DougSF30:
Congratulations on launching the Netflix newsgroup. I've been active on the Yahoo board, and love the idea of a place that is moderated and won't be so heavily spammed by hype and trash. There is a growing base of investors watching Netflix, and I think you've got the right idea.
I've been following the company for about a year, and am definitely a long-term long on the stock. I'd be very interested, though, in reading well-reasoned arguments from folks who aren't as positive on the company as I am. That's the best way to learn what the strengths and weaknesses of my own analysis are.
One of the tricks to getting a good group going is making good information available early on. I'll make my contribution with a posting I made there recently, that some readers liked. In a perfect world, we'd see strategic, fundamental and technical analysis all come together here, to inform investors on both sides of the debate.
Great job on getting something more serious started!
e7
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A FICTIONAL letter from Reed and Barry
Dear analysts, investors and potential investors:
Thanks for following Netflix's progress so far. We wanted to give you the inside scoop on our strategy for managing your expectations. Overall, we're determined to systematically prove wrong any doubts and worries that negative press has used or could use against us. This way, you will have objective evidence to answer your own doubts. Here's how:
"Netflix is a dot-com. Management could be a bunch of stock hypesters, and maybe I shouldn't trust them."
We will sometimes meet, and sometimes outperform our guidance to you. We will never miss. Unlike many companies, we will not lowball guidance every quarter, because we don't want you to get so used to us beating that an unforeseen meeting becomes a failure. We'll make it nearly impossible to doubt our guidance credibility.
"Netflix is a dot-com. It will never make money."
We'll prove with a profitable quarter that the business can Grow signficantly, Invest heavily, Generate cash, and Be profitable, all in the same quarter. It will be impossible to argue that the business model doesn't work.
"Netflix is a dot-com. Their accounting can't be trusted. They use non-GAAP reporting, which is just another word for pro-forma. Also, they give away options for free without expensing them."
We'll use GAAP to show profitability, and talk about GAAP a lot. If you look at non-GAAP or FCF, we'll be doing even better. We'll adopt the conservative, big-company style model for expensing options that you feel comfortable with, even though it's a little wacky for a company our size. It will be impossible to argue with the conservatism of our accounting.
"Walmart and Blockbuster are going to crush Netflix. There's no barrier to entry."
Our large customer base will be our first defense. We're also going to get as much legal IP protection as we can, by applying for patents and preparing to defend them. We will have competition, it's true. That happens in any good market opportunity. But among the competitors, we will be the undisputed market leader with the objectively most defensible position.
"Patents are way too expensive and difficult for a small company like Netflix to defend. Walmart's lawyers will crush Netflix."
Reed has already successfully won patent defense cases for his previous small companies. He has a winning track record at Pure Atria vs Sun Microsystems. You won't be able to scoff at his experience or the patent. There's certainly no downside for us, and potentially very large upside.
"Walmart and Blockbuster are going to crush Netflix. They have huge marketing budgets."
After we've proven to you that we can be profitable at a nice growth rate, we're going to reverse course and spend heavily to grow our customer base. We're going to grow like crazy, staying well ahead of Walmart and Blockbuster in their subscription-based rental businesses. By doing things in this order, we're able to show you that we have control of the business, and can choose high profitability or rapid growth based on how the market evolves. You won't be watching our crazy marketing spend and worrying about whether we're ever going to be profitable. You'll just be comfortable (and maybe even a little excited) about quarter after quarter of very high subscriber growth.
"The future is Video on Demand, not home delivery of DVDs."
We agree. But it won't happen for several years, and when it does, we'll be there with 5 million monthly subscription online customers. We'll be able to compete in that market with the big boys. Until then, we have a good model that grows fast and is profitable, and we're going to ride the hell out of it. If you want to make money, you should join us.
As you can see, you already have much of the objective evidence you need to debunk any naysayers in the press, and those nagging doubts you have about investing in Netflix. We're confident that whether you make the decision to invest today or over the coming years, you'll feel good about doing so.
Thanks for your interest. Enjoy the show!
Sincerely,
Reed and Barry
