Netflix Q1 Results - Loss of another 1 million Disc Subs

PSound

Read your own links Lee.

The concept of fixed cost vs variable cost means that revenue is the driver. You may not have the acumen to ever comprehend things, and that is OK. But your own links clearly spell out exactly why Netflix streaming is a fixed cost model. Just like you showing the 50% margin for subs added in Q1 vs the ~10% margin for base subs also clearly demonstrates that Netflix streaming is a fixed cost model.

Either you are open to learning, or you are not. If you have a genuine interest in gaining knowledge, I will engage you on this topic. If not, I will not engage you.

PSound

Or put another way, it would be impossible for Netflix streaming to be a variable cost model when the base subs (Q4) were 10% margin and all added subs in Q1 were 50% margin. That is simply impossible in a variable cost model (added subs would be at or very close to the existing margins, or ALL the margin would shift the same way if the variable cost dropped).

Lee Stewart

Sorry PSound, your "Fuzzy" Accounting just doesn't cut it with me.

Lee Stewart

PSound - let me show you something:

Q4/11

20.15M Paid Streaming Subs
$476M in Revenue

$23.62 per Paid Streaming Sub

Q1/12

22.02M Paid Streaming Subs
$507M in Revenue

$23.02 per Paid Streaming Sub

If Netflix's streaming business was a fixed cost, then the revenue per paid streaming sub would not change . . . but it did. It decreased $.60 per paid streaming sub in Q1/12.

dangerdoc

I came home the other day and the kids were streaming a movie. We own the Blu Ray disc. The disc was sitting on top of player. They were using the player to stream the movie. I guess the remote control wouldn't get up and put the disc in the player for them.

Kids nowadays.

Thankfully, we don't have a cap on our data yet.

Lee Stewart

They are wise beyond their years . . .

No waiting for the disc to load. No forced trailers to watch - just hit play and the movie starts.

PSound

No where in your post do you even factor in cost. ARPU alone has absolutely nothing to do with fixed cost vs variable cost. The fact that ARPU went down while margin went up (and based on what we know about how Netflix acquires streaming content) AGAIN reinforces that Netflix streaming is a fixed cost model.


Again, you fundamentally do not understand the concept of fixed cost vs variable cost. You have demonstrated that multiple times in this thread. I am done with you on this topic Lee. Your comprehension is off on this topic and for whatever reason you have zero desire to improve your understanding.

PSound

I am going to provide an example of fixed cost vs variable cost for illustrative purposes using an example of a movie theater. These are fictitious businesses, but should explain the difference between models.

Movie theater with variable cost:

Movie theater has an agreement with the studios to give them $5 for every ticket sold. The theater sells tickets to see the movie for $7. No matter how many tickets they sell, they make $2 per ticket sold (minus overhead, etc).

If they sell 5 tickets, they bring in $35 in revenue. give $25 to the studios and net $10.

If they sell 20 tickets, they bring in $140 in revenue, give $100 to the studio and net $40 - $2 ticket as the variable cost means they ALWAYS make $2 a ticket. It is simply not possible to sell that $7 ticket without generating $5 in costs.


Movie Theater with fixed cost:

Theater buys right to display movie for $50.

They sell tickets to the movie for $5 each.

If they sell 5 tickets, then bring in $25 in revenue, give $50 to the studio and incur a net loss of $25.

If they sell 12 tickets, they bring in $60 in revenue, give $50 to the studio and net $10.

If they sell 20 tickets, they bring in $100 in revenue, give $50 to the studio and net $50.

The fixed cost means that the amount made per ticket changes dramatically with scale of revenue. With 12 tickets sold, the income per ticket averages out to $.83 a ticket. With 20 tickets sold, the income per ticket averages out to $2.50 per ticket. With the fixed cost model, tickets sold do not directly trigger the direct rise in costs (as above where a $7 ticket cannot be sold without triggering a direct $5 cost).


Now, the fixed cost model does not exclude changes in costs at different times. During another period/showing it might be $60 for the theater to gain rights to display the movie.

And of course the illustration above does not take into account overhead, marketing, etc for either model. But it does clearly show the basic difference between fixed cost and variable cost.

In variable cost, costs rise linearly with revenue within a reporting period (something cannot be sold without generating direct costs).

In fixed cost, costs do not rise directly with generated revenue within a reporting period. Revenue generated does not trigger an immediate direct rise in costs.

Cygnus

Bingo...someone gets it! One of the reasons why I never bought movies. I can't believe ppl are not outraged over the ads on discs for a movie you paid for.

