Netflix stock is on a rip-roaring tear. Three months ago it was at $75. Two months later it had climbed to $90. Then up $15 over the next two weeks. And after well-received earnings results two weeks ago, it mega-gapped up, to $150. NFLX hasn’t looked back since, marching uphill to over $180 today.
So the release of its self-produced “House of Cards” series is just more good news that should boost the stock further, right? One would think so, based on the rave reviews. The most common posting on the blogosphere appears to be “Can’t wait for season 2!!!”.
You’d especially think more stock price gains were in order if traders followed the recent logic to push up Netflix's value NOW for a deal the company signed with Disney that doesn’t take effect for FOUR YEARS.
This is where being an excellent marketing strategist makes you a better business analyst. Let’s put aside the rave reviews of “House of Cards” – honestly, you could put Spacy Kevin Spacey in an empty room, have him stare at the walls, and viewers would just plotz – and look at this from a business perspective.
“House of Cards” was reported to have cost in the neighborhood of $50 million per season. Let’s take Netflix’s faux financial margin that it calculates and calls a “contribution margin,” and round it up to 20%. That means Netflix needs $250 million in new subscriber fees just to break even on season 1. That equates to roughly 2.5 million new streaming PAYING customers.
Netflix gained 2 million U.S. subs in Q4 without “House of Cards,” so this seems doable.
Except that season 1 of “House of Cards” is already over. Netflix released 13 episodes all at once, apparently to prove a point about “anytime” streaming.
For fun, let's assume the series did in fact attract 2.5 million new subscribers (can’t wait to see the Q1 2013 financials – April can’t get here fast enough). What do all these customers do now? Keep paying $8 a month in order to…wait for season 2? If another 13 episodes don’t come fast enough, and the customers bail, then the break-even just went negative.
So Netflix would need to rush the release of season 2. Except to pay that off, it will need ANOTHER new set of streaming subscribers to the tune of 2.5 million.
Without a season 3 to follow that up with, Netflix's new self-production model is f&cked.
Netflix played its full hand. But it doesn’t appear to be playing with a full deck.
