Why Netflix Won’t Make Cable Go Away

 Big Picture Stuff, Stocks  15 Responses »
Jan 312011
 

It seems like everybody on the PF blog community is touting the wonders of Netflix these days and  I don’t really blame them. Netflix is a pretty cool service. You can pay $8 a month and watch all sorts of stuff, whenever suits you. If you use the service through your gaming console or DVD player, you can watch it on your big screen. Most American internet service providers let people use as much data as they want- meaning they can stream video to their heart’s content. I’ve read estimates that 20% of U.S. prime time internet bandwidth is used by people watching Netflix.

Netflix recently introduced their streaming service in Canada. I convinced a friend to preview it, and I have to say I’m not impressed. The selection isn’t very good, I could only find a few shows I’d want to watch. The movie selection isn’t much better, as I don’t consider 2008 movies to be new releases. So far anyway, color me unimpressed.

Will Netflix cause cable to go away forever? We had this discussion at bowling the other night, with everyone (except a certain contrarian dude) predicting the demise of cable. Should I go sell my shares of Shaw Communications in some sort of frantic? Nope, here’s why.

Somebody Has To Pay For Content

You can whine and complain as much as you want about how much actors get paid, but the fact remains that somebody has to pay them. TV shows make money by selling ads during the commercial breaks. If everybody stops watching, ads sell for less, which makes TV that much less profitable to make.

Want to know why reality TV is so popular? Networks push it down our throats because it costs a ton less to produce. Paid actors are replaced with contestants who are happy to work for free for a shot at a big cash prize. Complex sets don’t have to be built, few writers have to be hired and the only guy paid to act is the host.

Since so many people are skipping commercials entirely, networks have responded by using product placement to get those logos in front of your eyeballs. I find it ironic that certain people will complain about product placement, while replacing their cable with Netflix.

Sports! Sports! Sports!

All you Netflix lovers, do me a favor. Try to watch the Superbowl on Netflix next week. What’s that? You can’t?

Just about 50% of the population is men. And as a group, we generally enjoy our sports. Sports continue to be some of the highest rated programs shown on TV. Big events like the Superbowl or World Cup Final are watched by hundreds of millions of people. Cable or satellite are the perfect delivery systems for sports and that’s not about to change anytime soon.

Netflix May Be Getting More Expensive Soon

One of the big perks of Netflix is the cheap price they charge for streaming video. Unfortunately for Netflixers, the era of super cheap streaming may be coming to an end sooner rather than later.

As detailed in this massively good piece on Seeking Alpha, Netflix got an incredibly good deal with some of their deals for streaming rights. They paid a measly $25 million a year (to a company called Starz) for the rights to stream some 2500 movies from Sony and Disney. This works out to less than $0.15 per subscriber per month. This contract expires in late 2011, with no chance at being renewed at current levels.

Netflix just stuck a one year deal with Disney to stream previous seasons of ABC content for $150-200 million. Current seasons will continue to be shown on Hulu, which Disney owns a piece of.

The bottom line is that Netflix isn’t fooling anyone anymore when it comes to the value of streaming video. Content providers will charge the company handsomely, which means either margins will be put under pressure or prices will be going up.

Content Is King

A quick glance on Netflix gives the user access to so many series of TV shows and movies that the user thinks they’re in content heaven. They go nuts for the first few months, watching all their favorites and discovering new stuff to watch. The question is just how long the user remains enthralled with the service.

If you go back to that Seeking Alpha post I highlighted, you’ll see Netflix is very weak when it comes to popular content. In the U.S., only 20 or so of the top 100 shows on cable are available to stream on Netflix. Movies are even worse, with less than 20% of the most popular available to stream. When it comes to streaming, Netflix’s content is weak.

Bandwidth Problems

As I mentioned above, estimates put Netflix users using 20% of total internet bandwidth during prime time hours. Just how long are internet service providers going to put up with that?

Faster internet is coming in a few years. Until then, Netflix users are simply using too much. Canadian ISPs have long had bandwidth limits, look for their American counterparts to start imposing their own restrictions.

Bottom Line

There are going to be a lot of people who maintain their Netflix subscription. Most of these people are going to keep cable as well. Yes, there will be people who will drop cable for Netflix. Cable and satellite companies can always respond by increasing prices for those people left.

Many people will join Netflix, use the heck out of it for a few months, slowly lose interest, and then punt the service. In fact, over 30 million U.S. households have already cancelled their Netflix subscriptions.

