TL;DR
– Why invest more in partnerships
– How Netflix Wins the content wars
– Launch New Products with Better Data from Particl
🧠 The Takeaways
Netflix needs to acquire CD Projekt + Six Flags to turn their beloved shows into universes for customers to experience throughout the year.
Netflix to buy CD Projekt to own the IP behind hit shows + have a studio to turn their hit shows into games.
Acquire Six Flags to bring the experience of their shows IRL.
Turn Netflix into a mega marketplace where they sell all of their own offerings.
+ Why partnerships determine your biz.
Newsletter-wide disclaimer: As always, this is not legal, financial, tax, or any other sort of advice. I have no insider knowledge on Netflix, CD Projekt, Six Flags Disney or any other biz mentioned. And I was never here. 😉
LBAB Community – Partnerships determine your success.
One of the reasons I post on LinkedIn consistently and spend a lot of time building relationships/partnerships is that at the end of the day, that’s really all business comes down to:
Who do you know who can help you?
How many people have you helped who can make a difference on your business?
When I started this process, everyone was asking me, “Why do you post on LinkedIn so much?”
What’s the point? Why is there real value in that? Aren’t you just wasting your time?
When we started our deal flow was from our network. Now LinkedIn has connected us with most of the people who now send us deals.
Which is the whole point of LinkedIn, but it wouldn’t have been possible by just hunting and the occasional update. The daily marketing has 100x’d our network. And with that our deal flow.
The newsletter is at 9k subs, and close to 28k people follow me on LinkedIn. This isn’t a humble brag but a quantifiable way to understand how posting has lead to our deal pipeline.
We’ve had a lot of founders come directly to us in this process. But a huge lift to our deal volume has come from bankers, brokers, and people who work at other investment firms that see my content on LinkedIn and reach out.
These network connections would have cost a small fortune if I’d built them outbound or by going to conferences/events. Instead, they’re coming inbound to us. Now we know more players. They understand our focus. We have dozens of partners we send deals to and who send deals to us.
Posting and writing has allowed us to find the right people + establish relationships faster. Most of the best deals we see come from people who work at other firms that it aren’t a good fit for them but are a good fit for us.
Let’s Talk Deals
Netflix ($267B cap) will die in the Content Wars because they don’t have a 2nd biz model. Content creation costs can’t be offset by $15/mo + ads.
The arms race is too hot. Their competitors, Disney ($149bn), Amazon ($1.43T), and Apple ($2.79T), all have core bizs selling goods/experiences.
You pay Disney to advertise toys/cruises/theme parks.
When you watch Prime Video, digital dwell time is sell time.
Apple will own all your data for their eventual Native Ads platform.
Netflix doesn’t have another “thing” to sell customers.
Netflix should buy CD Projekt for $5.2B (video game studio: Witcher + CyberPunk) and Six Flags (theme parks) for $5.2B, to clone and own Disney’s playbook with their own content.
Deal Terms
At a $267B cap with $10B in current liabilities and $6.6B in cash, Netflix is in an incredibly strong position to execute these acquisitions in many different ways. It doesn’t have enough in the bank for all cash deals, but at such a sky-high valuation it would be foolish to empty the bank account anyway.
We can’t go very debt heavy for these acquisitions because the theme parks already hold a lot of debt + will require more for maintenance, upgrades, etc.
TLDR Terms:
For CD Projekt:
$2B in Cash ($1B from Debt + $1B from Cash)
$2.5B in Netflix Stock
$0.7B in future royalties on Video game sales. (+ give them a taste on future upside)
For Six Flags:
Flip the biz for $5.2B in all Netflix Stock (2% dilution)
Six Flags’ recent merger with Cedar Fair in an all-Stock deal shows consolidation is already coming for this industry. These parks face the same problem as Netflix. Hit and debt driven consumer bizs where there isn’t another Rev stream to pay off on the back end.
These combined moves would add $6.5B in Debt onto Netflix’s Books (60% increase) + dilute shareholders by 3%, but both are well worth the trade-offs to add another $100B to Netflix’s market cap.
