21 Comments

Summary:

Google and Netflix stocks are moving in opposite directions — down 29 percent for the search giant and up nearly 99 percent for the video company. Their stock trajectories speak volumes about their strategies and their ability to focus on their core strengths.

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Earlier this morning, I received a research note from UBS Investment Research and a small graphic (left) caught my eye. It showed a stunning divergence in the fortunes of two of the most talked about companies of today: Netflix and Google.

From the looks of it, you would think all is well in Google-land. After all, the search engine giant is king of the heap when it comes to search and search related businesses. It has just made an audacious move to buy ITA, a travel data provider that cuts its rivals at the knees. And from the looks of it, Android OS, Google‘s attempt to take over the mobile world, is off to a great start. But despite all that great news, the stock down 29 percent for the year or about $190 per share to about $436 per share. Netflix, in comparison, has nearly doubled for the year to $111 a share.

Writing about stock markets for a very long time has taught me not to pay much attention to short-term vagaries. Investors very well be finding Google too expensive, just as they are finding Netflix attractive. However, when I look at these two companies — I see too strikingly divergent strategies. And most importantly, two different abilities to come to terms with their true selves.

Netflix – a video delivery company – is all about focus — it wants to transition from being a company that dominates a business that is being calcified (DVD) to a brand new kind of business model — delivering atomized content to many devices via the network. It is doing so by focusing and having a strategy that helps it walk down the razor’s edge without bleeding. It is that focus that has helped the company to become a preferred partner for Hollywood studios. Today, Relativity Media is the first production house to eschew cable and instead opt for Netflix. Netflix’s focus on turning their service into a platform is winning them fans and imitators in unlikely places, such as the management team at Skype.

Google, on the other hand, is a company that is still searching for a revenue engine beyond search and advertising. In their domination, they seem to have antagonized a few nations. It is great to see the company seek new markets — mobile is as big as one can image and one can’t fault them for acquiring ITA — but they are facing a new reality: their core business of search is coming under pressure from the likes of Facebook, which is intent on changing Internet behavior away from ten blue links.

Thoughts?

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  1. To some extent, isn’t this also the Apple vs. Microsoft argument? Though, the choice of Google and Netflix will provoke a more restrained debate, Apple since Jobs returned as CEO is all about focus on a select number of products and platforms, while Microsoft has many branches seeking to be the new hub of profit beyond the OS/productivity suite.

    While I appreciate the results of a focused corporate effort, I am also glad that there are companies who’s core competency is strong enough that they can afford to put a long term strategy in place in other areas. The competition from Android is going to benefit the mobile industry, even if it loses out to the iOS, Windows Phone 7, or even WebOS in the long term. And in putting out a high quality open source platform, Google has moved mobile towards smartphones which feeds back to their core strengths of search and advertising.

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    1. Mike

      No one is arguing that the mobile industry is going to benefit overall from the emergence of Android OS. I think the question I am raising is a lot simpler — is Google’s expansion strategy too scattershot and with lot less coherence. In many ways if you look at how Apple has expanded — it has used its core and expanded at the edges and not gone into new businesses all together.

      It has always been a software company that made hardware and married it to great UX. They are doing the same on their three different computing platforms. Netflix has that core focus and are expanding from within.

      Google’s ITA purchase and expansion makes perfect sense, but even that is something one would expect they would build in house. Or maybe I am just expecting too much.

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      1. I think you have it Om.

        And getting back to the point of the original post – the question that was posed was why is Netflix stock doubling while Google is down 30% year to date.

        As you say, Apple is focused on software married to well designed and easy to use hardware with great user interfaces. And one of the great reason for their success has been the competition they faced: check out the Zune or anything Dell has put out there. Their phone competition is far better – but always in catch up mode – or paired with worse services.

        Now look at Netflix. They are a software company built to distribute movies on any platform surrounded by the worlds most comprehensive recommendation engine. They have enlisted the cooperation of the CE industry to imbed their software all over the place and their competition is Blockbuster (enough said) or the cable VOD platforms (better but still pretty terrible) The competition, is just plain inferior right now.

