The temperature did not break 60 degrees in Los Gatos, California, on Tuesday, as was obvious when Netflix CEO Reed Hastings, CFO Spence Neumann, and chief product officer Greg Peters all wore jaunty buttoned-up sweaters on their quarterly earnings call where they discussed their just-announced quarterly results, their 2019 in full, and looked forward to 2020.
But there was another chill beyond the one outside Netflix HQ. The company’s execs put as happy a face on the company’s results as they could—and there is a lot to like in its earnings report—but it obscures or soft-pedals some troubling signs that Netflix is still hung up on the idea of being all of entertainment rather than merely a player, even the largest player, in the shift from linear to streaming TV that’s taking place.
For several years, Hastings has used YouTube as a yardstick for how much growth he sees ahead for Netflix. In April 2017, Hastings, during another earnings video with an analyst, said, “Our viewing is very large and growing, but nowhere near as big as YouTube, citing YouTube’s then standard of 1 billion hours a day in video, comparing it with his company’s mere 1 billion hours a week. “So we definitely have YouTube envy,” he added. He brings YouTube up as a competitor almost every quarter, and he did so again Tuesday afternoon.
It’s always nice to have a stretch goal, but the problem is that we’re increasingly seeing signs of Netflix letting this jealousy get to it.
In 2011, in Fast Company, YouTube announced its intentions to be “the first global TV station, the living room for the world.” On Tuesday, Netflix chief content officer Ted Sarandos (bucking the trend of his colleagues with a blazer, perhaps because he was in L.A. where it was a smidge warmer?) said that Netflix is programming for “every taste” and “every mood” in the world.
Hmmm . . . what’s one big difference between YouTube and Netflix? YouTube gets almost all its content for free! It’s very easy to be the living room—or the break room, or the bathroom break—for the world when everything is gratis.
Meanwhile, Netflix suggested that it spent about $15 billion in 2019 on programming, resulting in its free cash flow being minus-$3.3 billion, though it assured investors that its negative free cash flow has “peaked” and it promises to spend only $2.5 billion more than it actually has in 2020. Cool. Hope those dangerously low interest rates and/or the record levels of corporate debt don’t lead to that recession most CEOs fear is about to happen! Netflix is playing the most high-stakes game of chicken in all of business.
Another sign of YouTube envy warping Netflix’s thinking is in its, let’s say, evolving strategy around releasing viewership statistics. For years, Netflix—correctly!—pointed out that the only reason that anyone knows how many people were estimated to have watched a network or cable TV show is because they’re selling advertising against it. Because Netflix was purely a subscription service, it did not need to share any viewership data. (Movie box-office reporting is a relic of the time before movies were released nationally on thousands of screens and theater owners needed to know how a movie was performing elsewhere before booking it in their movie house.)
But it started getting a little overconfident. First, Netflix would just tell the press and business analysts that some show was incredibly popular, a kind of Amazon-like vague puffery that was kind of silly but not that big a deal. Then Netflix started to release numbers selectively, though there was no benchmark as to what those numbers meant. The holiday 2018 success of Bird Box, which attracted more than 45 million viewers in its first seven days on the service, led the company to clarify that it considered something watched if an account completed 70% of the program. Kind of an odd metric, right? Who turns off a two-hour movie almost 90 minutes into it? Over 2019, Netflix standardized its reporting a bit, mostly only sharing numbers from the first 28 days of any title’s release, though it made an exception for Adam Sandler’s Murder Mystery, sharing its eyebrow-raising opening weekend numbers.
Took off my blindfold this morning to discover that 45,037,125 Netflix accounts have already watched Bird Box — best first 7 days ever for a Netflix film! pic.twitter.com/uorU3cSzHR
— Netflix Film (@NetflixFilm) December 28, 2018
On Tuesday, though, Netflix made official what it had teased at the end of 2019: You’ve “watched” something if you consume two minutes of it. You had to choose to watch it and then actually go through with it for two whole minutes! The reasoning here was tortured: “Given that we now have titles with widely varying lengths—from short episodes (e.g., Special at around 15 minutes) to long films (e.g., The Highwaymen at 132 minutes), we believe that reporting households viewing a title based on 70% of a single episode of a series or of an entire film, which we have been doing, makes less sense. We are now reporting on households (accounts) that chose to watch a given title. Our new methodology is similar to the BBC iPlayer in their rankings based on “requests” for the title, “most popular” articles on the New York Times, which include those who opened the articles, and YouTube view counts.” Ah, there it is! But why? Who conceivably considers watching two minutes of even a 15-minute program effectively having watched it?
76 million people see two minutes of everything. They are called trailers. https://t.co/KwU1HG7MLP
— Van (@VanTheBrand) January 21, 2020
Even the most ardent Netflix supporter, Rich Greenfield, was incredulous about this news:
Netflix shifting from 70% completion of a movie to "watched at least 2 minutes" to determine watch counts is literally absurd — albeit, its also shocking it only increases viewcounts by 35% $NFLX pic.twitter.com/aw4X4UOqZ7
— Rich Greenfield (@RichLightShed) January 21, 2020
To Netflix’s credit, at least it understands that it should never compete against YouTube in the advertising business. Hastings, asked yet again about the possibility of advertising on the service, made clear that there’s no competing with Google, Facebook, and Amazon and the massive amount of data it’d need to target ads even to scrape out $5 billion in advertising revenue. The implication: Let all those new streaming services hoping to make money from ads flail against Big Tech’s ad machines. (That does not mean that you won’t see more brands on Netflix, of course. Perhaps those relationships with marketers can help Netflix bring down its remarkable $12 billion-plus in annual marketing expenses.)
For all of Netflix’s talk that there’s lots of competition and it’s extremely profitable and everything is pointing in the right direction, its spending still reflects that is pursuing the faulty reasoning that underpins Silicon Valley’s core business model: The only way to make money is having a monopoly. Entertainment companies can exhibit monopolistic behavior, but it’s nigh impossible to become an actual monopoly.
When the analyst asking questions on the earnings call asked each Netflix exec what they believe is the greatest misconception about the service, Sarandos responded, “‘There’s so much stuff on Netflix, everything gets lost,’ and I think the opposite is true . . . . It gets lost on people because they think that all this content is for them. It isn’t. It’s just meant to be your favorite show and your favorite movie, and that’s going to be something for everybody.”
All Netflix has to do is come up with the favorite show or movie for a couple of hundred million people. Every month. In perpetuity. That’s the price of wanting to be YouTube on a caviar budget. What’s that going to cost?