Netflix Lays Further Waste To the 'Quarterly Capitalism' Narrative
According to market data firm CB Insights and accounting firm PwC, technology start-ups managed to raise $55 billion worth of venture capital in the first half of 2019. This dollar amount is the most raised since the year 2000.
So while the dollar as a measure of value is a floating concept thus making comparisons to 2000 a little bit difficult, it’s apparent from the number that venture funding is on an upward slope. On its own this is a positive signal. While most venture-backed start-ups fail, the information that emerges from investment is precious. All great advances are a consequence of relentless experimentation that often results in proverbial “dry holes.” That’s ok, the failure enables more informed experimentation down the line on the way to discoveries that improve our living standards, health, wealth, and surely much else.
Notable here for the purposes of this column is that $55 billion worth of venture funding has been raised even though most of the start-ups that are being backed by this money won’t make it. It’s all a reminder that venture capitalists are a patient lot. Though they’re well aware of the historical truth that more than 90 of each 100 start-ups they fund will go belly up (for an interesting description of this, readers would be wise to listen to actor/VC investor Ashton Kutcher discuss it on Dax Shephard’s excellent podcast, Armchair Expert), they still put the money to work. They’re willing to lose on just about every company invested in given their belief that they’ll recoup their losses with a few successes amid all the carnage. All of this explains why the rich are so crucial to progress: they uniquely have the means to sustain endless losses while waiting for just a few investments to bear fruit. In short, Kutcher couldn't invest in intrepid fashion if he were still a no-name actor.
The VC story also works well in consideration of the popular view that investors in public companies, contrary to VC or private equity investors, are surely less than patient. Hillary Clinton, among many others, has long lamented a problem of “quarterly capitalism” in the U.S. According to Clinton, this focus on quarterly earnings causes companies to err on the side of caution. Rather than invest in the ongoing development of the corporations they oversee, corporate executives allegedly turn their noses up to the intrepid and expensive investments in people and projects that, while bursting with long-term potential, expose companies to investor flight given the allegedly short-term, or “quarterly” orientation of investors. If only what’s accepted wisdom were remotely true.
Back to reality, successful public companies quite simply cannot have a quarterly orientation. That they can’t is a statement of the obvious. The obvious part of the statement is that profits attract imitators (see all the VC investment at the moment), which means companies can’t rest on quarterly earnings laurels without being wiped out by the competition. Say it once and say it many times over: profits attract imitators who enter profitable markets only to compete away the profits.
A good example of this is Netflix. Though its shares are off of 52-week highs, the former DVD rental website turned movie/tv streamer is still worth over $134 billion. Useful here is that one factor in Netflix’s loss of market cap has been the entrance of content providers like Disney Plus and Apple Plus, not to mention that streaming services companies like WarnerMedia and NBC Universal are in the process of ramping up. Netflix, having revealed a huge unmet need in the marketplace of consumers eager to purchase streaming access to quality entertainment, has attracted imitators. This isn’t the first time.
Lest readers forget, Blockbuster Video was the home entertainment giant that came before Netflix. At one time it was so large and powerful that its merger with a competitor in the form of Hollywood Entertainment was blocked by federal regulators. The view back in 2005 was that Blockbuster’s combination with the #2 home video provider would prove too powerful on the way to the squashing of competition. The always backwards looking federal regulators who got in the way of the merger didn’t see Netflix (a company that had tried to sell itself to Blockbuster more than once) creeping in from out of left field as it were to wipe out Blockbuster and Hollywood Video altogether. Needless to say, Blockbuster tried to catch up to Netflix only to fail. As of this writing there’s only one Blockbuster store left, in Oregon.
Netflix plainly learned much from watching what happened to the now defunct giant that it once aimed to be purchased by. It recognized what pundits and politicians don’t: a focus on quarterly earnings at the expense of long-term growth is the path to obsolescence. And so Netflix basically disrupted itself. Cognizant that soaring internet access and speeds would render DVDs by mail yesterday’s news, Netflix focused on acquiring content that viewers could stream on its site. The ubiquitous red Netflix envelopes from not too many years ago are no longer ubiquitous.
Important is that Netflix didn’t stop there. Fully aware that profits attract imitators, its executives recognized that its arguably unrivaled knowledge of customer viewing habits, along with likes and dislikes, would enable the creation of content much more likely to please those same customers. And so it disrupted its old model again. While television used to be about seasons, Netflix recognized that its customers liked to binge watch shows such that it began releasing its new television series all at once.
What began as a fledgling DVD by mail service that Blockbuster couldn’t bother to buy, is now the biggest name in film and television production. And as readers can hopefully imagine, Netflix didn’t get to where it is through a focus on quarterly earnings. Had it done that the entertainment behemoth would be long gone. Netflix, like any company that aims for a rising market cap over the long term, continues to make intrepid investments in itself.
According to the New York Times, it will spend around $8 billion on original content for next year. What choice does it have? If it doesn’t continue to invest in its own improvement, it will soon disappear. Figure that Amazon plans to spend $3 billion on original content, Disney Plus, Apple Plus and Hulu will spend $1 to $2 billion, there’s WarnerMedia and NBC Universal (it will take back streaming rights to Friends and The Office from Netflix in the coming year) looking to enter the home-streaming/content space, plus this leaves out HBO, Showtime, USA, the networks, etc.
Simply stated, the supposed quarterly orientation of U.S. corporations is wholly mythical. So dynamic and competitive is the U.S. economy that no company can afford to harvest with an eye on boosting the near term. A quarterly orientation is the certain path to defunct status over the long-term. Quarterly capitalism is yet another myth that insults basic intelligence.