It’s popular to compare the current weakness in tech stocks to the so-called Dot-Com Bubble.
Don’t … because it’s not. The fallout is the beginning of the era of scale.
Executives at Netflix (NFLX) announced Wednesday that the streaming giant is partnering with Microsoft (MSFT) to build a new ad-supported subscription business.
The deal marries the world’s largest digital media business with the biggest data center network.
Microsoft wasn’t exactly the front-runner for Netflix’s new business. Alphabet (GOOGL), NBCUniversal, a division of Comcast (CMCSA) and even Roku (ROKU) have been bandied about as contenders for a business that could easily stretch into the billions.
Arguably, each of those firms is more attuned to the fast-changing world of digital ads. Their weakness is data centers.
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Netflix is the only global media network in the world, yet its potential is still untapped. The company, based in Los Gatos, California, has 221 million subscribers and customers in 190 countries.
There’s a real opportunity to grow the business substantially in emerging markets where subscription costs have been prohibitive. In the digital era, reaching those customers requires a big cloud platform, with an extensive data center network.
While Amazon.com (AMZN) may be the biggest cloud provider by revenue, Microsoft is the king of data centers.
The company, based in Redmond, Washington, operates 200 centers in 34 countries, with 165,000 miles of subsea, terrestrial and metro fiber-optic cable. And the company plans to open an additional 50 centers each year for the foreseeable future, according to its corporate blog.
In the end, Netflix chose platform scale over digital ad expertise. This distinction is important.
Pundits wax poetically about the 2022 tech-stock crash being just like the bursting of the internet bubble two decades ago. This is lazy and untrue.
The bubble was in finance. Junior tech companies were merely the vessel.
Venture capitalists and investment bankers, fueled by unprecedented amounts of cheap money, pushed too many small companies into the public markets.
This process of pumping and dumping firms that had no chance to scale ultimately created hundreds of new billionaires in the VC and financier communities. It also left new investors (mostly new ones) holding the bag.
Many highfliers from 2020 and 2021 have fallen 80%–90% from their highs. These stocks are never coming back. Some will burn through cash and go bankrupt. Others will be forced into mergers, or swallowed whole by the big platforms.
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But the companies pushed by the VCs never had a chance. Their businesses are merely features that could easily be replicated then given away for free by the likes of Amazon, Google and Microsoft.
Scale Is Everything … and It’s Just Getting Started
The cloud is a $1 trillion opportunity, according to a report from McKinsey.
Like never before, the opportunity for investors has so much money accrued to so few players.
Don’t buy in to the hype from VCs and investment bankers trying to hawk initial public offerings. Only a handful of businesses have the scale required to win that business over long term.
Microsoft won Netflix’s coveted ad business because it has the kind of scale required to move targeted digital ads globally. The only competition was Amazon and Google.
These scale advantages are playing out in other parts of the tech landscape, such as chips, consumer electronics and biotech.
Best wishes,
Jon D. Markman
P.S. Martin and early stage investor Chris Graebe are going on the air to show how staggeringly profitable private market deals can be … and how to get first access to one private deal for Weiss Members this July. If you’d like more information, check this out.
