Netflix’s Big Mistake

In a very interesting—and telling—recent exchange, investor Whitney Tilson explained why he’s shorting Netflix—and Netflix CEO Reed Hastings publicly replied, defending his decisions, promising returns.

What’s interesting about the exchange isn’t the fact that two giants went head-to-head publicly. Rather, it’s that two giants went head-to-head publicly and revealed just how arid, barren, and downright lame our economy’s overlords’ way of thinking about advantage, superiority, and value really is.

Consider how sharply both frame the discussion purely in yesterday’s terms: the industrial age conceptions of “competitive advantage”, achieved by “beating” the competition, and “creating value”, for shareholders (and all the attendant biz 101 jargon that goes with it: “COGS”, “opex”, etc). What’s missing? There’s not a single line from either about, well, Netflix creating authentic economic value, mattering, doing meaningful stuff. Just about the same old tired, threadbare notions of financial value, dominance, and value extraction. Yawn—it’s the thinking behind the ponziconomy, writ small.

Neither seem to have the tiniest morsel of a shred of a clue that if you want to achieve superiority in the 21st century, there’s no poorer way to begin than the above. That’s because the 20th century’s sources of advantage—scale, brands, cost advantage, market share, “differentiation”—are, in today’s radically altered economic world, sources of disadvantage (hi, Detroit, Wall St, big pharma, and big food).

Advantage in the 21st century is constructive, not just competitive. There are five sources of constructive advantage (each discussed in detail in the Manifesto): loss advantage, responsiveness, resilience, creativity, and difference. Netflix’s overlords aren’t just failing to strive for a single one of these—reading Reed Hastings, it’s pretty clear that they’re not even beginning to think in 21st century terms. Rather, they’re reliant on brand, scale, and market share—all of which are already starting to limit them from creating thicker, more enduring value (as real costs rise, and marginal returns diminish). When a boardroom can’t even perceive the contours of the competitive landscape, achieving superiority becomes something less than a game of chance. My prediction’s simple: a player like Apple, laser focused on resilience and creativity, will be able to disrupt this ponderous, info-poor, coordination-intensive, diminishing returns-focused model with ease, grace, and fluidity.

Netflix’s big mistake isn’t what Whitney Tilson suspects: more deeply, it’s that Netflix is bringing yesterday’s ammunition to today’s battle. And what that logic suggests is that, in the Street’s jargon, perhaps it’s time to not just “short” Netflix—but Tilson as well.