Mic Drop #39: Netflix, 6 Underground & The Curse of the Mogul

Rethinking Netflix's transparency after a candid interview with Netflix's Scott Stuber reveals symptoms

The reader question about the Curse of the Mogul framework I have discussed most is whether it applies to Netflix.

Meaning, is Netflix telling Wall Street that its business involves managing intangibles like creative talent and artistic product, and therefore it is not subject to traditional strategic, financial or management appraisals?

My answer consistently has been, no.

Netflix is the only streaming service that offers detailed metrics about subscriber growth quarter-to-quarter. It also is the only streaming service to disclose how many households consume its hit movies and shows, even if its recent two-minute standard is hotly debated.

But, the Curse of the Mogul framework also highlights instances where media company CEOs may be rewarding content creators at the expense of shareholder value. For Netflix, which has been aggressive in betting on nine-figure productions deals and movie productions, that criticism has always been muted by growth in stock price and user base:

• When it signed Shonda Rhimes to a $100MM deal in August 2017, its stock was at ~$165 and it had 52MM Total Memberships. The stock is now at $514.25 (as of the close of July 29th, 2021), or 312% growth, and it has 209MM memberships, or 402% growth.

• When it signed Ryan Murphy to a $300MM deal in February 2018, its stock was at ~$278.52 and it had 63MM Total Memberships. Since then, its stock price has grown 85% and its memberships have grown 332%.

• When it signed Kenya Barris to a $100MM deal in August 2018, its stock was at ~$316, and it had 130MM Total Memberships. Since then, its stock price has grown 62% and its memberships have grown 160%.

Fast-forward to August 2021, and only Rhimes has renewed her pact with Netflix to expand the relationship beyond television into film, gaming, merchandise, virtual reality and live events. Her show Bridgerton was watched by 82MM households.

Murphy has been prolific with content productions but with a mixed track record, and Barris exited his deal early because he wants “to do in-your-face shit” and he thinks “Netflix became CBS.”

Netflix’s stock has dropped 6% since mid-July, and churn in the U.S. and Canada (UCAN) has gone up (~433K subscribers lost, net, in Q2). UCAN has the highest Average Revenue per Membership (ARM) at $14.54.

6 Underground

Action-comedy film 6 Underground reached 83MM households across Q4 2019 and Q1 2020, a hair more than Bridgerton reached. It was another nine-figure bet with a budget of $150MM.

So, it was surprising when Head of Original Films Scott Stuber told Variety:

One blockbuster that won’t be getting a part two, however, is “6 Underground,” a $150 million Michael Bay and Ryan Reynolds film that Stuber confesses was something of a disappointment.

“We didn’t feel like we got there on that one creatively,” he says. “It was a nice hit, but at the end of the day we didn’t feel like we nailed the mark to justify coming back again. There just wasn’t that deep love for those characters or that world.”

Putting this statement in context:

• 6 Underground is the fifth most-viewed movie on Netflix, to date (tied with the Jennifer Aniston and Adam Sandler comedy Murder Mystery); but,

• A $150MM budget didn’t result in a production that connected 85MM households with either the movie’s characters or world.

That is a Curse of the Mogul outcome: 6 Underground’s creative team reaped more short-term value from the $150MM investment than Netflix shareholders will reap from the investment over the long run.

When a win is also a “big, messy loss”

I have written plenty before about Netflix’s failures to develop a library of IP, including its most recent flop Jupiter’s Legacy which had a $200MM budget. According to Stuber, 6 Underground is now another example of that.

But, I have written entirely about the flops and the “big messy losses” that reflect the “bigger risks” that Netflix Co-CEO Ted Sarandos is willing to take, as described in Co-CEO Reed Hastings’ No Rules Rules:

We should be ready to take bigger risks in high-growth-potential countries like India or Brazil so that we learn more about those markets. Let’s have some wins. But let’s also have some big messy losses where we learn how to succeed better the next time. We should always be asking, “If we purchase this show and it bombs, what will we learn from that?” If there is something big to learn, let’s go ahead and take the bet.

6 Underground was a win by Netflix’s viewing standards. But, Stuber is now implying it was a Sarandos-type ”big messy loss”.

Can it be both?

Down is up and up is down. It’s objectively confusing to process.

What about growth?

Can Netflix mute this objective, evidence-based Curse of the Mogul criticism with continued growth in stock price and user base?

Netflix’s growth is now coming from lower Average Revenue per Membership (ARM) international regions (EMEA at $11.62, AIPAC at $9.72, and Latin America at $7.45). All are at a discount to the U.S. ARM of $14.54.

So there will be growth at higher growth rates but at lower ARM. Will it be enough to mute investor concerns?

Curse of the Mogul symptoms have proven to be a reliable red flag in past PARQOR analyses (see: Peacock, Paramount+, discovery+). It’s notable that the framework now applies fairly and objectively to Netflix.

So, lower ARM growth and a move into gaming will need to soothe investor concerns. After this admission about 6 Underground, I’m not sold they will.