Netflix: Burn Concern?

While marginally profitable under accounting standards, Netflix burns through piles of cash. Time to be concerned?

We used Word2Vec to process 1259 articles that appeared on Dow Jones/Factiva between Netflix's two most reporting periods -- January 17, 2019 and April 16, 2019. Each article selected mentioned Netflix at least five times and was classified by Factiva as a "Corporate/Industrial News" piece. (Factiva is a global news resource with over 32,000 premium publications.)

We were interested in the extent to which these articles reflected concern about Netflix cash burn as its builds out its massive content offering. After all, Netflix reported a negative $2.7B cash flow from operations in the year ending 2018, even larger than the burn of -$1.8B from the previous year. And the company is in no hurry to start generating positive cash flow.

While some worry about this cash hole digging a grave, others assert such spending was building a competitive moat. The latter argue that only an investor rookie worries about free cash flow at this stage of the game. Netflix's burn, the argument goes, is strategically sound as it garners and cements market share -- just like Amazon did.

So how how much "burn concern" was reflected in the 1259 Factiva articles appearing during the quarter leading up to its most recent results?

Here are the top ten words closest to the "Netflix" and "cash" couple according to our Word2Vec results. (Recall that Word2Vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points.)

('spending', 0.777),

('increasing', 0.742),

('worth', 0.713),

('investing', 0.691),

('beat', 0.670),

('double', 0.667),

('add', 0.666),

('grow', 0.654),

('boost', 0.653),

('billion', 0.648)

Some observations:

• Contrary to our initial expectations, words such as "burn", "negative", or "trouble" are not at all prominent. Instead neutral words such as "spending" or even more positive words such as "investing", "grow", and "boost" occupy the space closest to Netflix and cash.
• For now, business publications appear to have largely bought into the Netflix strategy of spending/investing to build brand and attain global market share.
• Not surprisingly, Netflix's stock price has held its lofty valuation during this three month period of time, despite galloping hoofs of competition approaching from multiple directions.

When we repeat a similar Word2Vec analysis for the current quarter, should we expect to find a different set of words/phrases that reflect concerns such as:

• Will loss of pricing power (given aggressive pricing of competitive services) place a damper on Netflix's reach for positive free cash flow?
• Can Netflix continue to offer sweet deals to top talent, given the stress this puts on cash outflows?
• Given its huge customer base, will Netflix begin to explore a new business model to generate high margin revenue? In other words, can Netflix find what Amazon achieved with AWS or Disney discovered with merchandise licensing?

Or maybe Netflix will continue to operate for another quarter as is, burning cash yet still being protected under the sunscreen of first-mover disruption?

Weighing Disney v. Netflix

After over two years of "pregnancy" in the Disney womb, Disney+ will be born on November 12, 2019!

Pixar, Star Wars, Marvel, National Geographic, and Disney movies (from Snow White to Frozen) are some of the brands that will highlight the Disney+ launch. This streaming offering will compete with Netflix, Amazon and a host of other offerings as Disney makes a tectonic business model shift from out-licensing to direct-to-consumer streaming.

With this posting, we begin our analysis of how global business sources are weighing in on this ultra competitive space by examining the Disney/Netflix area of the battlefield. To do so, we evaluate the results from a Dow Jones/Factiva search selecting all articles mentioning both Disney and Netflix within ten words of each other. (Factiva is a global news resource with over 32,000 premium publications.) We did so for two time periods: 1) October 1 through December 31, 2018 (Q4 2018) and 2) January 1 through March 31, 2019 (Q1 2019).

Here are the number of articles over this period of time -- no surprise that the overall trend is upward:

Next we utilized the Word2vec model to process the raw text from these articles. Our use of this model places words in a high (64) dimensional vector space in which semantically similar words are positioned at points nearby each other. With Word2vec, one of the possible calculations generates the closest words in the space next to any given word (such as Disney). Another calculations generates the closest words next to any two given words (such as Disney and Netflix). For now, let's focus on the latter.

For Q4 2018, here is Python output (word, statistical measure of closeness) for the top dozen words in rank order that are closest to the Disney and Netflix couple.

1. ('disneyplus', 0.969),
2. ('streaming_service', 0.961),
3. ('announced', 0.955),
4. ('late', 0.936),
5. ('upcoming', 0.931),
6. ('launch', 0.923),
7. ('popular', 0.907),
8. ('show', 0.900),
9. ('library', 0.900),
10. ('competitor', 0.896),
11. ('warner_bros', 0.894),
12. ('exclusive', 0.892)

And here is the top dozen for Q1 2019. (Statistical measures overall are slightly lower, which is not unexpected given a larger number of articles):

1. ('disneyplus', 0.909),
2. ('rival', 0.898),
3. ('streaming_service', 0.878),
4. ('launch', 0.869),
5. ('upcoming', 0.863),
6. ('library', 0.852),
7. ('announced', 0.832),
8. ('hulu', 0.829),
9. ('debut', 0.784),
10. ('amazon', 0.782),
11. ('war', 0.778),
12. ('giant', 0.770)

A few observations:

• It's not surprising that disneyplus (Disney+) appears at the top of each of the lists. For both quarters, Disney+ was regarded as a chief contender to challenge Netflix's dominance of the steaming space.
• The Q1 2019 list suggests heightened intensity in the emerging Disney/Netflix conflict as indicated by the prominence of words such as rival, war and giant.
• Hulu's role in the saga achieved more attention during Q1 2019 in the global business press, given Disney's controlling interest in this property after completing the 21st Century Fox acquisition. How Disney will proceed with this complicated joint venture is of rising interest.
• Amazon's heightened prominence in Q1 2019 suggests it was increasingly being viewed as the third horse in the streaming race. Warner Bros (now part of AT&T) had been in the top 12 list for Q4 2018, but dropped to 20th position for Q1 2019.

We look forward to analyzing how the word vectors in this space evolve during Q2 2019. Here are some predictions:

• We'll see increased speculation on the outcome of the Disney/Netflix rivalry. In particular, concerns will be raised about the erosion of family-oriented Netflix subscribers. Many parents remain Netflix subscribers only because of the children's content offered. Netflix will be viewed as no match for Disney+ in this segment.
• Co-existence will be a theme. After all, at a $6.99 price point, Disney+ is not grabbing too much out of the consumer wallet. But speculation about bundling Disney+ and Hulu at an attractive price might begin, especially if Disney make overtures to buyout Comcast and AT&T, currently minority owners of the service.
• Expect to see more questioning as to why Netflix does not offer an annual subscription price. Subscribers of Disney+ will be able to purchase a $69.99 annual subscription. Netflix's monthly-only pricing only will increasingly be seen as a churn risk.

If you would like to use Google's captivating Embedding Projector to visualize our Disney/Netflix space for Q1 2019, you can do so here. (Note that Projector uses default distance metrics different from those utilized above.) Try typing in disney in the search bar, followed by netflix.