        Now look at Google. As someone commented the breadth of their vision is enormous – but so is the competition they face. In browsers, they are pouring money into a battle with Apple, Microsoft and Mozilla (which basically has workers hacking for free). In phones, they are in competition with Apple, Microsoft (well maybe not – anyone see a Windows phone anywhere anymore), Blackberry, Nokia, symbian (same thing) etc… If they do music there is enormous competition. In travel, they are taking on Expedia, Travelocity, Priceline, and a host of others. Except in search, where they utterly dominate – every single business line they have pursued, they come at as a distant competitor. So they are fighting multiple wars on multiple fronts against enemies who are well able to defend their turf.

        That’s a tough set of battles to win.

        My guess is that investors would like to see them focus on one or two of these fights – drag them out and see who has what share and then move onto the next front

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  2. Some of Google’s ‘loser’ businesses would merit larger market caps than all of Netflix. Babies alternate between growing fatter and growing taller. Google’s long strategy is in one of those growing-fatter phases.

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  3. Netflix are being rewarded for a few things, namely – (a) transitioning from physical media to digital as smoothly as one could imagine and (b) nimbly devouring all of Blockbuster’s business. Their growth will hit a hard cap a lot sooner than Google, though. I’m sure they’d love to place the outrageous bets that Google makes – very few companies have the scale, money and technical savvy to regularly do that, though.

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  4. If NetFlix had the kinda of incoming revenue stream Google does, they too would be doing that spaghetti test” of new ideas – Netflix simply cannot afford such a “luxury”.

    Also, post fails to factor in global recession’s impact on Adword budgets.

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  5. By any reasoning – Google is currently a “cheap” stock relative to its EV/EBITDA or FCF/Share valuation, and NFLX is “expensive”. What the market is saying right now is that NFLX has executed flawlessly and by bypassing cable companies – is poised to take over the complete VOD business going forward (which is not altogether inconceivable). The market is also saying that Google, while having perhaps the greatest business on earth in AdWords, is as at an inflection point in its growth prospects, and that nothing that they have done beyond advertising is moving the needle in the least. On top of this, the company is in a long protracted and expensive war with Apple on a few fronts, and Microsoft on another few fronts – which is great for consumers and not so great for investors. Contrast this with the NFLX competition, which consists of Blockbuster (currently going out of business), Movie Gallery (which just went out of business) and on the VOD side, a group of cable companies who operate what could be the worlds worst UI systems – and a “hobby” of Apple’s. NFLX is battling a hobby while Google is battling the core engine that drives 2 extremely large and well capitalized companies. There is also a takeout premium on NFLX that people forget about. Both Amazon and Apple have been rumored purchasers – and it might make sense for either to own the company longer term – again, unlike Google, who tends to buy companies (ITA for $700M) with not a ton of cash flow. Google also looks to be a growth laggard (how much more share in search are they going to get? did they just permanently shut the door on the worlds most populous country? is SEM and SEO growth at an end and is it search marketing that is going to win the day? does Google really have the lock on mobile search and monetization that it does on wired computers?) Compare this to the potential growth for NFLX (much lower penetration in the U.S. 0% penetration outside the US)

    Heck, I’m not saying any of it is justified – or that it will continue – but for now these, I believe, are the salient points

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    1. great post Harry.

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      1. +1 to that. Long response in a few :-)

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  6. The market is placing a huge future value in the Netflix business model in terms of how movies will be delivered in the future as the traditional video stores model shuts down forever and that is why Blockbuster is in deep trouble as Netflix will be the next Blockbuster in the movie rental business. Netflix has proven their model works and is indeed the future of how movies will get delivered to the consumer.
    Your are correct in that Google seems to be still stuck in the traditional search and advertising revenue model which faces stiff comeptition from the likes of Twitter and Facebook where most of the advertising is moving especially targeted advertising and this is I beleive reflected in the negative movement in Google’s stock price.

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  7. I don’t doubt Google’s ability to create another growth engine as its traditional search and advertising business peaks. Google TV alone could tap into a $60+ billion advertising market that could drive growth within the company for decades as the world continues to transition towards more digital and online forms of media.

    Netflix, on the other hand, doesn’t really have anything in the pipeline to drive growth once the streaming movie market fully matures.

