Tech world vs. Ponzi scheme, take 2

So in another thread, @glennf quoted this interesting statement:

…the investment opportunity [in web3 crypto] is … frequently … you know … a Ponzi scheme? In the sense that the returns come from more people joining the project, rather than from any fundamental purpose that the project serves.

And that got me thinking about other news of recently. Specifically, the pressure Netflix has come under when they recently announced that for the first time in a decade they had not expanded their subscriber base.

Now a lot around Netflix has changed: pandemic restrictions have lifted, Disney+ came out, people share their Netflix accounts, yada yada. But none of that happened just this last quarter. What did happen just this last quarter is subscriber numbers no longer went up. So I have to wonder, does this mean the stock market considers Netflix a Ponzi scheme, essentially a service only valuable as long as it grows its subscriber base? A service where the returns come from more people joining the project?

Netflix has essentially not changed their product in years. They add new content, a lot of it considered quite good, and they sign up new subscribers. Every once in a while they jack up their subscription price for (new) subscribers, I assume so as to fund new content creation. But as of now, that’s pretty much it. Is the stock market saying that essentially Netflix only offers value as long as they sign up more and more new subscribers? What does the stock market think will happen once Netflix has the entire world signed up? Or at least that part of the world that wants Netflix? Or maybe, we just observed that happen — so is this the end of the Ponzi scheme in the eyes of the stock market?


A confession…if there is any company I love almost as much as Apple, it’s Netflix. And I was very surprised and extremely disappointed with their financials this past quarter. And I was also very disappointed to hear them admit that their next quarter will probably be worse. But I don’t think that Wall Street considers them a Ponzi scheme at all. The Street is probably severely spooked that after over two decades of phenomenal growth and dominating streaming entertainment, they failed to live up to their projections of adding 2-3 million subscribers for this quarter and lost a significant amount of subscribers. This probably, and understandably, could mean that Netflix is on a down slide in a market in which companies such as Disney, Apple, Amazon, Warner Bros. Discovery, and many other streaming entertainment services are rapidly growing, thriving and eating into Netflix’s revenue across the globe. One of the reasons why Discovery recently merged with Warner was to create a more desirable, and therefore profitable, streaming service than Netflix. Netflix now has a lot of competition with very high quality content. Disney Plus is $8.00 a month, which is a lot less than Netflix.

And a very big % of their losses are coming from their two biggest markets, the US and Canada, where their pricing is at a premium. IMHO, a loss of over fifty million $ in revenue in a single quarter is really shockingly bad, and it’s not surprising Netflix’s stock tanked dramatically. Add in a humongous problem with password sharing that will be very difficult and rather risky to address, and I think it looks kind of, but not nearly as bad a scenario as Apple faced before the return of Steve Jobs. They might need a savior as brilliant, creative, and as marketing and technology savvy as Steve, or even a bunch of savvy and creative saviors.

I think that their strategy to limit password sharing is a good one, but my guess is that the number of sharers that pay to sign up will not grow quickly or make a significant enough revenue stream to even make much of a dent. If a decent majority of sharers really wanted Netflix, they would be already paying for it.

Disney, the newly merged Warner Bros. Discovery, BBC and others have yanked a huge amount of popular content away from Netflix to add to their own services, which they are heavily marketing and promoting. Some of Netflix’s most popular series, including Stranger Things,The Crown and others, will end in the next year or two. Apple’s Coda even beat out Netflix’s Power Of The Dog for the Best Picture Oscar. IMHO, upping the quality, frequency and number of their new offerings should be top of their to do list. And even Apple has been looking to team up with sports leagues and to develop news programming. There hasn’t been any mention of Netflix attempting to do either, and I think they would benefit them to do so. And for the past few weeks my husband and I have been been watching more even more live news and less entertainment programming than we have traditionally done every night before the invasion of Ukraine; I don’t think we are unique in this.

Netflix has started to talk about an advertising tier. After working for decades in advertising sales, starting from scratch will not be easy at all. And I don’t think that requiring that people who are using other people’s passwords to subscribe is going enormously increase Netflix’s revenues; if they really wanted the service they would already be paying for it.

