Netflix (NFLX) has been one POWERHOUSE of a stock with incredible performance, up approximately 3700% since 2012 vs the S&P 500 up 113% and five leading Media companies up nearly 200% on average (Jan 2012-Jun 2018).

Source: Bloomberg

Examining a few charts showing the fundamental momentum of the service makes it easy to see the reason for investors’ enthusiasm for Netflix stock relative to the incumbents:

Netflix has grown Subscribers and Revenue significantly and sustainably over the past decade, with an acceleration over the past 5 years…

Source: Kleiner Perkins Internet Trends 2017 Report

It’s done this by offering an over-the-top (of the Internet or OTT) streaming video subscription service, using the CLASSIC DISRUPTOR PLAYBOOK TO AN OVER-SERVED MARKET, that is significantly cheaper and more customer friendly than existing incumbent services in the US…

Source: Kleiner Perkins Internet Trends 2017 Report

Drawing significant consumer attention away from the traditional Media networks and demonstrating strengthening customer engagement (audience viewership in total and per subscriber)…

Source: Matthew Ball and REDEF

Source: Matthew Ball and REDEF

Boiling down these data leads to the conclusion that Netflix users spend about 10% of what their Pay TV spend would be on a Netflix subscription but spend 40-50% of their TV viewing time there, for a 75-80% cost advantage per hour of viewing.

Making matters worse, the trend among younger generations points to an accelerated decline in relevance of the traditional television media industry in the US…

Source: Matthew Ball and REDEF

Source: Matthew Ball and REDEF

(TV) VIDEO KILLED THE RADIO … Will OTT Kill Pay-TV?

Traditional Pay TV service is literally dying off unless it can change this trend. Not many could have predicted such change and performance prospectively 5 years ago, but we think it is generally indicative of the underlying value that Netflix has accrued in creating the first global scale media company by leveraging the inherent advantages stemming from internet distribution, global scale, and direct customer to content relationships.

Over the phenomenal period of returns and fundamental business performance, controversy has surrounded the company due to what had initially seemed like a limited and low-quality catalog, undifferentiable business model (reselling licensed content over the Internet), unsustainable/unscalable niche (media companies would stop licensing and kill it when it got too big), and its cumulative cash burn that continues at increasing levels even still. We were among them until we delved into the fundamental industry dynamics playing out a couple of years ago that led us to change our minds. We’ll address these issues in our discussion.

NETFLIX TAKES MEDIA AROUND THE WORLD… THE RISE OF GLOBAL SCALE MEDIA READ REPORT