Netflix is the #1 streaming video company. They also have a $100 billion valuation. So why are they in trouble? 😱

Netflix might be the industrial leader but they can't change the nature of capitalism 🧵

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Yesterday, Mel Conway responded to my blog post about Palm, and sent me this paper he wrote. Human organization is prone to unfairness. This is especially true for capital markets.

Regarding industry, Mel Conway sent me this chart about the threshold of profitiability.

Conway infers that, in almost all industries, few companies need to worry if they're #1 or #2 – but when they're #3, that's the point where life becomes hard.

Examples of life being hard for #3:

1. Mobile OSes. Android and iOS are #1 and #2. Who's #3?
2. Cola. Coke and Pepsi are #1 and #2. Who's #3?

Every company tries its best to maintain being #1 and #2, so how do they avoid being #3? By maintaining growth indefinitely! And the cheapest way to maintain growth is through acquisitions.

This is why industry and the stock market are co-related. In order to grow your industry, you must grow your stock price. Higher stock price means acquiring competitors. Acquiring competitor means growing your industry. It's a cycle.

"But Netflix is the #1 video streamer. Aren't they safe?"

Not when you consider the valuations of its competitors!

Here's the market caps of Netflix competitors:

1. Apple: $2.23 trillion
2. Google: $1.69 trillion
3. Amazon: $1.57 trillion
4. Disney: $240 billion
5. Comcast: $214 billion

What's Netflix's market cap? $100 billion.

Netflix is the #1 video streamer. Yet they're #6 in their industry when it comes to valuation. Why is this?

Netflix's sole cash cow is streaming video whereas its competitors have diversified in other industries.

Netflix has another problem. Over the past 10 years, they haven't:

1. Entered other lines of business
2. Innovated new industries
3. Acquired competitors

Competitors may fail at video streaming, but they'll survive because they have other cash cows to fall back on.

Not so Netflix. If they so much as hiccup, it could spell doom.

Most talking heads are saying, "Put a fork in Netflix, they're done."

However, they still have options. I'll least three that come to mind.

1. Netflix can cquire Paramount Global. This gives them another streaming service, a TV network, premium content from Showtime, Nickelodeon, and MTV, as well as franchises like Star Trek.

2. Netflix can acquire Roku. This gives them a digital player option that competes with Apple, Google, and Amazon's offerings.

3. Netflix can acquire Valve. This gives them a video game distribution service as well as cloud gaming technology that competes with Google Stadia, GeForce Now, and Playstation Now.

All options I listed mean acquisitions. This is because I don't believe Netflix currently has the option to innovate its way out of trouble.

The only thing Netflix can do is buy its way into innovation. This often works wonders for companies in trouble.

Do I like that capitalism means companies must perpetually grow by acquiring the "losers"? No, but this is captitalism's nature.

Big fish eats small fish -- unless all small fish act as piranhas to chew the big fish to the bone.

@atomicpoet They could try not auto-playing obnoxious loud trailers every time I hover over a thumbnail. Or giving me 4 milliseconds to stop autoplay. They could try making good content, instead of making every stupid piece of shit script pitched to customer service.

"Thanks for calling Netflix, you've been green lite!"

Pandering to the lowest common denominator is no way to sustain a brand. Unless you're Trump. Then it will work for a little while anyway.

Oh, maybe they could acquire Trump?!

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I guess Netflix buying Valve would mean proton limiting games to 720p resolution or similar shit.

@atomicpoet they just stopped streaming to russia and lost 530,000 subscribers. 😂

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