

Whitney Tilson: Why We Covered Our Netflix Short - njohnw
http://seekingalpha.com/article/252316-whitney-tilson-why-we-covered-our-netflix-short

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scotch_drinker
I think the most important part of the article is the quote at then end saying
that just because they aren't interested in buying it doesn't make it a good
short. The market can stay irrational longer than you can stay solvent and all
that.

75x trailing earnings in the current economic environments SEEMS expensive to
me. I'd be willing to bet (but not with real money) that it will be cheaper in
12 months. Of course, as a Netflix subscriber, I'm glad the streaming side of
things is going so well.

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jordanb
This is one of the most important things that those "if you're so sure
Apple/Gold/etc is overvalued why don't you short it?" people ignore.

Maintaining a short position is _expensive_. And even if you can afford it,
holding it for too long can kill any upside you get when it finally does
collapse. I can say that Gold is overvalued but I won't short it, and be
perfectly consistent in saying that, because I admit that I have no idea how
long it'll take for the bubble to pop.

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aspiringsensei
>Maintaining a short position is expensive

Short positions on companies like Netflix should be initiated using capped-
loss derivatives instead of assuming the unlimited risk of selling the
company's stock short.

Buying a long-dated put option is often the best way to short something,
assuming you have conviction.

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jdp23
Here was Reed Hastings' response to their bearish recommendation in December:
[http://seekingalpha.com/article/242653-netflix-ceo-reed-
hast...](http://seekingalpha.com/article/242653-netflix-ceo-reed-hastings-
responds-to-whitney-tilson-cover-your-short-position-now)

~~~
wallflower
> Streaming adoption will likely follow the classic S curve, and we’re still
> on the first part (acceleration) of the S curve. Since we expanded into
> streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in
> 2009, and over 7m this year (estimated). While saturation will happen
> eventually, given the recent huge acceleration of our business specifically,
> and streaming generally, saturation seems unlikely to hit in the short term.

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DevX101
Unless you know something everyone else doesn't (which would make this
illegal), it's never a good idea to short a high valuation stock. Sure it may
be overpriced, but you have to be one hell of an oracle to predict WHEN that
correction will come.

If you insist on doing this, do it soon after the house of cards start to
fall, but not before.

But kudos to this guy for adjusting his firmly held thesis. When money's on
the line, it seems people are willing to reject their prior wrong beliefs much
more easily.

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ryanmolden
Pretty sure the studios, once Netflix is all/mostly streaming will simply
change the licensing costs to pilfer most of the profit, why wouldn't they?
Without their content Netflix has nothing. Before they were insulated from
this via the First Sale Doctorine and distribution through the mail. If they
go all streaming the content producers can change licensing costs (already
happening) and there is almost no barrier to entry (anyone can stream videos,
see Hulu, Amazon, etc...) As a consumer I love Netflix streaming, from a
business perspective it seems like a bad idea. Let's hope I am wrong.

~~~
trunnell
_there is almost no barrier to entry_

Yes, anyone can stream videos. But not everyone can buy the rights, which are
sold in exclusive windows.

Every title is only licensed to one entity in each window. This system was
designed for pay-TV channels that wanted exclusive rights, and the studios
found that it was a good way to maximize revenue. So after a movie leaves the
theaters, there are a series of these licensing windows, each lasting about
1-2 years. This is why a movie that's on HBO will never be on TBS
simultaneously.

Buying content within a window is essentially like an auction. The highest
bidder wins. It's possible to enter the market, but to do so you actually need
a lot of capital to bid and win content.

 _studios... will simply change the licensing costs_

Reed publicly stated that a major goal in the future is to pay studios more
for content. And that's only fair as we increase the number of viewers.