    Competition is a good thing. It drives innovation and forces companies to create rather than stagnate. Google is in an extremely competitive market. Netflix, although currently driving much innovation, isn’t really facing any direct competition.

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    1. Netflix isn’t facing competition?

      They are going up against the cable monopolies and their VOD business. They are going up against Apple and Hulu.

      As an aside, Netflix is executing on its current and future business models — to me that gets them my respect.

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  8. I tend to view Google’s strategy more broadly than ‘search and advertising’. Microsoft has always seemed to dominate the ‘desktop’, Oracle wants to own ‘infrastructure’, Apple own’s the ‘user experience’…similarly, Google wants to own the ‘cloud’. I think all of their acquisitions seem to be in line if you view it from this perspective.

    Furthermore, as the web becomes increasingly ‘semantic’ in nature, I believe Google search and advertising will benefit as well.

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  9. I wouldn’t be too focused on stock prices. The stock market is a laggard when it comes to technological innovations and ability to penetrate markets. Google is the new kid on the block in comparison to Netflix in regards to the video business, but Netflix is the new kid on the block when it comes to the internet.

    I would instead focus on what innovations these two are pushing and how those are being received by the public. For example, when will Netflix and/or Google move from being merely distributors to content producers (or at least facilitators for content producers) themselves? It is content that will move the masses and cause the shift. And in this regards, Google has something that Netflix doesn’t. Very solid and long-term relationships with advertisers. If Google were to set it up so that content producers could easily tap into those advertisers to advertise on their shows as web-series-only shows and that are only available via Google TV, that will the be shot heard around the world. That will be the earthquake that will threaten to destroy the current Hollywood business model.

    And to just throw a ball in from far left field, I also wonder when eBay will do something similar. eBay could easily set up a way for advertisers to bid against each other to advertise on web-series. From 15-30 second spots to product placements to sponsorships. And if eBay doesn’t, perhaps Amazon will … or some company that will make this their sole focus that none of us have yet heard about but which is about the break the surface and make a big splash.

    The key to Web TV are advertisers. Some company is going to build a bridge between them and content producers and when they do, they alone might cause the death of broadcast and cable TV. Content producers are creative types. The bridge should enable them to completely own and control their creations while making the same (if not more) than they would selling (and giving all rights and control over to) the broadcast and cable TV networks.

    I’m afraid NewTeeVee is too focused on technology and not content when it comes to these things. It is and will be the content producers that will bring about the next shift in TV. The company that assists content producers in making that shift will reap the rewards. Those that try to hold onto the old business model will become mere tombstones.

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  10. Sorry to say, this is quite a short-sighted article. It fails to take a deeper look at Google and Netflix. It might appear that Google is not focussed. But make no mistake, Google is extremely focussed on advertising. It is at the core, an advertising company.

    Every step Google takes, every acquisition, every product is designed to strengthen its core business of serving ads. In its pursuit of dominance in the ad business, it takes amazingly long-term, breath-takingly broad and audaciously bold steps.

    When it wants to serve ads on mobile phones, it doesn’t merely create a mobile version of Adwords and Adsense. It creates an entire mobile operating system. When it wants to serve ads on TV screens, it doesn’t merely target ads at specific programming. It creates an entire TV platform.

    When Google TV becomes as much of a success as Android, Google’s ads could be served alongside Netflix’s streaming content. IMO, Netflix could be unseated from its position in video content delivery much more easily than Google can be moved from its dominance in search and advertising.

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    1. Sorry to say that this reply is a bit..well, not really focused. If you had a million, you’d rather invest that in Netflix (at least on hindsight) than Google. Doesn’t matter who has the tech smarts. What matters is who gives you more returns. At this moment, due to a plethora of reasons mentioned already, that is Netflix and not Google.

      Stock market is not a church. Make your hay while the sun shines. And move on.

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    2. AS

      You are right about one thing — Google does a great job of its current search and advertising business and bolstering it, especially through acquisitions. It is the other stuff — the Google TV nonsense — that doesn’t make sense.

      Buying Doubleclick or ITA makes perfect sense. But that is going out and buying companies — what about internal developments

      What would have made perfect sense if they built Kayaks and other such vertical search applications in house.

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