Whether long or short, in order to buttress one's theory about Facebook (FB), there may be anecdotal evidence for virtually every scenario one wishes to tender. When a company has 60% of the nation and near 30% of Earth as subscribers, short-sellers can easily find some numbers to spin for their benefit. The most popular statement, "Facebook is losing teens by the millions," is accurate but it does not put it into context or talk about the capricious nature of teens. It does not put the percentage in context either. As I recently posted on FB (and tweeted), when considering Facebook's 1.2 billion subscribers, the 3 million teens are about as impactful as the $1 billion in spending cuts congress pact last week out of the $1.2 trillion, nine-month budget.
Out of all that I have seen, heard and read, I have not observed many parallels of companies that have achieved Facebook-like numbers, because they do not abound. There are not too many precedents of companies achieving "critical mass" to the extreme degree of Facebook. How many companies in the world can you put forward as examples that have over 1 billion subscribers?
The numbers they have make the valuation of Facebook dependent more on how many ways can they monetize their 1.2 billion subscribers. Pardon me for being crass but when we talk about "monetization" with regard to Facebook, the question put bluntly really boils down to how many ways can they extract money from them? This discussion usually leads to contemplating the number of ways Facebook can advertise to them without driving users away. This is all pretty much "inside the box" thinking. It doesn't require a stretch because that has been the traditional way, as with Google and the way they monetized their traffic.
The assumption is that Facebook cannot charge subscription fees for the social service and with that I would agree. But that doesn't mean they could not charge their subscribers fees if they sold them products or services that subscribers already pay for elsewhere. The nature of Facebook's venue positions it at an ideal point for marketing services that are often topics of conversation among consumers. Advertising alone has propelled Google valuation to about $300 billion (91% of their revenue coming from ads despite the many great innovations they have) but Facebook has the potential to monetize its users in ways we have not imagined. For example, what is one of the most popular topics of casual conversations in America, whether around the water cooler, dinner table and many social gatherings? Anecdotally, to a fault, entertainment is this nation's primary obsession.
Facebook is the global emperor of "casual conversations" between friends and family. Enter Netflix (NFLX). The synergies between Facebook and Netflix make a much further integration than they already have established, perfectly expedient.
The companies are very close. Netflix CEO Reed Hastings has for a few years been serving on the board of Facebook so there is already a relationship. The whole could be worth more than the sum of the parts as both companies have something very compelling to offer one another:
- Netflix as the undisputed leader in the movie rental sector has the best delivery methods of films and television programming. Consumers favor it, and it has about 30 million subscribers now. It would be offering current Facebook subscribers a service that is very relevant to them and make Facebook an instant success as a retailer. Thirty million subscribers is a drop in the bucket for Facebook; however, it would be a successful means of getting a growing number of Facebook subscribers to pay them cheerfully every month.
- The benefit to Netflix being owned by Facebook would be the unabated integration with the billion-plus subscriber base and highly prioritized devotion of its parent company. Of their current relationship one could say they have been going steady but again, the synergies of these two companies provide a sound basis for a marriage.
Up to this point in the Facebook/Netflix integration what we have seen leaves much to be desired. On that note I would proffer some pre-marital counseling. Facebook and Netflix subscribers should be enabled to post recommendations to every movie in the Netflix catalog — on a wall — with the description and trailer available to any Facebook member, regardless of whether they are a subscriber or not. That way, for example, if I post a link to a film on my wall, all of my "friends" can be taken to that page in the Netflix catalogue, read the description, view a trailer and from there hit a "subscribe" link with ease. That would be profoundly powerful.
If FB and NFLX allowed for that and enabled FB subscribers to subscribe to NFLX right then and there without mandating that all of the new subscribers must enable their friends the privilege of perusing their viewing history henceforth, the growth to Netflix would explode in an unprecedented manner. The crux of that bold contention is that people listen to the advice and recommendations of their friends and family they know best and who best know them.
According to a January 2014 USA Today column, home video sales rose for the second year in a row in 2013, with spending on movies and TV episodes downloaded digitally surpassing $1 billion for the first time. Total consumer spending on home video - digital sales and rentals, and physical movie discs - topped $18.2 billion, according to two separate industry reports, one due out Tuesday from research firm IHS and one last week by the Digital Entertainment Group at CES 2014 in Las Vegas.
The $18.2 billion spent includes disc rentals (an area in which Netflix also has a leading role) but it is a foregone conclusion that those primitive disks are becoming obsolete and are destined to fuel more rapid streaming growth.
A recent column at Huffington Post cites that a report by PwC anticipates that Americans will spend more and more on streaming video going forward. If the accounting firm is right, Americans will fork out $6.68 billion on streaming movies by 2016.
An $18 billion market is within Facebook's sights to dominate, and it should not be ignored. This is not a column by a Netflix long looking to ferment an acquisition rumor. This writer has already made his 1,200+ percent return in Netflix in 2012 to 2013, and I am out of my long position in Netflix. However, as a Facebook long and one who still believes in the leadership of Reed Hastings, I believe that this deal would make so much sense that it would be one of the rare cases where the acquiring company's shares would go up after such a deal was announced, even at the currently "high" $20 billion market cap Netflix is boasting.
Logistics of a Possible Deal
Facebook and Netflix have both undergone rapid increases in market cap this past year (Facebook at more than $140 billion). Facebook could see the clear synergies and buy Netflix using its shares as the primary currency. Although they operate in different sectors, their share prices have moved on a very similar track for the past year in terms of percentage gains. Any market volatility leading to the consummation could be expected to be commensurate. It would not be an inequitable move for Netflix shareholders to receive a large part of the transaction in Facebook shares with a smaller portion in cash of course.
The deal for the previously explained rationale and strategic monetization makes sense. The Netflix brand is strong and it would be prudent to keep it as is. Reed Hastings is a great visionary. The role of President of the entire company might appeal to him. His talent and software industry experience has probably already benefited Facebook heretofore through his board of Directors experience. Then again, he did not set out earlier in his career to revolutionize the video rental industry. It came about as he saw a need and necessity was the mother of his invention. So who knows, he might prefer to conquer another industry at this point.
Competition is heating up with companies like Amazon (AMZN) Redbox / OuterWall Inc (OUTR) and Verizon (VZ) moving into streaming. Netflix is the early mover in the industry and doubles its closest competitor in the segment. However, a full integration with the world's dominant social media company and its 1.2 billion subscribers would be a great benefit to them. Potential consolidation and strategic alliances are daily on the radar. So as the marriage vow goes, will you Facebook, take thee Netflix…?
Disclosure: I am Long FB and closed out my call option positions on NFLX in 2013.
About the author:
With a passion for writing as well as broadcasting, has spent two decades building a track record of prescient stock selection. As strong proponent of value investing, he looks for value as a bull and a bear, long and short. He believes that in raging bull markets, the best value can sometimes be found on the short side of the market and does not hesitate to take advantage of companies with securities trading far above what he believes to be there “intrinsic value” by taking a short position.
Scott Currently publishes financial and political columns through his websites.