Netflix isn’t talking about itself like a tech company anymore

Investors didn’t care when Netflix got an Oscar nod for Best Picture. They might soon.
Investors didn’t care when Netflix got an Oscar nod for Best Picture. They might soon.
Image: Netflix/Alfonso Cuarón
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When Netflix posted earnings last October, it told investors (pdf) it launched a cadre of young stars to Instagram fame such as Millie Bobby Brown of the Netflix series Stranger Things and Katherine Langford from 13 Reasons Why. It said (pdf) during earnings in January that 80 million members had watched the straight-to-Netflix thriller Bird Box, and that the video-game craze Fortnite was a bigger competitor than long-time rival HBO.

These are not the kinds of metrics you typically get from an earnings release. Netflix investors trade on things likes subscriber gains and free cash flow, not Instagram followers. But the streaming-video company is sending a message: It isn’t just a reflection of culture. It creates culture.

“What we’ve seen more is that these shows that come out on Netflix are really piercing the culture,” Ted Sarandos, chief content officer, said on the October earnings call (pdf). “Some of the most-watched shows in television are on Netflix, and the creators know that.”

Netflix wants investors to know that, too. The streaming-video giant is bracing for a fresh wave of competition from Disney, WarnerMedia, and Apple, in addition to increasingly formidable rivals like Amazon Prime Video and Hulu. In this environment, where every media and tech company sells a streaming-video service, Netflix wants people to know it is among the one or two platforms people must have; it has the original shows and movies that everyone will be talking about at work, school, or on social media tomorrow.

Netflix’s talk of impact and viewership plays into a broader shift to get Wall Street to view the company less as a subscription-driven technology business and more like a movie studio or TV network whose financial results are driven by hits, said Jim Nail, principal analyst at Forrester.

As media groups like Disney and CBS work hard to frame themselves as technology companies by investing in streaming and other technology, Netflix, long a stock market darling thanks to its hyper growth as an online service, is taking the opposite tack: It’s boasting about its content.

Currently, the company’s stock lives and dies on subscriber growth. Investors like subscriber growth, in part, because it represents a reliable, recurring revenue stream. But growth could come under pressure as more competitors enter the marketplace and threaten Netflix’s share, particularly in the US, where growth is already slowing. It behooves the company to shift investor thinking away from subscriber gains, which could be challenged in the months and weeks ahead, and toward engagement.

“As much as they say they’re not concerned about Disney+ or WarnerMedia or any of the other upcoming, impending launches, of course they’ve got to be worried about that,” said Nail, referring to Disney and WarnerMedia’s planned streaming services, which are expected to rollout late this year.

Engagement aligns more closely with where Netflix is heading as company. A majority of its investments now are in content rather than technology, and have been for some time. Netflix budgeted $10 billion for content and marketing in 2018, for example, and just $1.3 billion on technology and development.

The trouble is there’s no clear measure of engagement for a subscription company like Netflix. Netflix doesn’t release many of its movies theatrically, or sell ads based on the audience for it various series. It makes money from subscription fees. Valuing engagement becomes a much more complex equation.

“That’s the problem with their business model,” said Nail. “If you’re a movie studio and you have a hit, every additional person who walks in the theater is incremental money in their pocket. At Netflix, there’s no 1:1 correspondence between people watching and more money in the pocket.”

Yet, the more time people spend watching, talking about, or otherwise engaging with Netflix, the more indispensable the service becomes. It has more room it to raise prices, as it has done for its standard plan in the US at least four times since 2011, and shoulder competition.

The company has been playing around with metrics like Instagram followers and viewership to see what investors gravitate toward. One that might be of more interest is a measure of how valuable Netflix content is over time. Take the 2017 movie Bright, for example. Netflix touted it as one of its most viewed original titles ever in January 2018.

“Nobody talks about it anymore,” said Neil Macker, senior equity analyst at Morningstar. “The movie came and it left. That’s going to be continual problem. They’re building this library of stuff. Some of it may have more legs, but I’m not seeing a Star Wars or a Friends, something that people are going to keep coming back to 10 years from now.”

Without lasting hits, Netflix may have to continue spending hand over fist to keep members coming back, Macker said.

Convincing investors to think of Netflix’s financials like other movie and TV companies comes with other pitfalls, too. The movie and TV business is notoriously fickle. The biggest US movie studios have suffered high-profile flops, like Disney’s Solo: A Star Wars Story, which underwhelmed, and Warner Bros.’ lackluster Justice League. Unlike those studios, Netflix doesn’t do anything else, such as sell products or operate theme parks, to distract investors when it has a rough quarter.

The sheer volume of Netflix’s content output could help generate a steady supply of hits. Netflix put out more movies than all the major US studios combined last year. And, by Quartz’s count, it released 1,500 hours of original content in the US. HBO, for a rough comparison, recently said it would boost (paywall) its output by 50% in 2019 to 150 hours of original scripted fare.

So far, investors don’t appear to have come around to Netflix’s thinking that engagement and cultural impact matter most. When Netflix received its first Oscar nomination for best picture for the movie Roma last month, investors didn’t care. The stock continued to drop on the prior day’s earnings release. Over the last year, shares of Netflix have risen 34% to $359 on strong subscriber growth. In the end, it’s the same old story for Netflix, even as it tries to spin a new narrative.