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  • 04.18.17

Netflix Is Playing The Long Game, Even If Wall Street Isn’t

Even though profits are up, the company’s stock took a hit on news that user growth has slowed.

Netflix Is Playing The Long Game, Even If Wall Street Isn’t
[Photo: Flickr user Mark Bonica]

In the latest twist in Netflix’s never-dull growth narrative, on Monday the streaming giant’s stock took a hit after it reported lower-than-expected subscriber increases and high cash burn in a first quarter earnings report. Even though profits were up–net income rose to $178.2 million from $27.7 million a year earlier; with revenue at $2.64 billion–Netflix shares fell about 1% in after-hours trading.  In fact, today might be the worst day for Netflix shares in 5 months.

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Netflix CEO Reed Hastings brushed off the slowdown, saying, “We have come to see these quarterly variances as mostly noise in the long-term growth trend and adoption of internet TV.”

Long-term, of course, is the key term to keep in mind if you want to understand Netflix’s strategy. The company has been on a wild spending spree for years, plowing billions–this year it’s $6 billion, to be exact–into original content as it attempts to build a global streaming service, the likes of which have never been seen. Hastings’s vision is to create a platform with not only great TV and movie offerings for its nearly 100 million subscribers, but identical offerings around the world. His dream is that a user in Germany, say, will be able to access the exact same content as users in Brazil and the U.S. Doing this requires money to license international rights–a lot of it–and Netflix isn’t at all shy about spending it. Last month during a Q&A with reporters at Netflix’s Los Gatos headquarters, Hastings bluntly said that there were no plans to curtail Netflix’s content budget in order to ensure that “everybody” around the world “gets the same great experience.” Doing that is “going to take a lot more money than we have now,” he said.

Netflix needs subscribers to support all that spending, which is what has Wall Street worried. With nearly 100 million users–which puts it significantly ahead of competitors like Amazon and Hulu–there are signs of saturation, particularly in the U.S. In the first quarter, Netflix added 1.42 million domestic users, which fell short of the anticipated 1.59 million. Internationally, it was up by 3.53 million, but analysts had expected 3.6 million. Hastings brushes off any concerns, noting that fluctuations are part and parcel of the business, in part related to when new series–such as House of Cards–drop on the service. (Season 5 of that show debuts next quarter.)

A long-term view is also helpful in discerning the company’s motives. Hastings seems well aware that U.S. numbers may indeed be plateauing, but the real focus is on the international potential, where major markets like India and China have not yet been fully exploited. (At this point, Netflix is up and running in India, but is still working to improve streaming quality. China has been a struggle, due to regulatory issues.) Spend any time with Netflix employees (many of whom are jetting around the planet on a weekly basis), and it’s clear that fine-tuning the Netflix experience in the nearly 200 countries in which it now operates is the company’s primary focus. Once that fine-tuning is complete, the sky’s the limit in terms of subscriber growth–or at least that’s what Netflix hopes.

As much as Hastings, et al. like to keep their eyes on the distant horizon, as a publicly traded company Netflix will continue to have to confront the more short-sighted focus of Wall Street. Not to mention Hollywood, where there have been complaints that for all of the great content Netflix is investing in, much of it is getting lost in the sea of its growing reserves. As a recent IndieWire story put it, Netflix is “not a distributor; it’s a graveyard with unlimited viewing hours. Netflix doesn’t release movies, it inters them.” The Hollywood Reporter, meanwhile, has chronicled complaints from Hollywood creatives about the lack of marketing that their shows and movies get on the platform. To live near a Netflix-owned billboard (as I do) is to watch posters for new Netflix titles go up and come down on what seems like a weekly basis. And yet the company continues to line up top-notch talent like Dave Chappelle and Amy Schumer, showing how, ultimately, money assuages everything.

To Hastings, all of this is just “noise,” as he put it, in his company’s great steam-roll forward. The noise surely won’t die down any time soon, but for now, or at least until Netflix expands into its full potential, Hastings is asking the world to tune it out.

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About the author

Nicole LaPorte is an LA-based writer for Fast Company who writes about where technology and entertainment intersect. She previously was a columnist for The New York Times and a staff writer for Newsweek/The Daily Beast and Variety.

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