Netflix’s streaming service is still a pretty cool service. At the end of the day though, cable will win out.

 Posted by Nelson Smith at 12:15 am

Saturday Morning Dump- Link From Zelda

 Saturday Link Dump  5 Responses »
Jan 292011
 

So there I was, sitting at the hockey game, talking to my friend and minding my own business. Suddenly, the PR guy for the hockey team came and sat down beside us and invited us to play off against each other in the intermission shoot-0ff. Apparently my buddy promised his wife he was going to phone her in the intermission, so he couldn’t. Worst excuse ever or what?

I went out onto the ice, against a new opponent, who I will refer to as “Dr. Evil.” Our competition was to shoot the puck from the hash marks to the center dot, with the closest winning an autographed Team Canada jersey.

My first shot has great weight, settling about 3 feet to the right of the center dot. We exchange forgettable shots until Dr. Evil is down to his last one. He shoots… And the puck settles within a foot of the center dot. Dammit.

I did get some cool Royal Bank swag for finishing second, so that was alright.

Random Thing That Irritated Me This Week

One of the teachers that I bowl with informed me he’s a vegetarian. Here’s a summary of the conversation:

Me: So you don’t eat any meat?

Him: Nope

Me: Not even chicken or fish?

Him: Nope. Well, I eat fish…

Me: Then you’re not a vegetarian!

Him: Yeah I am!

Idiot

Random Thing I Enjoyed This Week

As I mentioned before, my car decided to be a moron and die in my driveway. I borrowed my Grandpa’s car (which is good, he shouldn’t be driving anyway) and kinda forgot about the whole thing.

On Tuesday I figured I should get the thing to the shop to see if they could at least get it going again. It was a nice warm day, around plus 5 at the time. I figured I’d give it one last start before conceding defeat.

It started! Total repair bill: zero.

Its days are still numbered though.

Song I Like And Therefore You Should Too

I have almost 1400 songs in my ipod. I am listening to it right now. Let me skip to the next song and see what the random ipod wheel of fortune gives us:

My favorite Christmas song, only a month too late! You’re gonna want to make sure the kiddies are away from the speakers when you play this one. It describes Santa going crazy and killing all the elves and reindeer. Really gets ya in the Christmas spirit!

Simpsons Quote Of The Week

You asked for it, so I’ll deliver. More Milhouse!

“I’m not a nerd Bart… nerds are smart.”

Sports You Should Watch This Week

Turns out that I was very wrong by telling you to watch the NHL All Star Game last weekend, since it’s this weekend. Let that be a reminder to all of you to never believe a word I ever say about anything. I watched the first hour or so of the fantasy draft and it was as boring as reading a blog post about credit reports. Is there some sort of rule that hockey players need to have the personality of a waffle?

Even the Aussie Open was a let down. Both Nadal and Federer are out? Boring! I only care when those guys play.

I don’t know. Watch the Pro Bowl or something. Maybe there are some reruns of Mythbusters on. All Star games are stupid.

Blogging Snack of The Week

Looking for a snack to keep you fueled while you blog/read blogs? We’ve got you covered.

I have a bit of a sweet tooth. Desserts are probably the greatest thing since sexy redheads that I bowl with. Because of this, I usually don’t buy them in large quantities because I know I’ll eat the whole thing in about a minute and a half.

I broke my own rule by buying ice cream. It wasn’t just any ice cream though, it was PC Loads of Peanut Butter Cups. It’s chocolate and vanilla ice cream, mixed with peanut butter and TONS of peanut butter cups. Plus, your local Loblaws store probably sells it for about 5 bucks.

It’s so good I’d probably lick it off a hobo.

Babe Loosely Related To Finance

Heyden Panettiere has very little to do with finance, but she is quite lovely. When it comes to this category at least, the little head beats the big head.

Apparently she’s big into animal rights and stuff, so if that does it for you fellas… Then you still have no chance with her.

Oh Right, Time For Links

Sandy from Yes I Am Cheap weighs in with The End of Credit Cards Is Coming. As a guy who enjoys gadgets, I’d definitely pay for stuff using only my cell phone.

Dividend Growth Investor called Proctor and Gamble The Greatest Dividend Stock Ever. I’m not sure I agree with it being the greatest ever, but he does a great job on his dividend analysis.

Million Dollar Journey is giving away a book from Derek Foster called The Idiot Millionaire. Catchy title, but the only idiot millionaires are lottery winners, most professional athletes and Britney Spears.