IMHO, Netflix needs to make drastic changes, develop more and better content as soon as humanly possible. They have been too complacent and made bad choices. But a Ponzi scheme Netflix is not and probably never will be.

In that case, every stock is a Ponzi scheme because growth is expected every quarter. Apple is now considered to have a bad quarter if they have single-digit growth.

As for Netflix, it’s been in a death spiral for years and it’s just now being reflected in the market. Netflix’s streaming service was able to grow for so long because it was cheap and had a wide library of content from several studios. Now those studios have formed their own streaming services and have cut middleman Netflix out.

To be fair to Netflix, they saw this coming years ago and started making their own content. But content is expensive, so Netflix put itself deep in debt doing so, to the tune of about $15 billion. Now Netflix can’t afford to borrow more and to pay off what they’ve borrowed they have to jack up rates, which is why the monthly fee is edging up on $20 per month.

And the thing is, most of the content Netflix is producing is crap. Of course, most content is crap and it’s really hard to create a hit. Apple has been singularly focused on high-end content and even then they’ve struggled to get hits.

Netflix is, in effect, the new Blockbuster.

A good deal of the failure to grow was the loss of apparently 700k+ subscribers in Russia. Netflix are smart and their taste-interest breakdown and analysis of content is very interesting and apparently an excellent employer.

The reality is they were first out the gate and the big player but now the competition are getting more solid. Disney is, well, Disney, and a must-have subscription for many, Hulu and HBO are continuing to do well. And then there’s Apple, more money than all of them and in for the long haul, and they have been hitting it out of the park lately. The only tired looking big player is Prime, who have the Amazon free shipping to lean on.

I only watch AppleTV+ and a few additional channels within there like Paramount+. My kids watch Disney and HBO Now depending on their age. My wife just wants to watch current cinema.

We have a bunch of subs we are looking at dropping, Showtime, BritBox, and perhaps, yes, Netflix…


When everyone in the world becomes a Netflix subscriber they can’t grow anymore. There’s probably some intermediate point where more subscriptions are unlikely. They my be hitting that point now. The streaming business really increased their subscriptions from the old DVD by mail model they started with. What else can they add?

Other companies like Apple can diversify into new markets as they’ve done with wearables, Apple TV+, and services. I’m sure they are working on the next big thing. What can Netflix’s next thing be?

I don’t think account sharing accounts for a large amount of subscription losses as many of those using others accounts would subscribe anyway. Similar to the case with software piracy.

My favorite story about Netflix account sharing was the guy whose ex-girlfriend was using his account. He noticed she was heavy into a series. He waited until she got to a critical point in the series then changed his password.

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Netflix is dabbling in games now, but that seems to be something to retain people. I cannot imagine it will pull in new subscriptions

I could see a mass password reset coming, would flush a lot out. We as a family have the middle-tier offering, we got tired of having to reenter passwords with the basic one.

More and better streaming content. As mentioned before there hasn’t been enough of it.

I’m not anything resembling a gamer, but Netflix does include a gaming service, but it is very far from setting the world on fire, There are downloadable mobile phone apps for the games on the Apple and Google App Stores, but only Netflix members can play them. There hasn’t been many games so far, but it looks like they will be upping the number:

Like many gaming apps, they could charge for in game purchases. Netflix has acquired some gaming studios, so it’s likely they could be getting serious about gaming. It’s been a very successful avenue for companies like Sony.

Maybe they could be working with Apple, Sony, Facebook or whatever for gaming on headsets? It could help their service get off the ground. Or they can develop their own headset.

In that case, every stock is a Ponzi scheme because growth is expected every quarter.

Which is stupid of course, because continued growth is never sustainable. (Even the universe is going to collapse.) Back in the day, companies were expected to be stable and provide dividends. That’s sustainable. The growth type stocks were far less common and known to be risky, and would primarily be added to a portfolio as seasoning. These days the stock market is basically a sleazy gambling den, exacerbated by magical-thinking algorithms.