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PSound

This is why I think UltraViolet could help sell through. Anything to boost consumption of purchased material is a big plus to value, which should boost overall sales.

Make watching your collection as easy, seamless and portable as picking a movie from Netflix, and consumption should increase.

Kosty

That's kinda one of the issues of concern.

For the past year or so. Netflix has really not at all done any marketing advertising or promotion of the disc by mail side of the business.

Its promotional efforts have been directly exclusively at the unlimited streaming side of the business and it have seemed to many that it almost was actively discouraging the use of its disc by mail business.

Redbox is using the same content and its physical disc rental business is rapidly expanding and overall this year the releases have been better in general than in the same period last year. Redbox has been expanding while Netflix physical side has been in decline as they have switched their emphasis on streaming and away from disc by mail.


The studios have actively tried to separate out their promotion of sell through and that of Netflix and Redbox rental activity by extending out their titles to a 8 week rental delay after sell through DVD and Blu-ray release. The studios care about promoting sell through, they don't care as much about promoting rental.

Its probably a fair assumption and possible observation that the rental delay has hurt Netflix a bit for both streaming and disc by mail as well as Redbox but it does not seemed to have affected Redbox at all in their growth over time.

Studio sell through has done much better this year for DVD and Blu-ray than last year, so Netflix disc by mail is the outlier.

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Kosty

But your argument is not talking about the costs being fixed over a short term. You are deliberately using the same phrase when talking about the growth of the streaming business in the longer term.

In this case those costs went up from quarter to quarter so talking that those costs as being fixed when talking about subscriber acquisition is kinda nonsensical. The costs for streaming are obviously going up as their streaming user base expands, no matter if any specific contracts are fixed for the quarterly term. That's the bottom line.

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HD Goofnut

In 480, with plenty of compression, and DD 2.0 or 5.1. Yep, wise beyond their years. Even my three year old can see the difference even if she pronounces it Boo-Ray.

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Kosty

Just because you want to make the assumption that the streaming business is more a purely fixed cost model than a variable cost model than it seems to be does not make your analysis right and everyone else wrong, or not having the ability to understand the concepts.

Not agreeing with you does not make others less worthy or less intellectual or even wrong here.

The streaming business for Netflix is clearly showing elements of having variable costs associated with its streaming user base expanding and clearly has greater costs associated with streaming that is dependent on subscriber growth. Even if those costs for their streaming side of the business are less variable, they are not absolutely fixed.

They obviously are increasing and varying from quarter to quarter as Netflix infrastructure and content acquisition costs continue to rise and as their negotiations with the studios and other content providers get more difficult over time. Streaming is clearly not a pure fixed cost model even if it is more so than the disc by mail side with its postal costs of servicing its users.

So even if the streaming side has less variable elements in the servicing costs of an additional user, their are other threshold and content and infrastructure costs that clearly are variable that apply to that streaming business as a whole.

You just cannot hand wave those obviously increasing variable costs away and focus only on single user additions.

Theoretically, if the content for a period is already purchased and the network infrastructure is in place, a new streaming subscriber costs little in variable costs to service.

Unlike a new disc by mail user, there is no major variable costs like postage to eat up profits. But most postal disc by mail users do not max out their service and therefore as a whole that side of the business is still very profitable.

But Netflix just cannot add new steaming subscribers at no variable costs overall at this point in time. Even though a single user has low variable costs because they have no postal costs, the streaming business for Netflix now has some highly variable elements as it has grown over time.

As the streaming business at Netflix has grown, the studios have noticed it and since the first sale doctrine does not apply to digital they have variably increased Netflix's streaming content costs over time. They lost Straz in part because their streaming business became larger and the studios and Straz took notice. At certain thresholds of subscribers, the streaming business has to have more infrastructure support and costs more to handle more users. Those are variable costs above the cost to service one more additional user.

Even if the content price is fixed for a period, its obviously costing more over time and in the longer term is clearly a variable element that is costing more over time.

Now its certainly possible that there will be a point in the near future that the content costs will stabilize and become more fixed and the Netflix infrastructure will be in place to support the maximum amount of possible users. In that case, indeed the streaming business will convert into a more fixed cost model with little to no variable costs for increasing subscribers.

But that's in the theoretical future and clearly is not the reality that is facing Netflix right now. The reality at the moment is that more subscribers for streaming also are needed some increased variable costs for streaming as a whole even though individual additional users have mostly fixed costs.

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Kosty

LOL

I've had friends say that their young kids call it the same thing!

Boo-ray!

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