaker 2: really dominated in twenty nineteen when Disney launched, Disney Plus launched,

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Speaker 2: and during the pandemic as well, when we were all

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Speaker 2: locked up and watching TV, we had Amazon Prime Video,

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Speaker 2: Apple TV and dozens of others ramping up further to

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Speaker 2: grab our attention. But what was super brutal was that

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Speaker 2: Disney and all these others launched at very low prices.

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Speaker 2: So Disney launched at seven bucks a month in the

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Speaker 2: US versus Netflix, which was thirteen bucks at the time,

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Speaker 2: so almost a fifty percent discount.

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Speaker 1: What happened in twenty twenty two that it fell seventy

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Speaker 1: five percent. What happened there?

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Speaker 2: Yeah, it got punished, so it roared through covid is.

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Speaker 2: We all bought Netflix subscriptions to watch while lockdown, along

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Speaker 2: with all these other subscriptions, it seems, and the company

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Speaker 2: got a little bit too excited about the future and

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Speaker 2: wrapped up investment and costs. And then the combination of

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Speaker 2: us all coming out of lockdown and wanting to travel

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Speaker 2: rather than watch Netflix Plus the drag from all these

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Speaker 2: new low price competitors like Disney meant revenue was way

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Speaker 2: lower than expected and costs higher, so profit got destroyed.

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Speaker 1: Obviously, they have recently decided to introduce the ads. Now

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Speaker 1: what brought this on?

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Speaker 2: Yeah, I think founder Read Hastings is on records saying

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Speaker 2: things like Netflix is a safe respite for users without

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Speaker 2: the controversiversy of exploiting them via advertising. So that's what

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Speaker 2: he said. Yet here we are, so it is an

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Speaker 2: optional chief of subscription. So why the backflip. He was

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Speaker 2: very frank about his mistake. He said, we got this wrong,

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Speaker 2: which we'd flipped sooner. And it's good business. You've got

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Speaker 2: hundreds of millions of loyal subscribers and you know their

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Speaker 2: viewing history, so you've got a good data to feed

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Speaker 2: them appropriate ads, and that tier, the ad tier, the

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Speaker 2: cheaper ad tea, has been a huge success, so especially

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Speaker 2: in an era where there's been a cost of living

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Speaker 2: crisis where now has more than fifty million subscribers from

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Speaker 2: zero a couple of years ago, so incredible growth there. Yeah.

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Speaker 1: Interesting, I see that Prime Video. Amazon Prime is going

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Speaker 1: to do the same thing here in New Zealand roll

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Speaker 1: out the ads. Is it for the same reason?

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Speaker 2: Yeah, Well, they've done a much blunt away actually, but

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Speaker 2: they rolled it out to the US UK earlier in

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Speaker 2: the year, and they said, other countries would follow, and

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Speaker 2: we're next on the list. Their much blunter approach though,

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Speaker 2: as they're rolling out ads to all of their members.

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Speaker 2: But if you don't want ads, you have to pay

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Speaker 2: up an extra three bucks a month. And Disney, of

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Speaker 2: course did it right out of the gate in between nineteen,

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Speaker 2: so most are doing it now.

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Speaker 1: And so tell me, how is for investors thinking about

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Speaker 1: the stuff, how is Netflix going in the face of

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Speaker 1: all of this competition.

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Speaker 2: It's going very very well. So during the streaming wars,

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Speaker 2: where again dozens of competitors were plowing tens of billions

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Speaker 2: of dollars into creating movies and TV, Netflix was the

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Speaker 2: only pure place streaming service on Earth that was profitable.

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Speaker 2: Hence the irrationally low prices that competitors were originally offering

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Speaker 2: them couldn't last. So take that Disney example. They launched

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Speaker 2: at seven bucks, almost a fifty percent discount to Netflix.

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Speaker 2: Disney now costs sixteen dollars, so prices are up well

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Speaker 2: over one hundred percent, and there's actually more expensive than Netflix.

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Speaker 2: So it's really helpful if your competitors pushing prices up

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Speaker 2: by more than a undred percent. And what's super interesting

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Speaker 2: is Netflix has ended up crushing the others on new subscribers.

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Speaker 2: So since twenty twenty two, Disney subscribers have actually fallen

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Speaker 2: slightly while Netflix has gained another eighty million.

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Speaker 1: So what do investors need to think about when they

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Speaker 1: think about this stuff?

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Speaker 2: I think it's an excellent lens through which to look

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Speaker 2: at economical moats and growth runways, which are both critical.

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Speaker 2: So back in twenty twenty two, when the stock was

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Speaker 2: down seventy five percent, many thought Netflix's moat was eroding.

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Speaker 2: It was game over, the barbarians were at the gate,

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Speaker 2: but the market actually mistook a fast move and competitive

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Speaker 2: backdrop for an arrow in the moatent. In fact, Netflix's

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Speaker 2: moat has had the blow torch applied to it and

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Speaker 2: it came out the winner. And on top of that,

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Speaker 2: they've extended the growth runway via the ad tearing and

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Speaker 2: the password crackdowns. He might have seen as well, Heather.

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Speaker 2: So it's kind of like that positive flywheel on full

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Speaker 2: force great content. It's making tons of profit. It's reinvesting

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Speaker 2: that into content, which is the polar opposite of Disney

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Speaker 2: Plus right.

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Speaker 1: Now, very very interesting stuff, Sam, Thank you so much,

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Speaker 1: as always at Sam Dickey of Fisher Funds.

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