The scam of Netflix. [NFLX]

Netflix is a scam.  The reasons for this are simple enough but all you have to do is look at the chart to know that at some point the exponential and thus unsustainable euphoria will peak and then go into collapse.

In order to understand the Netflix scam, you have to understand human nature.  First off, the herd knows a good deal when it sees one.  Netflix has put out a lot of original content and a lot of it is really good stuff.  When you get this kind of thing commercial free for $10 per month, that's what we call a good deal.  And so as Netflix has continued to product good content, those willing to pony up the $10 per month have increased.

This all seems so easy.  Why hasn't anyone done it before?  Clearly if you make a good product at a great price, the herd y will come.  After all, Suddenlink Video on demand is $7 per movie.  So $10 a month for a bit more casual entertainment with the occasional mega winner winner like Breaking Bad is just a fantastic deal.

OK so here is why: making all of this content is expensive.  Talented people do not work for free.  Far from it.  And so Netflix has been paying up for talent.  But their income cannot afford such talent so they are paying for it with debt.


This is how the Netflix scam works.

Netflix is providing a better product than they are charging for (AKA a good deal) and that is driving grown.  But it is debt based growth and that is why NFLX is doomed to peak and then go into freefall collapse at some point.  Debt based consumption ALWAYS provides more consumption than the consumer can actually afford.  That's why they call it debt.  The hope is that the consumption will eventually take off and the debt will be paid down.  But that is never going to be the case with the entertainment business.  Customers of this business do not buy content at any price; they are cheapskates looking for a great deal.  As long as Netflix is able to continue racking up debt in order to provide a better experience than a $10 monthly fee should allow, Netflix viewers will continue to rise.  But at some point the banks are going to have too much on the line and they will not only begin to demand some repayment but they will also cut off future loans.

At that point NFLX will go down in a fiery ball.  Why?  Because when faced with the reality of having to repay some of these loans instead of just being allowed to rack up endless frivolous debt (and making entertainment content is certainly frivolous from an economic standpoint), NFLX is going to have to reduce their prices significantly while curtailing the new content drastically.

When people see that not much new comes to Netflix sometime in the future not only will new subscriber rates collapse but so will the existing subscriber base.  I know that looking at the stock price and listening to Wall St chatter about how great NFLX is makes economically ignorant people believe in economic fairy tales.  Thus, my words are blasphemy today.  But mark my words:

• interest rates will rise
• NFLX will have a harder time getting credit
• NFLX performers will ask for more money
• The amount of new content will collapase 
• NFLX subscriber growth will collapse 
• NFLX subscriber base will collapse
• NFLX share price will collapse

Debt based consumption always looks like a miracle but it always ends up the same way.  Always.   NFLX is eventually doomed.  Maybe not today, but I give it no more than 3-4 years before the shares are trading at $10 again.

Now those of you who are laughing, remember that you laughed.  And when I come back in 3-4 years to remind you about how you were warned, just remember that you were laughing when you should have been paying attention.  Just one of life's little lessons.