Pesky technicalities aside (I won't even bring up contribution margin!), Crockett could be correct. Netflix's margins might continue to rise. But that's all he'll be right about. He'll take credit for getting to the finish line even though a reality other than the one he imagined will have run the marathon.
Carrying original and/or exclusive programming doesn't directly drive margins at any of these companies. Again, we see a sloppy leap of logic from one of Wall Street's "senior" analysts.
Subscription revenue from individuals drives Netflix's revenue. That's it. At HBO, fees it collects from cable and satellite companies drive revenue. At the networks of Viacom, Discovery and others, these same fees and advertising dollars drive revenue. Given the obviously distinct business models, I'm not sure how a serious Wall Street analyst or even part-time hobbyist investor could make the case for Netflix margins using HBO, Viacom and Discovery as examples.
Certainly the programming gets these companies into a position to succeed -- possibly -- but it's simply not the direct mechanism that drives margins. It's how your model and cost structure takes the content you serve and monetizes it.To say investors attribute high margins to HBO (or, more specifically, TWX), Viacom and Discovery and therefore they can, should and will, over time, do the same for Netflix makes zero sense. It's so inconsistent that, frankly, it should disqualify Crockett from ever commenting on the company or the media space again. In fact, Lazard Capital should make him take his driving test again. Particularly if he refuses to provide context for his claims. He had the opportunity early on in the CNBC interview, but capitulated and changed the subject. If this was merely about the future of Netflix, it wouldn't matter much. But there's a bigger picture issue that looms large. An analyst from a major firm sent me the following via email after my appearance on CNBC. I changed the exact wording to protect the analyst's identity, but preserved the meaning of the comments:
I share your pain ... am embarrassed by some of my own peers. I lived through the dot-com bust and accounting issues at ... I only wish some were more thorough.If I just took off on a guy for the sake of taking off on him, I would have, rightfully, received negative reaction. But I'm convinced investors and those who follow the stock market and/or companies want to see the culture Wall Street analysts operate under stirred and shaken. Collectively, we -- the media and, to a lesser extent, you -- have allowed an atmosphere to persist where it's more about touting and driving stocks while building a one-sided case, not researching the various faces of public companies. We have become desensitized to how toxic of an arrangement this is. If nothing else, in some small corner of our universe, I hope the Netflix issue can trigger a conversation about the way Wall Street conducts itself, particularly as analysts morph into pseudo-media celebrities, forced to to speak, out of their element, in 31-second sound bytes. Follow @rocco_thestreet -- Written by Rocco Pendola in Santa Monica, Calif.
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