Disclaimer: I work at Netflix.

~~~
ryanmolden
>Buying content within a window is essentially like an auction. The highest
bidder wins. It's possible to enter the market, but to do so you actually need
a lot of capital to bid and win content.

I think Amazon has sufficient capital to go to auction, also, in general,
capital comes 'cheap', if someone has a business plan with a reasonable shot
at success they can get VC money. If your expectation that a barrier to entry
is purely capital costs, well...you better hope no investors want to back a
competitor, there is plenty of money out there.

>Reed publicly stated that a major goal in the future is to pay studios more
for content. And that's only fair as we increase the number of viewers.

Well, from a business perspective fairness isn't what matters, he should
strive to retain as much of the 'pie' for Netflix as possible. His concession
that he 'wants' to pay content producers more seems like PR, more likely he
has no choice. It is good and fine to say you want studios to make more money
on content, but I don't think history has shown either the movie or music
industry care terribly much about how much profit their partners make, and
they can drain any profit by increasing licensing costs anytime they want no?
The more successful you are in streaming it seems the more you are exposed to
this risk.

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paul9290
I recently became a subscriber and even if it does not have the latest movies
i dont care because like Pandora it learns what you like and thus the
recommendations are great. Another thing I love about it is the random DC
comic cartoon/movies Ive watched like Batman/Superman and Superman and Shazam.

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icarus_drowning
Has anyone else noticed a distinct dive in Netflix streaming quality over the
past few weeks? I used to be able to watch their full HD videos nearly
instantly, and now I'm lucky if I get the lowest quality-- about half the time
videos won't even start.

I haven't changed anything on my end that I'm aware of. Still, I can't believe
this is all on Netflix's end, can it?

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SoftwareMaven
Don't use Google's DNS or Open DNS. That screws with the CDN endpoint you are
given and drastically hurts performance.

~~~
cdr
If that's so, what do you do if your ISP's DNS is terrible? Try to find a
better one that's still geographically close?

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SoftwareMaven
I have a device that I use exclusively for streaming, so I've set it up to use
my ISP's DNS. My DHCP server is set to give out OpenDNS' address, so
everything else gets good DNS service and my streaming doesn't get hit.

Alternatively, you could probably write a script to bounce back and forth. It
would be pretty trivial in Linux; I'm not sure how it would work with OS X
(ironically, my OS of choice :) or Windows.

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underdown
Sounds like Hastings charmed them.

I'm a Netflix streaming subscriber and even though it's so cheap - I'm
considering canceling because they don't bring enough new content online for
me to get value from the service.

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chime
My wife and I use Netflix differently than you. Netflix is not what's new but
what's good. And over the past year we have discovered that there is a lot of
good content on Netflix, you just have to change your viewing habits. We don't
look for a movie released last year. We look for a sci-fi movie with a time-
travel theme or a comedy show about evil corporatations. Also, I highly
recommend instantwatcher.com to find good stuff to watch.

~~~
CamperBob
_Netflix is not what's new but what's good._

Exactly. It's like the early days of DVD -- you had people whining and moaning
about the lack of Star Wars or Titanic, when there were already more great
films in release than you'd ever have time to watch. Netflix streaming works
the same way -- you can't turn on the TV with the intent of watching a
specific Hollywood A-list movie, but if you turn on the TV with the intent of
watching _something_ good, you will not be disappointed.

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cicero
Is anyone concerned about a backlash from ISPs over Netflix bandwidth
consumption? Many ISPs provide a video on demand service, but instead of
getting revenue for video on demand, they have to beef up their Internet
infrastructure to support a competitor. I would think this imbalance would
bolster their case against net-neutrality or justify charging for bandwidth
usage, which could upset the economics that make Netflix profitable.

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Qz
The main reason I'm not a netflix subscriber is that I would never get
anything done because I'd be sitting around watching video all day.

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barista
WTG NFLX! More power to you. You allowed to me stay free of Cable for last one
year. Love you.

Hastings made the right bet by focusing on the streaming. That's clearly the
future and I'm glad they are planning to go ahead with streaming delas with
full steam. Hope the studios realize this and partner with them.