Hopefully when Netflix is just another streaming service they will show their content in the “Up Next” section of the tv app.


I see that revenue growth is being confounded with subscriber growth. A company can in principle grow their revenue indefinitely as long as they become more productive. But due to finite population (especially, that of means) they cannot grow their subscriber base indefinitely. Consensus is the stock market reacted to Netflix’ subscriber growth stagnation, not revenue. So the stock market has some answering to do.

The big issue for Netflix is that, for the first time, they did not achieve their forecast of subscriber or revenue growth, their competitors are booming, and they weren’t smart enough to see this barreling down on them. Another big part of the problem is that they have also been loosing subscribers, and they have a long history of subscriber growth quarter after quarter. In the meantime, they have lost popular content from Disney, etc., who are very successfully growing their own memberships and revenues.

Netflix is no longer the only, and certainly not the new kid on the block. The costs of funding and acquiring new streaming content are astronomical, as are the back end serving and tech stuff. “We’re thinking about cracking down on sharing” isn’t their only problem, or even their biggest one. What I think is really spooking Wall Street is that Netflix didn’t announce a concrete growth, or even stabilization, plan. “Maybe we’ll do an advertising tier” isn’t cutting the mustard, especially since they are projecting a loss of even more subscriber numbers next quarter, and they don’t have anything resembling a history in ad sales.

I can’t help but think about the brilliant, and highly effective, Mac vs. PC ad campaign Steve Jobs launched years ago. And also how Steve branched out Apple’s products and services, when almost all of the world thought Apple was just about dead.

Something Netflix should think about re: ad sales:

“Google-parent Alphabet (GOOGL) reported March-quarter earnings and revenue that missed Wall Street targets. GOOGL stock fell as YouTube advertising growth fell short of expectations amid rising competition with TikTok.”

Netflix would be competing with the world class ad sales heavyweights if they jump into the ring.

For myself, the recent price increase triggered a re-evaluation of my Netflix subscription. I watch TV only on an appointment basis. I don’t set aside time for watching and then look for suggestions; based on miscellaneous sources (including word of mouth, I decide to watch a particular show. In recent months, none of those shows were on Netflix. So, it makes sense for me to only turn on my Netflix subscription when the content I want to watch is exclusively on Netflix (and there is one new show that I will do this for). There is no monetary penalty for this behavior.

I wonder if the recent price increase has caused more people to adopt this intentional view and has helped drive the subscriber loss. If so, Netflix needs to find a way (discounted annual subscriptions?) to cut down on this churn.

Keep in mind that the stock market is forward looking. A drop in subscriber growth likely means a drop in future revenue and profits, so investors will sell their stock to invest in companies with better outlooks.

I think investors are worried that Netflix doesn’t seem to have a good plan to maintain or grow profits. Cutting down on password sharing (which I would think all subscription services suffer from to some degree) or adding an ad-supported tier seem to me like bandaids that don’t really address the core problem: the service is too expensive compared to the competition without the content to justify the high price.

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A drop in subscriber growth shouldn’t lead to a drop in revenue (though of course a dop in revenue growth), and Netflix remains a profitable company, with profits increasing. As previously mentioned, most of the Netflix drop in number of subscribers was due to Netflix terminating accounts in Russia and Belarus. And looking at the their actual financial statement, I see a company with increasing revenues, increasing profits (despite a loss in subscribers), and Netflix is still forecasting growth - just slower growth than before. I think Netflix is in pretty good shape really.

At some point it’s inevitable that many growth companies mature into value companies - stocks with less volatility, which pay dividends (i.e., they deliver returns to the investor beyond stock valuation growth), and a good, stable value stock will also be valuable to investors, though perhaps to other investors than those that seek growth companies. I’m not saying that this is happening to Netflix - most likely not - but having a stable customer count with stable revenues running profitably is a company in pretty decent shape.


It is? So then, what changed just now?

The changes you mention are real, but I would claim the stock market knew about those already 3–6 months ago (some certainly well before then) and could have reacted to them then and there (or before actually, if we’re talking truly forward looking). That would have perhaps had something to do with being forward-looking. But no, it’s now they get cold feet. Which kind of debunks that “rationale”.

