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Netflix is a media company that was valued like a software business. Software businesses have near-zero marginal costs. Media businesses have very high marginal

Netflix is a media company that was valued like a software business. Software businesses have near-zero marginal costs. Media businesses have very high marginal costs; making just one more show is not the same as adding one more feature to your ERP SaaS offering. Media business is also a hit business. It should not have that valuation. They have the best tech stack amongst their competitors, but it is irrelevant if the offerings are not there.

webmaven 4y ago
> Netflix is a media company that was valued like a software business. Software businesses have near-zero marginal costs. Media businesses have very high marginal costs; making just one more show is not the same as adding one more feature to your ERP SaaS offering. Zero marginal cost has nothing to do with the cost of developing a software feature (or a show), it refers to the cost of adding and servicing one more customer or user. Originally it was often used in a theoretical sense, as the cost of getting another copy of your software on a retail shelf wasn't really all that close to zero, but it certainly kept dropping from year to year, and with the advent of the web, downloadable applications, and SaaS business models the marginal costs dropped enough that Freemium business models became possible, and even wildly profitable, especially if you were deriving some business value from the free users in aggregate that you were selling to the paying customers. Anyway. The zero marginal cost model is a really good way to think about Netflix's fight with ISPs over interconnect fees. It wasn't that Netflix couldn't afford the fees the ISPs were demanding in order to allow their customers to connect to Netflix without throttling, or even that it would have impacted their profits much. Rather, those fees would simply have messed up Netflix's ability to lay claim to having a zero marginal cost business model (because the fees would scale with the number of users), which would have nuked their PE ratio and driven their valuation down.
- muddi900 4y ago
  Marginal cost is a supply side issue. Netflix supply is bandwidth, but also CoNtEnT. They need a constant stream of films and TV shows to be valuable to the customer and attract new customers. Anyway, what I wanted to say was that while Netflix is overvalued, it is a very good media business. It has access to every market in the world besides China, it has brand equity in those markets as well and its only competition would take years to catch up. It just should be valued like Disney or DicoveryWarner.

webmaven 4y ago

> Netflix is a media company that was valued like a software business. Software businesses have near-zero marginal costs. Media businesses have very high marginal costs; making just one more show is not the same as adding one more feature to your ERP SaaS offering. Zero marginal cost has nothing to do with the cost of developing a software feature (or a show), it refers to the cost of adding and servicing one more customer or user. Originally it was often used in a theoretical sense, as the cost of getting another copy of your software on a retail shelf wasn't really all that close to zero, but it certainly kept dropping from year to year, and with the advent of the web, downloadable applications, and SaaS business models the marginal costs dropped enough that Freemium business models became possible, and even wildly profitable, especially if you were deriving some business value from the free users in aggregate that you were selling to the paying customers. Anyway. The zero marginal cost model is a really good way to think about Netflix's fight with ISPs over interconnect fees. It wasn't that Netflix couldn't afford the fees the ISPs were demanding in order to allow their customers to connect to Netflix without throttling, or even that it would have impacted their profits much. Rather, those fees would simply have messed up Netflix's ability to lay claim to having a zero marginal cost business model (because the fees would scale with the number of users), which would have nuked their PE ratio and driven their valuation down.

muddi900 4y ago
Marginal cost is a supply side issue. Netflix supply is bandwidth, but also CoNtEnT. They need a constant stream of films and TV shows to be valuable to the customer and attract new customers. Anyway, what I wanted to say was that while Netflix is overvalued, it is a very good media business. It has access to every market in the world besides China, it has brand equity in those markets as well and its only competition would take years to catch up. It just should be valued like Disney or DicoveryWarner.