Let’s Save You Money – sponsored section
Today, we’re going to save you from one of the costliest mistakes you can make in your biz:
Not having enough data behind launching new products.
Launching a new product is hard. Most of the time, you’re reading the tea leaves, collecting customer feedback, and going off of your gut. Research usually comes down to checking out a few sites, surveying some customers, and launching the product to see what happens.
But it shouldn’t be that way.
With Particl you can take a more data-informed approach to understand the potential market for your new product. Answering questions like:
How big is the market for this product?
What price point should we launch with?
How much should we buy? In what colors/sizes?
Where are customers currently buying the product?
What’s the seasonality of this product?
After seeing a ton of brands like Skims, Away, Hexclad, and Gymshark crushing new product launches with better data, I decided to check it out for some acquisition research.
As we were looking at an Apparel deal (it was interesting but wasn’t a perfect fit), I wanted to get a better idea of the jogger market—it feels like we’ve hit peak yoga pants, but I have this feeling that joggers is a category that is growing and will continue to grow.
So, I dove into what/how joggers should be priced if we were going to launch them for the new brand. The interesting trends based on 50k products + 600 bizs:
Joggers are a $1.3B product line that moves 29m units a year.
They’re strongly seasonal, with uplifts in NA Fall/Winter months + they really move volume over Holiday.
I also wanted to see what the products sell for and what price point the Rev really comes from.
Key insights for me if I was going to get into joggers:
The Median price of joggers is $40.
While the majority of products (55%) are priced <$44, the sales really come from $44, $66, and $89 price points.
There’s an upper tail where 13% of Rev comes from $112+ price point, but <5% of joggers are priced at the premium end.
If I was going to get into joggers, I’d either introduce a mass-market, affordable jogger at ~$44. Or an attainable-premium one at $89.
There’s a ton more data you can tap into too, like:
Competitor intel. Est. total sales. Top selling products. % they discount their products.
Market trends on industries and products. What colors or product attributes are selling the best?
Benchmarking, so you can see how your store stacks up against competitors.
Unlock these insights free for 14 days and get 20% off your first month using code JEREMY.
Let’s Set the Scene
The real money from your favorite shows is made in experiences + merch. Not from the content itself.
Netflix has hit an impressive $8B/yr in Profit run rate, but while they trade at 38x earnings, Disney trades at 101x earnings.
Why? Because Disney fully monetizes their content. Netflix only makes money on their content when you watch it. Yes, they have a merch store and are building mall experiences (😮), but that isn’t the same scale of monetization.
Every major streamer/studio has (+ will continue to have) a “-verse” based on their core IP. Disney mastered this playbook.
Disney Cartoon-verse: Toys, apparel, cruises, theme parks, Broadway shows.
Marvel-verse: More movies/shows than you can watch, comic books, toys, theme parks.
Star Wars-verse: You get the picture. Light sabers and stuff.
And every other studio/streamer will get in on this.
Warner + Six Flags: Already has the same playbook with Harry Potter + DC Comic IP.
Universal + Nintendo: Launched this around the Mario Bros movie.
Warner + Mattel will do this around Barbie’s success.
(If you don’t think Warner is cooking up a Thrones-verse + Dune-verse you have another thing coming.)
Microsoft: Bought Activision (World of Warcraft, Call of Duty, Tony Hawk). Don’t be surprised if they jump in the chat.
Netflix has the IP, just not the -verse.
Stranger Things
Money Heist
Bridgerton
Squid Games
But they don’t have the backend of experiences, merch/toys, + games to let customers enter the world. And worst of all they don’t own the IP behind 1 of their most popular shows, The Witcher.
Let’s Take on Disney!
Here are the 3 big bets we’re making to take on the mouse:
1) Buy a Video Game Studio to own the IP
Netflix needs to buy CD Projekt for 1 simple reason: they’ve already invested close to $500m on 5 seasons across 3 shows they don’t own the IP for.
There’s a bit of a mutually assured destruction pact here. Netflix basically holds The Witcher brand in the palm of their hands, and it’s undeniable that the show has had an impact on game sales.
Before Dec 2019 (Witcher first aired on Netflix) the entire video game franchise (12 games) had sold 33m units.
