Nathan Mayer Rotschild (1777-1836) made a killing off being the first person in London to know of Wellington's victory at Waterloo in 1815. This time the arena is not geopolitical, but the streaming space.

Capitalism is working in a strange way. It is not a free market, but rather a highly oligopolistic arena at war, guided by the incentives of the visible hands: the central banks. Central banks are boosting bubbles where size makes the difference. Buybacks, ETFs, and access to cheap capital help to clearly define the strategy of this Parker Brothers game where massive bubble reflect how strong, or weak is the competition.

In a bubble regime, the market follows Pareto’s 80/20 principle. The capitalization index is not a good representation of what is really going on in the entire market. For example, 80% of the market could be in bear market territory, but the S&P 500 will overrepresent the large cap bubble stocks, masking the negativity.

There are many battles being waged in the dominance for mobile, cloud, streaming, gaming, fintech, biotech, cyberwarfare, customer relationship system and autonomous cars. Today we will focus on one of what we consider to be one of the most interesting strategic oligopolistic wars: the streaming business.

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It’s Not Only Netflix Vs Disney

Netflix has completely changed the entertainment business, with more than 100 million users binge-watching series like Stranger Things, Narcos and many others… and it is true that Netflix’s distribution model has proven to be very disruptive and the quality of production is excellent, but the cost has been excessive.

This war is not as much about Technology as it is about content and customer loyalty. The streaming business is easy to replicate. Services like Amazon Prime, Apple TV, Hulu and Google were some of the first to replicate the streaming business.

This is why the future of Netflix is a global macro bet. Central banks made capitalism a very different system. It is no longer solely about profits, but about customer acquisition, at any price. In the case of Netflix, this cost has been assumed by it huge debt position. And while interest rates have remained low, this strategy has been successful.

Source: Bloomberg.

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Debt Works, but Until When?

The streaming war focuses on the ability to produce good content without going bankrupt in the process. It resembles a war of attrition, where the only winner is the last competitor to enter the war, or those that join alliances in order to siege a new scapegoat. These alliances are already evident between Apple, Disney and HBO.

Netflix’s strategy has focused on producing the best content no matter the price, and lots of it. They continue to flood the market with new movies and shows, but what really matters is new user acquisition. More users lead to more loans in the high-yield market. Disney’s strategy has been different. They have gone about acquiring brands with solid reputations to produce content and learned the business before undermining Netflix’s capacity to distribute quality, third-party content. The acquisition of 21st Century Fox also aimed to have control of Hotstar, the streaming service provider in the country with the most booming demographic: India.

Since April 12, Disney’s CEO has been ready for a war of attrition with Netflix:

From Yahoofinance:

The important thing for investors, though, are the finances of Disney's push into direct-to-consumer streaming. The company is planning to expense about $2 billion on content next year, spending about $500 million more on a cash basis. And that's just for Disney+. The company is also spending big bucks licensing and developing content for Hulu and ESPN+, which are both unprofitable.

But Disney is clearly looking to scale its services as quickly as possible. That's evident in its pricing for Disney+, just $6.99 per month. The company expects to reach 60 million to 90 million subscribers by the end of fiscal 2024. It also expects to grow Hulu to 40 million to 60 million subscribers and ESPN+ to 8 million to 12 million subscribers in that same time frame.

Disney has the late mover advantage

Source: stockcharts.

Bogotá, April 25 2019

Guillermo Valencia A.