Netflix: An Emerging Monopolist?

For years it was interesting to observe the dominance of UPS, driven by a "network" effect. This effect was simply that the "network," that is, the entire UPS system, grew in value as each customer was added to its network. The reason for this was simply that the huge capital costs of the UPS delivery system was amortized more effectively with more customers. This cycle of increased profitability allowed for an expansion of the network and the acquisition of more customers. The beauty was that the addition of each customer did not cost as much as the value added by that customer. Despite having a union whose motto is "you make more, we take more," UPS grew solidly and appeared unstoppable.

These "network" effects are on steroids in reviewing the Netflix dynamics. The internet has removed so many frictional costs and barriers that scalability is possible at levels I previously could not imagine. Netflix will pass 200 million subscribers this year after passing 100 million only three years ago. Those are truly astonishing numbers. Further, nearly 30% of global internet traffic is utilized by the viewing of Netflix product. That's even more amazing. If, like UPS in its capital costs, Netflix had to build out the percentage costs of the internet utilized, then it would be so capital constrained that these monumental growth rates would be unachievable.

However, by piggybacking on the existing infrastructure, utilizing all of the improvements, Netflix is able to scale up rapidly and dedicate its revenues to the acquisition and development of content. Its rapid scale up has allowed an advantage that means that people go to Netflix to watch what's available as opposed to the other services where people go to watch a specific show. This dynamic is even more forceful than the old days when viewers were limited to ABC, NBC and CBS. It is difficult to see how others can compete and how the flywheel of this "network" effect is stopped.

If Netflix were defined as a "monopolist," traditional anti-trust would not apply. Standard Oil's products were more expensive to the consumer but more favorable to the suppliers. Under John D's "cooperative capitalism," the oil and gas industry thrived. However, in a world of Netflix, the power shifts to the favor to the consumers and the suppliers, the manufacturers of content, are squeezed. A quick review of content providing companies reveal astonishingly low valuations. Anti-trust laws are pro-consumer. Will that focus change as this industry is Netflixed?