Sam Dickie: Fisher Funds expert on Netflix and similar streaming giants rolling out ads

Plenty of Kiwi customers are still enjoying Netflix's output - and the company's doing well among investors.

But as times get tough, the streaming giant has walked back on an earlier promise and looks to introduce ads on the service.

Fisher Funds expert Sam Dickie explains why Netflix has made these changes.

LISTEN ABOVE

See omnystudio.com/listener for privacy information.

Episode Transcript

Speaker 1 (00:00):
Get a duplicy Now, chances are you're a Netflix customer, right,
who isn't? And it's not doing too badly for investors either,
But there has been some brutal competition and bumps in
the road, and more recently it's changed its spots and
done something it said it would never do, which is
to introduce ads. Sam Dickey from Fisher Funds is with us, say.

Speaker 2 (00:15):
Sam, good evening here.

Speaker 1 (00:17):
A lot of people won't realize how Netflix started, which
was it was a DVD rental company, wasn't it?

Speaker 2 (00:22):
That's right? Isn't that awesome? A DVD rental by mail business?
And it wasn't until two thousand and seven actually that
it launched its streaming service, and simplistically that means you
could watch TV and videos real time over the Internet,
and astonishingly it has almost three hundred million streaming subscribers
today after starting as a DVD rental by mail business.

Speaker 1 (00:43):
Now it goes fast forward to today and we have
a streaming service. But was it the first of its kind?

Speaker 2 (00:50):
Yeah, it was. It's the first of its kind. But
we saw the explosion of many many of these things
in what was called the streaming war. Was it's a
really dominated in twenty nineteen when Disney launched, Disney Plus launched,
and during the pandemic as well, when we were all
locked up and watching TV, we had Amazon Prime Video,
Apple TV and dozens of others ramping up further to
grab our attention. But what was super brutal was that

(01:15):
Disney and all these others launched at very low prices.
So Disney launched at seven bucks a month in the
US versus Netflix, which was thirteen bucks at the time,
so almost a fifty percent discount.

Speaker 1 (01:26):
What happened in twenty twenty two that it fell seventy
five percent. What happened there?

Speaker 2 (01:31):
Yeah, it got punished, so it roared through covid is.
We all bought Netflix subscriptions to watch while lockdown, along
with all these other subscriptions, it seems, and the company
got a little bit too excited about the future and
wrapped up investment and costs. And then the combination of
us all coming out of lockdown and wanting to travel
rather than watch Netflix Plus the drag from all these

(01:53):
new low price competitors like Disney meant revenue was way
lower than expected and costs higher, so profit got destroyed.

Speaker 1 (02:00):
Obviously, they have recently decided to introduce the ads. Now
what brought this on?

Speaker 2 (02:05):
Yeah, I think founder Read Hastings is on records saying
things like Netflix is a safe respite for users without
the controversiversy of exploiting them via advertising. So that's what
he said. Yet here we are, so it is an
optional chief of subscription. So why the backflip. He was
very frank about his mistake. He said, we got this wrong,

(02:25):
which we'd flipped sooner. And it's good business. You've got
hundreds of millions of loyal subscribers and you know their
viewing history, so you've got a good data to feed
them appropriate ads, and that tier, the ad tier, the
cheaper ad tea, has been a huge success, so especially
in an era where there's been a cost of living
crisis where now has more than fifty million subscribers from

(02:47):
zero a couple of years ago, so incredible growth there. Yeah.

Speaker 1 (02:49):
Interesting, I see that Prime Video. Amazon Prime is going
to do the same thing here in New Zealand roll
out the ads. Is it for the same reason?

Speaker 2 (02:56):
Yeah, Well, they've done a much blunt away actually, but
they rolled it out to the US UK earlier in
the year, and they said, other countries would follow, and
we're next on the list. Their much blunter approach though,
as they're rolling out ads to all of their members.
But if you don't want ads, you have to pay
up an extra three bucks a month. And Disney, of
course did it right out of the gate in between nineteen,
so most are doing it now.

Speaker 1 (03:17):
And so tell me, how is for investors thinking about
the stuff, how is Netflix going in the face of
all of this competition.

Speaker 2 (03:24):
It's going very very well. So during the streaming wars,
where again dozens of competitors were plowing tens of billions
of dollars into creating movies and TV, Netflix was the
only pure place streaming service on Earth that was profitable.
Hence the irrationally low prices that competitors were originally offering
them couldn't last. So take that Disney example. They launched

(03:47):
at seven bucks, almost a fifty percent discount to Netflix.
Disney now costs sixteen dollars, so prices are up well
over one hundred percent, and there's actually more expensive than Netflix.
So it's really helpful if your competitors pushing prices up
by more than a undred percent. And what's super interesting
is Netflix has ended up crushing the others on new subscribers.
So since twenty twenty two, Disney subscribers have actually fallen

(04:08):
slightly while Netflix has gained another eighty million.

Speaker 1 (04:11):
So what do investors need to think about when they
think about this stuff?

Speaker 2 (04:15):
I think it's an excellent lens through which to look
at economical moats and growth runways, which are both critical.
So back in twenty twenty two, when the stock was
down seventy five percent, many thought Netflix's moat was eroding.
It was game over, the barbarians were at the gate,
but the market actually mistook a fast move and competitive
backdrop for an arrow in the moatent. In fact, Netflix's
moat has had the blow torch applied to it and

(04:36):
it came out the winner. And on top of that,
they've extended the growth runway via the ad tearing and
the password crackdowns. He might have seen as well, Heather.
So it's kind of like that positive flywheel on full
force great content. It's making tons of profit. It's reinvesting
that into content, which is the polar opposite of Disney
Plus right.

Speaker 1 (04:52):
Now, very very interesting stuff, Sam, Thank you so much,
as always at Sam Dickey of Fisher Funds.

Speaker 2 (04:58):
For more from Heather duplusy Ellen dro Listen live to
news talks. It'd be from four pm weekdays, or follow
the podcast on iHeartRadio