Since then another 50m units have been sold.
The video games themselves were incredibly successful, but the show clearly boosted sales in a way that CD wouldn’t have been able to. CD Projekt’s success comes down to 2 hit franchises:
The Witcher
Cyberpunk 2077 (doesn’t have a verse yet).
But more importantly, Netflix can flip their best IP (Squid Game, Stranger Things, Money Heist, Bridgerton) into hit video game franchises. Netflix already knows this content is a hit. Now they can extend the story lines and give the audience more time to spend in the world they’ve invested billions to create.
It’s a flywheel where the more time the audience spends playing the video game, the more time they’ll spend watching the show, and vice versa. Adding a $60 video game sale on top of the monthly subscription lock in is a cash cow.
And yes, Netflix has a game studio.
But no offense to the team, these franchises are so much bigger + more interesting than a Queen’s Gambit chess app or Stranger Things puzzle. Basically producing low quality Zynga iPhone games with the Show branding as a skin.
Just like a great TV production studio, there’s a quality required to produce a video game level that matches the show (I’m thinking Star Wars or Lord of the Rings video games). That are so good they make you want to watch the show/movie again.
You can’t just spin up that level of talent with some B team they hired. CD Projekt has proven they have the talent to turn great content into incredible hit games.
Takeaway: Sell more games to increase screen time + keep subscribers sticky.
2) Acquire an amusement park + print profits
Theme Parks accounted for 69% of Disney’s 2023 Operating Profits on only 36% of its Revenues. We can talk all we want about the power + multiples of software, but the real $$$$ still comes from premium real world activities.
Netflix, on the other hand, ran some pop-up experiences to bring fans in IRL. A good test, but those are not the same.
They already have the IP to create a full-blown park for teens & adults (Disney’s most profitable segment). It would take too long for Netflix to build a Theme Park themselves, but Six Flags just went through a massive merger + could use a shot in the arm.
Six Flags attendance is down, while Disney’s is booming. Coincidence? I think not. Disney dominates Six Flags because their content is blasting their brand everywhere all the time. The Theme parks catch pent up digital demand.
With Disney+’s launch in the middle of Pandemic lockdowns, it’ll probably take years to see the impact Disney+ has on Park sales, but I’m confident they’ll be positive. The more your kid watches a Disney movie/show, the more they’re going to want to see Goofy or Iron Man IRL.
Netflix has the opportunity to do the same with theme parks as they do with Video games. Theming experiences around a Squid Game or Stranger Things park will drive more attendance (overall + when new seasons drop) than just having scary sounding roller coaster names.
They can turn the Theme Parks into immersive worlds.
Some can be themed around hit games (imagine a whole theme park fighting Witcher monsters and completing quests)
Others are mashup parks where they can convert existing parks to the branded versions of famous rides (like Superman Escape)
End result will be must-attend destinations that come with a unique experience + price points people will travel for.
The immersive IRL experiences are what create the 4 pillars of the flywheel. The Audience falls in love with each piece that reinforces the others:
Content: Creating desire to have more in world experiences.
Video Games: Creating desire for IRL experiences + rewatching the shows.
IRL experiences: Creating desire to buy merch + digital experiences (video games -> rewatch the show before & after we visit the park).
Merch: Creating a constant reminder (+ advertising) to go experience more of the world in every way possible.
Netflix would monetize all of it. More importantly, they’d block out other players from monetizing any aspect of their IP. CD Projekt wouldn’t be able to license Cyberpunk 2077 to another studio/park.
They need to own 100% of the world. That’s what locks in the flywheel and the monopoly within their universe.
Takeaway: Max out customer purchases. Profits pour in.
3) Create an internal marketplace to sell + advertise it all.
It’s hard for Netflix to justify investing in a massive eCommerce + sales infrastructure when, candidly, they don’t really have a meaningful sales opportunity today.
Clearly, a standard Shopify stack does the trick to sell their merch, but Netflix has the opportunity to reinvent eCommerce + replicate Disney’s playbook in a much more tech-driven, efficient way.
