Originally Posted by
Sturgeon's Lawyer
To make it worthwhile for Jill (or Joe) Investor to put their money into the stock of Consolidated International, LLC, there has to be a reasonable expectation of repayment at least as good as she can get from other investment opportunities, like corporate bonds) bonds, savings accounts, municipal bonds, money-market accounts, savings bonds, and commodity futures. It can be worthwhile in one of two ways:
1. Quarterly dividends, or
2. Reasonable expectation that the stock will become worth more than the price at which Jill buys it.
Netflix, like most younger companies, has never paid a dividend and is not likely to any time soon. Thus, the only thing that can entice Jill to buy it is a reasonable expectation that the stock etc. If its revenue stream -- or, rather, its net profit, which is not entirely a question of revenue -- ceases to increase, the stock will stagnate or, more likely, drop in value. Most stock prices are based not on the stock's current value (by which I mean here the amount a share of stock would be worth if the company liquidated and issued all the money as a one-time dividend), but on what they believe it will be if the current trends continue for X amount of time, where X is based on a number of factors, including the investor's taste for risk, something called the forward P/E ration, and much more (I don't pretend to understand this part of it).
So, to keep the executives' stocks and options valuable, they need to keep net profit growing. There are three basic ways to do this:
1. Increase the company's customer base.
2. Increase the price of the company's products and/or services.
3. Cut costs.
Starting with #3, this is a risky strategy unless you can cut costs by economies of scale. Sometimes the market rewards, in the short term, things like layoffs; but this can have negative results on the company's ability to provide products and/or services to a (hopefully) growing customer base.
#2 has its own risks, especially for something as commoditized as streaming entertainment. Netflix has to compete not only with Disney+, Paramount+, Peacock, and God wot what all else, but with free services like YouTube and, for that matter, XVideos or PornHub. If they raise their prices too much, there's a good chance that their customer base will not just stagnate but actually shrink, which is an obviously suicidal trend in the long term. (Setting prices to maximize so as the product of per-unit profit and sales volume is a particularly abstruse corner of the Dismal Science...)
That leaves #1. The problem with #1 is that any market has its limits. Netflix doesn't compete with Disney+ etc. for individual customers so much as for market share. If the market is getting larger -- as the market for streaming entertainment has mostly done for the past n years, and especially during COVID restrictions -- well, "a rising tide floats all boats"; but when you hit the limit of the market, competition becomes much more cutthroated, as the companies sharing that market enter into a classic Darwinian battle to see which vendors are best adapted to the (current) market conditions.
Oh, and the streaming companies don't just compete with each other. They compete with live entertainment and movies -- which is why COVID has been such a boon for the streamers -- and also with books, magazines, DVDs, CDs and streaming music, and, not least of all, food and drink, especially alcohol. The late Robert A. Heinlein used to say that he was competing for your beer money -- he, together with the publisher's publicity department, had to convince you that buying his latest book was a better choice than buying the equivalent amount of beer. (This is an easy sale for me, as I dislike beer intensely, but, then, I like other alcoholic bevvies, so the competition remains valid.) In short, everyone with a non-necessary product is competing for your discretionary income with all the others, and also with the options of saving it, investing it, or giving it away (whether to a friend/relative or to some worthy-in-your-eyes charity).
At any rate, the point I was making here is that any market has a total size limit. There are only so many people in the world, and only so many of them are in places Netflix reaches, and only so many of those have sufficient discretionary income to even consider Netflix, and only so many of those actually care enough for what Netflix sells to plunk down ten or twenty clams a month for it. (I am one of those who does not, though I subscribe to a couple of other services.)
But profit growth is the only thing that makes a company valuable (== viable).
Or, to summarize: consumer capitalism is doomed, and the sooner we recognize it, the better chance we have to convert to some other form of economy, preferably one that won't continue to contribute to the destruction of the biosphere.
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