Rachelle from Landlord Rescue reviewed a book about renting to own property. She isn’t impressed. I like it when other people read crappy books, then all I have to do it read the review.

Some bastards made Money Rabbit cry. If I was dating her, I would totally beat them up. Since I’m not, I guess you’ll just have to settle for reading about it.

Saj Karsan shares his messenger conversations with fellow value investor Frank Viosin. Let’s just say they’re not talking about what normal people talk about on messenger.

Carnivals I Was In This Week

I was in the Carnival of Personal Finance over at Living Richly On A Budget

I was also in the Wealth Builder Carnival.

Last but not least, I was in the Totally Money Carnival at Budgeting In The Fun Stuff.

Have a good week everyone.

 Posted by Nelson Smith at 12:15 am

What’s The Big Deal About Ads?

 Big Picture Stuff  8 Responses »
Jan 272011
 

Regular readers will know there is a particular personal finance/frugality blog I don’t like very much. Since I’m in a good mood tonight, I won’t mention that specific blog by name. Recently, the blog in question has published a couple of posts on the deluge of ads that are pushed down our throats, one about a Toyota ad and the other about product placement in movies.

If you’re too lazy to click through to those posts, let me sum them up for you. Ads are bad because they influence people to buy things they don’t need. Buying excess stuff forces people into debt, which leads to all sorts of problems. An especially bad ad is a particular one by Toyota, since it implies that children can force their parents to choose a certain brand of SUV.

If you did bother to click through to that particular blog, you might have noticed something. Along the right sidebar, there are ads. If you read this blog via RSS like I do, you’ll probably notice the ad at the bottom of each post. This particular blogger is so big that he makes his living blogging. What do you suppose pays for that? Hint: it’s not good intentions.

A Little History

I’m not sure this story is true, and I can’t remember where I heard it, but let me tell it to you anyway.

Back in the late 1800s, one of the pioneers of newspaper advertising was the owner of a department store in Pennsylvania. When asked about his advertising he remarked “half of my ads work and half don’t. My problem is figuring out which half work.”

As time went on, all a company had to do was produce a decent product, advertise it through existing channels, and public demand would be enough to take care of the rest. Because of this, one or two dominant players emerged in all sorts of industries and products.

As North America became more affluent, disposable incomes went up. From industry’s point of view, this meant they could introduce more products that people could afford. 30 years ago, we didn’t have cell phones, very few had PCs, and nobody had ipods or GPS devices. Even video games and cable tv were in their infancy. In my short lifespan, I’ve seen all sorts of technological innovation. I like all these advances; in fact, now that I have them, I don’t want to give them up.

The Other Factor

The other factor that influenced our consumerism is debt.

All sorts of types of credit are relatively new. Credit cards have been around for years, but didn’t really get popular until the 1980s. For the most part, store credit cards have an even shorter history. 50 years ago, very few people financed a car, and nobody financed consumer purchases like furniture or electronics.

As competition heated up, both producers and sellers of products needed a way to entice the consumer to buy their product, rather than the competition’s. As the field of credit matured, competition emerged there, leading to 0% credit cards, subprime mortgages, and all sorts of other enticements for a consumer to sign up for credit.

The credit bubble grew and grew, eventually popping in 2008. Just a scant 3 years later, credit is flowing almost as freely as ever. Even though it looked bad at the time, the whole crisis of 2008 is looking more and more like just a hiccup in the growth of debt.

People Aren’t Idiots

Well, some are. You’re definitely not though. You read this blog.

Unless you’re an old timer, you’ve been bombarded with ads your entire life. You’ve been exposed to everything from the most subtle to the glaringly obvious. You’ve seen celebrities shill anything and everything. You’ve even seen ads pop up at almost laughable places, like at eye level of a urinal.

(No, I don’t need to see a preview of some Ashton Kutcher movie while I pee. Thanks for that though.)

If you’re anything like me, you’ve developed an incredibly thick skin when it comes to ads. We’re aware of their presence, but have largely grown immune to their advances. Of course, advertisers have responded, by not bothering to actually sell their product anymore, rather selling an image and attitude. Want to be cool? Buy this.

I guess that’s the crux of people’s problems with ads. They’re outraged that marketers would try to sell us a better reality, at the expense of our own reality. Want to be hip? Buy an ipod. Want the ladies to throw themselves at you? Buy Axe body spray. Naturally, I don’t need Axe for the ladies to love me.

Anybody with a reasonable level of intelligence knows that any individual product isn’t going to have a huge impact on our lives. The product will probably make our lives easier in some small way, but that’s it. People realize this. Not everyone is a mindless buying machine.