If you think about Disney’s infrastructure, they have teams that market, service, & sell each division:
Movies
Merch
Toys
Cruises/Parks
Video Games
Streaming
It’s built across a ton of legacy tech with their own teams + structures. There’s some overlap, but not a true integrated system where one drives the other.
Netflix could launch its own marketplace within the Netflix app to sell everything across the portfolio.
Customers could seamlessly go from watching a show to buying the video game (+ play within the app) to buying tickets to the park to merch, etc. Netflix already has customers payment + shipping info and knows what shows (and genres of shows) they like.
But the real value driver is that they’d have built-in distribution for new launches.
Drop new movies/seasons of a show when they drop new games, merch, or Park attractions.
Create a flurry around getting as many people to watch the show as possible (their current goal)
Backed by conversion rates from audience -> buyers of their full offering.
Then, Netflix can spend more money promoting the show. Today, Netflix’s budget is determined by how many people will watch a show, which they correlate to how long an audience member will stay subscribed.
Even at $800 Lifetime Revenue (LTR) ($15.49 over a 55 month average lifetime), Netflix is only spending 7% of Rev on marketing.
If you add $200 in Video game + Merch sales + a $3k weekend trip for a family of 4 (Disney park estimates) on top of that $800 lifetime subscription fee.
Netflix can anchor ~$4k LTR, which would bring their marketing budget to $280/customer to make their hit shows more of a success, which will trickle down to all the other monetization strategies. Before we consider increasing marketing spend as a % of Rev.
And it will build the empire with real data and examples for the real profit puppy: Ads. Netflix proves they can do it for themselves, non-competitive brands will pay through the nose for similar access.
Takeaway: Content selling all the things is what will make Netflix a $1T biz.
Final Thought
Netflix really did change content forever, but $15/mo + $36 CPMs against Big Tech is bringing a wooden sword to a lightsaber fight. The disruption playbook that made them 1 of the most valuable bizs in the world will also be their downfall.
TV shows + movies traditionally made their real profits licensing content to other platforms. Usually, the original run for Movies in a box office or a TV show w/ ads was a breakeven/barely profitable venture.
Selling the hit content over and over for years to other people who wanted to monetize it was where the real profits came from. Netflix was the innovator who launched by leveraging this principle to eventually destroying it by forcing everyone to move to DTC streaming.
The delta between how much it costs a streamer to produce hit content vs. what they can monetize in subscriptions isn’t going to create long-term profitable cash flows for 1 simple reason.
Content production budgets increase exponentially.
Subscription revenues have a defined, capped upside.
A great ex. of this is Netflix now betting on NFL games. Live sports are the ultimate subscription + Ads arbitrage. The sports leagues will continue to drive higher fees to broadcast their games, but Netflix can’t consistently increase prices.
There’s only so many new subscribers the events can drive. These types of investments will continue to erode margin.
Before you go thinking tech magic will save Netflix, you need to remember that Netflix is just a tech-founded media biz. With how expensive content production is, Netflix isn’t a high margin tech stock.
Netflix operates at a 44% Gross Margin. Most DTC bizs have a higher Gross Margin than that.
Merch, Parks, and Video Games will add in a new product line and sales opportunities at roughly the same Gross Margins. The unlock will be the raw dollar volumes that these will add to the P&L.
The real value that Netflix can provide + capture:
Reinvent the video game landscape + expand into that $243B market.
Breathe fresh air into the $113B theme park market.
Redefine eCommerce to sell the whole experiential stack.
By combining all 3 of these elements Netflix will be able to fend off the barbarians at the gate.
They’ll replicate Disney’s model, and both will live & die by their IP quality (aka content).
They’ll be able to offer mega talent more backend profits (from merch, rides, etc) to prevent Amazon/Apple from outspending them.
They’ll have the most integrated + efficient selling engine monetizing their audience for more purchases at a lower cost of sale.
Netflix’s strength in content creation is the data it collects on its users + placing more concentrated bets on what it knows will perform well. Slapping that content onto other experiences will only feed the beast.
Then, when Netflix has exhausted those opportunities, it will have a unique ads offering (@ 90% margins) to exponentially growing the biz to a $1T cap.
