On March 10, 1998, the first DVD from a brand-new website called NetFlix.com was dropped in the mail. The movie was 1988’s “Beetlejuice,” from director Tim Burton with a cast that included a teenage Winona Ryder, who nearly 20 years later would be tapped to star in the series that has become one of Netflix’s signature original titles, “Stranger Things.” Last year, Burton directed the first four episodes of “Wednesday,” a hot property that turned Jenna Ortega into an overnight star.
Those connections are just a few of the full-circle moments Netflix has marked in recent years as the upstart has become the establishment. The Silicon Valley-born company barreled into Hollywood a decade ago in search of shows that were edgy and distinctive and maybe even expensive.
Ten years after “House of Cards” launched Netflix into its 2.0 phase of growth, the company is settling into a new role as the leading incumbent streamer. It’s defied the many naysayers and turned the corner into profitability. Now the challenge is to keep a tight grip on the crown in a global marketplace that is more crowded and cutthroat than ever.
To get there, Netflix is pursuing a flurry of longterm growth initiatives that support its central mission: to draw new customers and encourage existing subscribers to spend time regularly on the platform. In the past 18 months, the strategy has sent Netflix down previously uncharted paths, including bringing advertising into the mix after vowing for years to keep sponsor messages from crossing Netflix’s virtual door, and using technology to crack down on password sharing among its members. Also, the streamer is experimenting with hosting live events, such as Chris Rock’s big return to stand-up, and, starting next year, the annual SAG Awards. Netflix is also pursuing ancillary arenas such as licensing, merchandising and offering paid IRL experiences like those based on “Squid Game” and “Bridgerton.”
Simply put, Netflix is at an inflection point, says Michael Nathanson, senior analyst at MoffettNathanson Research. He sees two overarching issues that will be key to the company’s growth in the short term. “It’s really about one thing: Can they re-accelerate revenue growth with the crackdown on password sharing and advertising,” Nathanson says.
The stepped-up activity, which aims to harness the streamer’s 232.5 million-subscriber platform, comes at a time when there’s been a co-CEO shuffle, with founder Reed Hastings stepping back and Netflix veteran Greg Peters joining longtime content chief Ted Sarandos in sharing the chief executive reins.
Sarandos sees the burst of activity as “futureproofing” for a maturing company. “Ten years from now, people are going to spend a bunch of time watching movies, TV shows and playing games — I don’t know in what order, but I’m pretty confident they’re gonna be doing all three of those things,” Sarandos says. “When we looked at the game business, it seems to have a lot in common with what we’re doing now — world-building, storytelling and technology. For us, it seemed like a natural thing to build competence in.”
The key challenges for Netflix in this next phase revolve around how to continue boosting the top line as subscriber growth in its most mature markets (chiefly, the U.S.) has stalled. Among its targets for new areas of revenue: a lower-cost advertising-supported tier and an “extra member” subscription option to monetize rampant password sharing. It’s still too soon to know whether either of these will dramatically move the needle, and there are plenty of possible pitfalls. In advertising, Netflix is a newbie. But it’s jumping into the big leagues by making its first upfront presentation to buyers in New York on May 17.
(The streamer had planned a live evening event for media buyers at the Paris Theater, which Netflix put under long-term lease in 2019. But that plan was scrapped at the last minute for a virtual program because of the Writers Guild of America strike that began May 2. The threat of a picket outside the venue was nerve-rattling to executives, advertising mavens and talent alike.)
Later this year, Netflix will close the DVD business that bootstrapped it into a company that has a bigger market valuation ($148 billion as of May 9) than Sony, Warner Bros. Discovery or Paramount. By design, revenue from the 25-year-old DVD-by-mail biz has steadily declined over the years, as the company has pushed customers toward streaming. In 2022, Netflix’s DVD business generated $146 million (down 20% from the year prior), which represented just 0.5% of total revenue. The final Netflix DVDs will be mailed out on Sept. 29.
The biggest problem Netflix had in its early days was the plastic discs coming back broken in the mail. (Sarandos, who in fact stuffed DVDs into envelopes after joining Netflix in 2000, recalls that the team solved the issue by going to one of its DVD suppliers and figuring out the most durable discs were those printed with a whitegray color.) “Now,” says Sarandos, “we have much more complicated problems.”
Netflix is the biggest player in the area every Hollywood conglomerate sees as the key to sur vival: streaming. Disney, Warner Bros. Discovery, NBCUniversal and Paramount Global are losing billions as they pump money into those services. Netflix got to the top after years of debt-fueled content spending. And now it’s generating what Wall Street expects will be sizable and lasting free cash flow, boasting the largest global subscriber base of any platform.
Sarandos and Peters, who was chief operating officer and chief product officer, have recently spent time reassuring investors that they will run the company with a steady hand and are spending money with discipline in the face of macroeconomic uncertainty.
