Edward Harrison is the founder of the blog Credit Writedowns and is a finance specialist at Global Macro Advisors. Previously, Edward was a strategy and finance executive at Deutsche Bank, Bain, and Yahoo. He started his career as a diplomat and speaks German, Dutch, Swedish, Spanish and French. Edward holds an MBA from Columbia University and a BA in Economics from Dartmouth College.
Netflix is going to spend $8 billion on original content this year. And – get this – they plan to spend the money on about 700 original TV shows and movies. Ritholtz Wealth Management CEO Josh Brown was excited.
The CFO OF Netflix told a Morgan Stanley conference that they’re spending $8 billion to produce
… get ready for it …
700 (seven hundred!) new original shows and movies in 2018.
Might have to quit your job. $NFLX
— Downtown Josh Brown (@ReformedBroker) March 1, 2018
This announcement got me to thinking about technology and competition. Technology increases competition. Last month, I wrote about this regarding Amazon vs. Walmart and Comcast getting bigger. But it was the last bit about SpaceX and O3b creating competition out of left field I want to concentrate on.
That’s an example where SpaceX can becomes a media company — totally out of left field. Suddenly, SpaceX is using reusable rockets to lower the cost of low-orbit satellites. And suddenly, you have a viable satellite-provided high-speed data network. That’s a network that can reach rural areas, can reach distant places in Africa or South America. If SpaceX pulls it off, it would be stunning.
Now, if you’re Comcast this is the thing that keeps you up at night. Take Netflix for example. Here’s a company that started off delivering CDs by mail. That was 1997. They weren’t a content provider. They were a content delivery channel — and not a very high tech one at that. If you were you a movie studio or a TV network. You wanted Netflix to succeed because that meant increased content delivery.
Then, all of a sudden Netflix became a streaming company in 2007. Yes, they were still delivering content — your content. But now they were uncomfortably close to competing with you. So, that’s when the movie studios and TV networks started to chafe at Netflix’s ambition. Comcast, itself just a content delivery network back then, decided to buy NBC Universal in 2009. This vertical integration gave them a huge catalogue of content to deliver as bandwidth on the Internet increased.
Then, in 2013, Netflix entered the content production business. Suddenly, Netflix was a direct competitor. You, Mr. media mogul fed the beast, helped it grow, and created your own competition that will slay you.
Now Netflix is making 700 new shows and spending $8 billion a year on new content. Amazon is in the mix too. Disney, Comcast, Viacom, all the big production companies are fully aware of the threat Netflix represents. They see how the media landscape has changed because they helped change it through mergers and through acquisitions. But it was technology that built this.
I’m in the process of getting rid of a bunch of books I don’t need anymore. Some of them are on the technology industry. These are books I started reading when I worked in high yield capital markets and most every deal in Europe, where I worked, was in technology, media or telecom.
I’ve got “High Performace Web Sites”, “HTML, XHTML & CSS”, “Newton’s Telecom Dictionary” and “Residential Broadband – An Insider’s Guide to the Battle for the Last Mile”. It’s that last book that tells the story of Netflix (and Amazon and SpaceX). This is one from 1999, when the Internet bubble was at its peak and broadband was mostly just a concept. But people could see the future pretty clearly.
Here’s the line in Chapter 1 that tells you how the writer, Kim Maxwell, saw the future:
Over time the access multiplexor will creep closer to the premises to obtain higher speeds on the final leg. Eventually, however, the final leg will be changed to fiber-optic cabling. This endgame network will deliver from 200 Mbps to 10Gbps per household, enough to satisfy any application envisaged today.
Folks, that’s the future. This is what Kim Maxwell spelled out as “A Thirty Year Synopsis” back in 1999. Maxwell was basically saying that the content delivery networks of the future will be able to deliver any content we want anywhere we want by 2029. And when I say content, I mean anything that can be digitized and delivered in data format. And that’s darn near everything outside of physical products.
I think I will keep the Maxwell book now.
So, technology is competition.The world Kim Maxwell predicted is the world that created Netflix and that allowed Netflix to thrive. It has allowed Netflix, a CD delivery service in 2007, to compete with Sony Pictures and Universal in 2018.
Before I sign off, let me give you another example, fitness. A few weeks ago I was looking for a gym. And I noticed that yet another well-regarded local fitness studio had closed down without my knowing. I did a web search and came across an article about fitness studios closing down because of competition with free gyms inside office and apartment buildings.
But then, thinking about my own experiences, it dawned on me that wasn’t the only story. Another big source of competition is online.
I use an app called Strava, where I track my cycling, rowing and skating workouts. And this is an app that is getting huge in the fitness world because of its social component. It combines exercise and social media to make your lonely run on the river a mix of Instagram and Facebook or twitter all rolled up in one. The app is so popular now that a recent storie hit the headlines of how its heatmap feature gave away the location of secret US army bases because of the US military personnel using it.
Since I cycle a lot, I’ve noticed a lot of people in Winter popping up logging time from another app called Zwift. This is a virtual world you can explore by connecting your indoor cycling trainer to the Internet. You can ride alone — or better yet in competition with others from around the world. Zwift says:
Explore routes inspired by Central London and the 2015 World Championship course in Richmond, Virginia, or discover our virtual world of Watopia. Climb mountains, sprint down famous stretches of road or ride inside a bubbling volcano.
Basically what’s happened is that people who want to work out in the wintertime when it’s cold outside have turned to the Internet instead of the gym. They are using a virtual game to connect to other exercise enthusiasts without ever leaving their home.
If you’re a fitness studio that’s built out a network like Bally’s or Gold’s Gym or Fitness First, how do you compete with that? You’re not going to build an app. And you probably don’t have the scale or the right merger fit to buy Zwift. Basically, you’re in for some serious pain. Welcome to the retail apocalypse.
This is why companies that have no virtual presence are dying. If you don’t live on the Internet, you are always at risk of losing out to some company that does. And even if you make physical products, you can be outmaneuvered by a new manufacturer whose customer channels are Internet-based.
Amazon understands this better than anyone. And even though they have integrated back into the virtual world with Whole Foods, I think they have done so to increase their logistical footprint. Since I live literally a mile from three different Whole Foods stores, I can see the advantages every day. There is the Amazon Locker. That’s how I return items I ought at Amazon. There’s one in each Whole Foods and even one at the local 7-Eleven, putting four locations within a mile where I can return my Amazon goods. That definitely decreases the pain of virtual shopping.
Eventually, I suspect I will be able to pick up or buy Amazon products at these Whole Foods stores. And I also suspect Amazon will deliver oft-purchased Amazon products from these stores as well, not just groceries.
The downside to all of this is industry concentration. I am describing a world of deep insecurity in the executive suites across the globe. If you run a business, any business, you have to know that competition can spring up from nothing. If an online bookseller can become your grocery store competitor and a CD mail delivery company can become your Oscar-nominated film competitor, then anything can happen — overnight.
The rational response is vertical integration. You want to be present across your space and adjacent spaces, up and down the supply chain. That means mergers, getting big not just for bigness’ sake, but to forestall competition.
Now forestalling competition may be good for you. But for consumers it makes for less choice and potentially higher prices. That puts regulators in an unenviable position. My overarching message here is that technology increases competition. Yet, at the same time, perversely it leads to an industrial organization that decreases competition. As we move to the world of residential 10Gbps broadband connections, we may find more choice but fewer companies delivering those choices.