The Real Problem

Buying stuff doesn’t make people poor. If you spend all of your money every week and that’s it, you’re hardly screwed. Sure, you’re not getting ahead, but basic needs are being met, along with probably a few wants.

What really screws people up is when debt is added to that equation. Once they start spending more than the earn, the downward spiral of debt begins. You all know what happens when too much of that happens. So is buying stuff the real culprit here?

Who’s at fault if you spend too much money or finance something on a credit card? Is it the advertiser, for making you want the product so badly that you’ll make a bad decision to get it? Is it the creditor’s fault for giving you such easy access to credit? Or is it the consumer’s fault for making the decision they know is a financially bad one?

Conclusion

People who are anti-ads place the blame squarely at the feet of the marketer or creditor. If they didn’t create the desire they argue, the purchaser wouldn’t buy it. Since competition is fierce, they feel marketers are resorting to dirtier and dirtier tricks to sell their products. How dare they!

There’s only one person to blame if you buy too much crap, and that’s yourself. There are all sorts of ways to purchase stuff without going into debt or forcing financial hardship on yourself. Someone can choose to largely ignore ads, like most of us already do.

And then maybe a certain blogger can realize the hypocrisy of his stance against ads.

 Posted by Nelson Smith at 1:00 am

Mortgage Basics #1: The Application Process

 Mortgage Basics  6 Responses »
Jan 262011
 

For the next 10 Wednesdays here at Financial Uproar I’m going to post a series of articles on mortgages. Every step of the process will be covered from the application to qualifying to tips and tricks to save money on your mortgage and everything in between. To read all of these just click on the category Mortgage Basics.

So you’ve decided to buy that dream house and to do so, you need a mortgage. Luckily for you, as a former mortgage broker I know a thing or two about mortgage financing. Whether you use a mortgage broker or your local banker, the application process will be pretty much the same.

The Initial Meeting

Chances are you’ll spend that initial meeting nervously waiting for the lender to approve you. You give the lender all of your information and they spend some time inputting that into a computer. Then you give them the information on the house you’re buying. At some point the lender pulls your credit report as well. Once all this information is entered into the computer you’re either approved (yay!) or denied. (boo!) The process seems very simple on the surface. Too bad it’s really much more complicated.

Even if you get approved after that first meeting that approval is only conditional. The lender requires proof of everything you’ve just told them. If you’re dealing with your bank some of this verification comes easy; after all, they can just check your account to see whether you have as much money as you say. Other verifications are a little harder and might require some hustling on your part to get these things done.

Documents You’ll Need

By the time you’re done with the whole process it might feel you’ve given a book worth of documents to your lender. Types of documents needed can be divided into 3 main categories: Income statements, down payment statements and house statements.

Income Statements

The lender is looking for proof that you make as much money as you previously told them you did. If you’re a salaried employee the lender will typically ask for a letter from your employer verifying you have the position and salary as stated on the application. The lender will also usually call the person signing the letter to verify that it was indeed them who signed the letter and that all information contained in that letter is correct. Besides the employment letter, a lender will typically ask for an applicant’s last 2 pay stubs.

What if you’re not a salaried employee? If you’re commissioned salesperson or a business owner, lenders will usually ask for the last two Notice of Assessments (NOA) from the Canada Revenue Agency (CRA). The lender will then take a two year average of the NOAs and use that figure as an applicant’s income.

What happens if a borrower doesn’t have two years of being a business owner? There are ways to get around this rule, but for the purpose of this discussion the borrower is basically screwed. Getting a co-signer is pretty much the only way around this rule.

Down Payment Statements

The lender is looking for the down payment to be in an account that is either sitting in cash or is easily converted to cash. The lender is also looking for the money to be sitting in that account for a minimum of 3 months. Besides that, the lender is also looking for a minimum of 1.5% of the purchase price to be available for closing costs. Stay tuned for when we discuss down payments in much more detail.

House Statements

First of all, the lender requires a copy of the contract the borrower has signed to purchase the house. This contract must be signed by both the buyer and the seller and be filled out correctly. The lender is also looking for all the information about the house. (year built, square feet, etc.) An MLS feature sheet provided by the realtor will be fine for this. If the deal requires an appraisal then usually the lender will call in someone to verify the house is worth no more than the borrower paid for it.

