Commentary

Netflix Sees The Future And It Is It; Shares Drop

Wall Street may have had a negative reaction in after-hours trading to the storyline in Netflix’s “fireside chat” conference call on Google yesterday but if there’s one thing founder Reed Hastings has been proving recently it’s that his self-described slide into “arrogance” a couple of years ago was akin to that of a resilient cat

Netflix’s new life as a provider of original content is still attracting new subscribers to its steaming services, if perhaps fewer than anticipated, and most observers write this morning that it seems well positioned for a media landscape it has been instrumental in cultivating.

“Netflix’s subscriber gains -- an improvement over last year’s performance during what is traditionally its weakest quarter of the year -- and overall profits were well within projections,” Brian Stelter reports in the New York Times, “but some investors, hoping for more, sent the stock down about 8% in after-hours trading before rebounding somewhat.”

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Let’s not forget, as Bloomberg’s Linda Sandler wrote a few hours before the call, that “Netflix has become the best-performing U.S. stock in the Standard & Poor’s 500 Index in 2013 and the second most expensive,” although there were already skeptics, as she documents.

In a letter to shareholders, Hastings and CFO David Wells reported that their streaming service now has nearly 30 million domestic members and 8 million international members and that year-to-year revenue was up 26% domestically and 155% internationally.  

“The company viewed the Emmy nominations it received last week as a validation that its investments [in original programming] are yielding high-quality content,” Amol Sharma points out in the Wall Street Journal. But, as Hastings himself admitted on the call, “the larger we get, the harder it is to grow.” 

Netflix introduced a new format for the quarterly earnings call, with Hastings and his executive team fielding questions from BTIG analyst Rich Greenfield and CNBC reporter Julia Boorstin, who had compiled queries from their colleagues. That in itself was news.

“For decades and decades -- stretching all the way back to the dawn of the conference call -- publicly traded companies have organized their quarterly earnings reports pretty much the same way: The CEO and other executives highlight financial results over the phone, then take mostly dry questions from analysts covering the stock. Yawn. Not so with Netflix,” Luke Stangel wrote in the Silicon Valley Business Journal a couple of weeks ago.

Forbes contributor Mark Rogowsky gives yesterday’s production four stars out of five and suggests that the format is “definitely the future of shareholder communications.”

On the marketing front, Hastings and Wells write in their letter: “With our new Watch Responsibly ads, we’ve sought to tell a fun and emotional story that ties consumers to the Netflix brand and highlight attributes of our service that drive certain consumer behaviors -- like watching ahead, spoiling it for others, and marathon viewing. We didn’t invent these behaviors, but they’ve become associated with Netflix and highlight the fundamental changes in the way consumers are enjoying TV series and movies.”

Media columnist David Carr writes in the New York Times this morning that releasing all of the episodes of shows such as “House of Cards” and “Arrested Development” at one time “is a hugely disruptive strategy, one that has already altered consumer expectations.”

Meanwhile, Netflix is well positioned for a future it has had a major role in creating. “Consumer cord-cutting is a looming threat, not a current reality, but without prospects for growth, cable companies and programmers will continue to robotically raise rates, blaming one another as they go and deepening consumer antipathy that will eventually come home to roost,” Carr writes.

Still, the race has just begun and Netflix faces formidable competition. “In addition to Netflix rivals like Hulu and Amazon Prime, both Apple and Google are said to be weighing new online video services,” writes Sam Gustin in Time. “And, of course, there’s Aereo, the upstart online video company that’s been giving broadcasters fits as it eludes their efforts to shut it down.”

Hastings is watching avidly, of course. He “noted that while Netflix’s content, tech capabilities, and user experiences are all getting better, ‘competitors for consumer attention are also all improving, and the risk of U.S. market saturation only grows as we do,’” writes CNET’s Joan E. Solsman.

Alas, the old production schedule still applies as this drama plays out. Episode 13 is a long way from being written.

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