• Rethinking the Netflix Regency Billboard Purchase

    Netflix is a b-to-c company growing 35%/year in an unregulated industry where success is dependent on (1) developing great entertainment content and (2) maintaining a great consumer interface.

    Why would Netflix want to spend $150 million and dilute management focus by entering a regulated b-to-b industry which is growing 3%/year?

    The thesis for the investment has to run something like this:

    Having a huge Sunset Strip billboard presence is a strategic move for Netflix.  It’s mindshare, not market share.  It announces shows and builds visibility in the community where producers, actresses and actors circulate.  Look at this twitter from actress Christy St John.

    But why not just rent the Sunset Strip billboards forever?  Apple does that with an iconic billboard in San Francisco.  Insider calculates that for $150 million, Netflix could have rented the 32 Sunset Strip faces for almost 15 years at a rent of $25,000/month without the headaches and distractions of being an owner.

    Insider suspects that Netflix tried to work out a forward rental deal with the out of home companies and was unable to come to terms so decided to buy the billboards.

    Insider remains skeptical about whether this is a smart use of Netflix capital.  Every investment has an opportunity cost and putting $150 million into the Regency billboards means Netflix can’t invest in other projects.  Insider has heard that the purchase price was 20-30 times billboard cashflow which works out to a return of only 5%/year on the transaction.  But the Netflix execs are choosing mindshare over ROI.

    What’s your opinion of the Netflix transaction?  Let Insider know using the form below.

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