Even More Paperwork

Do you think that sounds like a lot of paperwork? For special situations there is even more paperwork required. If a parent receives or pays child support then additional documentation is required. Sometimes a paid debt will still be marked as open on a borrower’s credit report, meaning the lender needs proof that it’s paid off.  Proof of fire insurance on your new pad is also needed. There are potentially dozens of extra proofs that a borrower could be asked for, but typically only a few are ever relevant to someone’s personal situation.

Conclusion

Once all the proper paperwork is in, the lender submits them to an underwriter, the person who is ultimately making the decision to approve the paperwork and the mortgage. Usually an experienced broker or loans officer won’t submit a form they know will get rejected, so once paperwork is in that’s usually a good sign. Even the best organized deal will still take a few days from application to ready to go, with most taking almost a week. Being an organized borrower will take stress off both yourself and your lender, so make sure you’ve started getting these documents

 Posted by Nelson Smith at 12:15 am

My Teenage Years: Awkward, But Productive

 Personal Finance  16 Responses »
Jan 242011
 

Let’s flash back about 10 years, back when I was 16.

Like every 16 year old guy, I wanted to get a car. I imagined just how free I’d be. I could go out to the golf course whenever I wanted. I could drive to my buddy’s house across town, instead of having to depend on him to make the trip over to my house. I could even take girls out for dates, conveniently forgetting that talking to girls scared the crap out of me. Yes, I was going to be the man.

I sat down one day and started to crunch the numbers. There were so many expenses, but undaunted, I crunched on. There was the cost of the car, a number I conservatively set at $3000. Insurance was a minimum of $250 per month since I was a rookie driver living in a province where there were no government controls on auto insurance. On top of that, there was gas and repairs. To summarize:

Car: $3000

Insurance: $3000

Repairs: $500

Gas: $500

Registration: $100

Depreciation: $300

Total cost year 1: $7400

Total cost per year after: $4400

I was just starting to get into investing at this point, so I was familiar with compound interest. I started to crunch the numbers. What if I took that $7400 and invested it, earning an 8% return and kept compounding it until I retired at age 65?

I’d have $321,362! As a 16 year old kid working at the local Dairy Queen for $5 an hour, this seemed like all the money in the world.

I continued the thought process. What if I delayed getting a car for 5 years? How much would I end up with?

Year 2: $176,926

Year 3: $163,820

Year 4: $151,685

Year 5: $140,449

The numbers astounded me. If I didn’t get a car, I’d end up with a nest egg of $954,000. If I added just $1000 to the total each year or assumed a 9% return I’d end up a millionaire.

Never Underestimate Compound Interest

A common refrain in the PF community is the lackluster job our schools do teaching kids about finance. While I agree my financial education was lacking, I did learn about compound interest, as well as other basic topics. Because I learned interest compounds exponentially, I knew starting earlier was better than starting late. I was finally figuring out why my Dad was pushing me so hard to save my money.

Most teenagers would choose to get the car anyway. A car today would trump a million dollars down the road for most teens; after all, they’ll have plenty of time to make money as adults. If parents took the time to crunch the numbers with every teen that wanted a car, maybe we’d have more teens who choose to walk and invest for long term growth.

Small Sacrifices Can Make You Rich

If you start young, small sacrifices can have a huge impact on your finances. I managed to do without a car until I was 24, I like to explain to people I was funding my retirement by doing so. I lived in my parents’ basement until just after I turned 25. I saved tens of thousands of dollars by not getting my own apartment.

What excess can you cut from your life? Just about every single person can save money, it’s just a matter of sacrifices. I didn’t take a day off work for a holiday for 7 years. I wore underwear with holes in them until they could be replaced as a birthday gift. I worked nights, because it paid more and because if I slept during the day I’d spend less money. I could list a hundred more examples of things I did to maximize my savings because I was serious about becoming rich.

Are You Actually Serious About Wealth?

Perhaps my example is a bit extreme. I didn’t go to college, I worked directly out of high school. A student who lives far away from University can’t really live in their parents’ basement. I get all that. The point is, I was serious about growing wealth, so I made sacrifices in my life. If you’re serious about it too, you’ll find excess fat to cut from your budget.

And if someone isn’t serious about it, that’s okay too. They can muddle along, paying interest on credit cards, financing vehicles and the like. If that’s the path they choose, then they can’t complain about having a lack of money. You can’t have it both ways.

There is a very simple way to get wealthy. All you have to do is spend less than what you make, for a long period of time. For various reasons, people just aren’t patient enough to do it.

 Posted by Nelson Smith at 12:15 am
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