Growing things in scorched earth might not yield much

One of Shakespeare’s best-known scenes is at the end of Henry V, where two armies have, with few exceptions, killed each other. Such events might not make sense to civilians, but they have occasionally resulted in the achievement of one side’s objectives. The real Henry V did win the Norman territory he regarded as his birthright—temporarily. Enter Netflix, a frightening behemoth that levels pay-TV giants all over the world with its cheap subscriptions and compelling programming, some of it original and exclusive. Cord cutters and cord nevers in one country after another either rely on streaming exclusively or in combination with digital terrestrial broadcasting with its near-perfect signal quality. Much of the streaming is Netflix. It is verily scorching the earth, and unlike Henry V, it’s doing so unilaterally. But all is not alright in the monster’s lair. The company is 22 years old. Shareholders and investors have acquired the silly notion that it’s old enough to meet expectations of a mature company. Instead it continues to have an astounding burn rate and has no obvious means of escape: even if it raised prices and/or increased market share transcending any realistic expectations, it would still take decades to break even. The notional Wall Street is tired of waiting for the adult that still behaves like a child. Netflix’s actions and statements seem to militate against reality. It is raising new fundingwhich, however, won’t even last it a year. And it predicts its burn rate will peak this yearalthough heretofore it has been growing, and at increasing rates. In fairness, no-one has tried to do what Netflix is doing: to become a provider of programming and a producer of much original programming to most of the world, all at once, and to do so at affordable prices. An effort such as this is bound to be expensive. And if it could only keep growing at the current pace a few more years it would at least stop losing money. But competition is growing (Hulu’s international expansion is just starting), access to third-party programming is shrinking in the US and will likely do so in the highest-income countries as well, and its ability to raise prices is dampened by competition and local economic reality. It can cut back investment in original programming, but that might be counterproductive (or not) by removing a motive to subscribe or keep subscribing. It can introduce advertising but ditto. So the possibility that Netflix will die having killed many others is no longer hidden behind the horizon. Particularly relevant to this blog is the audience measurement aspect. Netflix has until recently avoided any external disclosure of its own measurement, save for a very few tidbits dripped onto the press. This has raised the fame of its ratings of its own service to the level of unobtainium: although no-one outside the company knows whether it’s even any good, almost everyone would like to see it. It has recently started sharing limited data on its US viewing as Nielsen started measuring it (Nielsen also has an agreement with Hulu and measures it and Amazon Prime Video). This seems to have been a defensive move as Netflix’s numbers, at least for some of its highest-profile original programming, are higher than Nielsen’s, and thus serve Netflix management’s interest (to show that its investment in this content is rewarded with viewing). Netflix is apparently breaking with convention in how it reports its numbers. It uses cumulative audience (reach) rather than average audience (the audience at a given moment of the content, across all views in the reported time interval). Nielsen offers cumes too, but carefully deduplicates them; it’s unclear whether Netflix does, and the fact that the numbers it does share are substantially higher suggests it might not (so what it’s actually reporting is gross impressions at one per show, which would be a strange and misleading measure to use here). Beyond such ruminations is the algorithmic and technical design of Netflix’s audience measurement system itself, which remains a black box, probably unseen by anyone qualified who did not create or curate it. Unless Netflix is brazenly lying about its numbers, the possibility arises that they are nonstandard and thus too high, that management cannot understand this, and is therefore overpaying for its top external content. Another effect is also possible, and would explain why Netflix has historically regarded its audience measurement data as a trade secret: its subscription pricing suggests that, while it might be overpaying for a few high-profile third-party properties, it probably underpays for most. There’s simply not enough revenue for everyone to be paid equally relative to audience—the same problem faced in sports leagues with salary caps, which harms all players except perhaps the stars. So far, Netflix has been able to shut down any third party that tried to measure it, loudly claiming those numbers were wrong, without proof. It tried to do that to Nielsen, as well, but must realize it cannot win in a credibility contest with the leading name in the ratings industry. Had Netflix not been thus undermined, then, rapidly losing its ability to offer its investors an exit strategy, it could be expected to hang on to every perceived advantage as long as it can, including keeping its data away from content providers who would use it to force higher rates. It is still expected to do so in countries where it is not exposed to third-party measurement. As in the case of Uber, another tech company without evident means of escaping eventual fiscal doom, the fact that competition based on profound lossmaking leaves a scorched-earth battleground of dying competitors, doesn’t help the disruptor much in the end.