I guess what I’m getting at is often these stock market explanations sound like after-the-fact rationalizations for what is fundamentally, to significant degree, irrational behavior. People are placing bets, following their gut and/or wishful thinking, at times making use of available facts and at other times choosing to ignore them. When they then win it’s because of their wisdom and foresight. When they lose it’s because of things not under their control. It’s a bit shallow IMHO, all the fancy modeling and “analysis” notwithstanding. I don’t mind the gambling aspect, I get a casino can be fun. It’s this whole hypocritical song and dance about how there is some great underlying change that only just now got uncovered and the traders’ reaction to it is the only possible rational reaction in light of what will happen in these next quarters. IMHO that’s baloney. I’d claim very little of this is about math, and most of it is human psychology.

Netflix just lost $50,000,000 off of its market capitalization, and it’s now the worst performing stock in the S&P 500; it had been among the very best for quite awhile. And in the same quarter last year Netflix added about 400,000 new subscribers and was still one of the most darling of the darlings of the stock market. Their current losses are truly staggering, and now that Covid numbers are dropping in many of Netflix’s key countries, and subscriber numbers, and therefore revenues, have made potential losses even more staggering.

The stock price of Netflix shares is dependent on subscriber growth and increased revenues; they have no other revenue stream. Netflix has admitted the next quarter’s numbers will be even worse. And they haven’t come up with detailed plans to make things better. And how will drastically reduced income affect new and renewed content going forward, which could affect customer retention? They are now competing with Disney+, HBO Max, Amazon Prime, HULU, Apple TV+, Sling TV, etc., etc., and there are probably more to come.

And Netflix is still paying off debt:

“ Netflix’s total debt stood at $14.5 billion at the end of March. The company does have around $6 billion in cash balancing that out, but at any given time it also has billions in short-term content liabilities it must pay. Netflix paid $188 million in interest during the first quarter, which annualizes to $752 million.”

So this longtime Netflix fan is wondering about how all these problems will affect Netflix’s ability to create new original content going forward.

Nothing may have changed now, but investors are now expecting less than they did.

Sometimes a stock tanks not because a bad thing happened but because an expected good thing didn’t happen.

Let’s take real estate as an example. If there’s a surge in people applying for pre-approved mortgages, it is logical that a surge in home buying will soon follow. Real estate speculators may start buying properties (causing prices to rise) in expectation of all those extra people looking to buy. Now if that demand doesn’t materialize (maybe an unrelated economic event causes those mortgage pre-approal people to abandon their plans to buy new homes), then the speculators now have a glut of homes they need to unload, which will drive the prices down - probably lower than before the start of the cycle.

Did anything in the housing market change to cause that sell-off? Not really. It’s just the result of an (incorrect, in hindsight) assumption about where the market was going to go in the future.

The stock market is similar. Speculators buy and sell, not based on the current state of the companies, but based on what they expect the future state to be. When the future is better than expected (even if it’s not very good), the prices rally. When the future is less than expected (even if it’s good), the prices tank. Because today’s shifts are not isolated events, but are the culmination of decisions made weeks or months prior.

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A Ponzi scheme has two particular features: that there is little intrinsic value, and that the investment is being used to solely enrich the owners and initial investors.

Stock market values on a long term basis value the future value of a company. If we were to value Netflix we would look at what it has (intrinsic value) so it has:

It’s existing catalogue - if it had no subscribers it could sell its Netflix originals back in to the market which on its own would have a value in the $b.

It has subscribers - each making regular payments on a regular basis. To value these we need some assumptions as to the price they will be willing to pay in future, their likelihood of leaving and the cost of replacing them. $b = future income x # of subscribers

Add those up, divide by the number of shares = your own opinion of what the stock is worth.

The change in value experienced recently is where the company statements on subscriber losses have caused people to change their assumptions. The large fall is primarily where some analysts have had a slightly naive view that it would continue growing for the foreseeable future, so the correction has been larger than may have been anticipated based on the pretty small losses actually announced.