With all that good news, Netflix, like the rest of the biz, is grappling with the prospect of a protracted WGA writers strike that could derail the flow of content for months. “Everyone has to get back to the table and has to be committed to a speedy resolution,” Sarandos says. The last writers strike, in 2007-08, “was bad for the industry. It was bad for writers, it was bad for networks, it was bad for studios, it was really bad for fans. I think we can get these things resolved, but we have to be at the table.”
On balance, the writers strike could wind up being good for Netflix, says Nathanson. “The company with the most content in the bank is going to win.”
Over the years, Nathanson has expressed doubts about the Netflix business model. But now, he says, the company has hit a steady state of improving profitability. “It took them a while, but they’ve crossed the Rubicon.”
With an annual budget of around $16 billion in 2023 (rising to around $17 billion next year), Sarandos is focused on the development of content that spans multiple genres, languages and viewer tastes. Netflix is “definitely trying to be much more intentional” about its release cadence, he says, and “trying to draft things off one another and things that are similar. … And now there’s enough content to do that.”
“At the end of the day,” says Sarandos, “we’re a content company, and you’ve got to get the content right.”
A little over a decade ago, the idea that Netflix would become a Hollywood giant was met with outright scorn by some people. Exhibit A is the famous dis from Time Warner CEO Jeff Bewkes in 2010. “It’s a little bit like, is the Albanian army going to take over the world? I don’t think so,” Bewkes said in an interview with The New York Times about Netflix’s threat to the industry.
“For the next year,” Hastings told The New Yorker in 2014, “I wore Albanian army dog tags around my neck. It was my rosary beads of motivation.”
And Netflix had skeptics on its own payroll. “I vividly remember thinking at the time, ‘No one is ever going to watch that stuff,’” says one former Netflix exec about its originals push prior to “House of Cards.” “To see the growth of not only its content offering but its impact on the industry in a relatively short amount of time is astounding.”
Fast forward to 2023 and “the Albanian army is, indeed, taking over the world,” according to Wedbush’s Michael Pachter — that is, if Netflix’s first-quarter results are sustainable.
Still, the company will be flying into headwinds throughout the remainder of 2023. For starters, it must contend with a weak advertising environment, which could depress its nascent ad-supported efforts. Netflix is likely three to five years away from seeing advertising have a meaningful impact on the income statement, says BofA Securities media analyst Jessica Reif Ehrlich. “There’s a longer runway here, and it’s a business they really want to be in. It’s a long-term growth strategy,” she says.
Netflix’s decision to adopt advertising is a bid to “expand the market” for consumers who are willing to watch ads in exchange for a cheaper monthly payment, says Sarandos. He adds that the streamer hasn’t seen many existing users downgrade their packages.
Another X factor for 2023: the effect of Netflix’s crackdown on password sharing. The company is pushing the wide rollout of paid sharing, including in the U.S., to the June quarter from the first quarter, a policy under which it will charge a primary account holder an additional fee for access to someone outside their household (and will start to block unauthorized users). Netflix hopes to claim a windfall from password piggybackers, estimating that more than 100 million households illicitly share account access.
On the programming front, Netflix is focused on expanding live events — as important to the company as unscripted TV, Sarandos says. “It’s an entertainment category that we’re investing heavily in,” he says.
But Netflix hit a big speed bump with its much-ballyhooed Season 4 “Love Is Blind” reunion, which failed to launch in its livestreaming window on April 16. The problem: A performance enhancement Netflix engineers tried to implement for the event, after its livestreamed Chris Rock comedy special, failed under the crush of millions of fans trying to access it. Sarandos says Netflix is positive it will work better next time. “In the early days when you broke the internet, that was a good thing. Now it’s not a great thing,” he says.
Netflix also has no plans to trim its roster of original movies in the near term. And while traditional Hollywood debates the impact of Netflix’s ramp-up on filmdom overall, Sarandos firmly believes the streamer’s titles don’t need a theatrical release to have a cultural impact. He cites the success of last year’s rom-com “Purple Hearts,” calling it “an enormous movie” in terms of streaming viewing hours. “The beauty is, that doesn’t have to be a $200 million movie, right?” he says, adding that the summer movie blockbuster experience can be replicated on Netflix “because it’s that excitement of watching together.”
Ultimately, the company wants its movies to go direct to streaming because it’s something Netflix customers love, similar to its binge-release strategy for TV series. “You could argue that’s a better business decision — to release a series over 13 weeks,” Sarandos says. “But we found a better model for us is to be pro-consumer and give them what they want.”
As Netflix makes moves that will set the course for its next decade as a content powerhouse, Sarandos says he and Peters keep lessons learned from company founder Hastings, who has semiretired to the role of executive chairman, top of mind.
“Hastings would have a really brilliant way of asking you to rationalize this thing that you’re going to do, instead of this other thing that you want to do that’s really in the core wheelhouse of the business,” Sarandos says. “It’s about discipline, focus, and yet being super adventurous to get into new things.
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