Netflix Inc – Jun 08, 2023

Now that on-demand entertainment has transformed the way the world consumes content, capturing and retaining viewer attention has become a complex art form.

Despite challenges from a list of well-established competitors including Amazon Prime, Disney, and HBO, among many other regional powerhouses, Netflix still tops the list of global subscribers with its diverse library of films and television series, including those produced in-house. The company’s name is now considered a verb as its core proposition is straightforward, yet impactful. Provide a plethora of high-quality, varied content that allows anyone to “netflix and chill” anytime, anywhere.

The platform appeals to a broad spectrum of customers, ranging from children to adults and spanning all social demographics. Whether you’re a comedy aficionado, a drama enthusiast, a reality TV fan, or an animated series lover, Netflix caters to every genre preference. While geographically, the company now services over 190 countries, with an expansive and inclusive content library that resonates with the diverse tastes and preferences of its hundreds of millions of subscribers across the globe.

With the fight to maintain viewers stronger than ever, Netflix continues to invest heavily in content creation and acquisition, constantly refreshing its library to maintain user engagement. Furthermore, the company is exploring newer market segments, such as interactive storytelling and video games, while continuing to penetrate untapped global markets.

Underpinning this fight is the company’s relentless focus on enhancing the user experience through advanced algorithms, which recommend personalized content to subscribers, thereby driving customer engagement and retention. While a commitment to original content production aims to distinguish Netflix from other streaming platforms.

Now a household name in streaming entertainment and with its own dedicated button now featured on most new TV remotes, Netflix was founded in 1997 by Reed Hastings and Marc Randolph. It started as a DVD rental-by-mail service, which was itself a revolutionary approach that contrasted sharply with the traditional model of physical video rental stores.

The company experienced steady growth and by 2000, it had captured a significant portion of the DVD rental market. However, the defining moment for Netflix came in 2007, when it pivoted to streaming content over the internet, changing the way people consume media forever.

In 2010, Netflix made a significant move by expanding its services outside the United States, ultimately reaching every country in the world except China, North Korea, Syria, Russia, and Crimea, as the company focuses on catering to international viewers by acquiring and producing local content from different regions.

2013 marked another milestone for Netflix, as it ventured into original programming with the launch of successes including “House of Cards”, “Orange Is the New Black” and “Stranger Things. This strategy enabled the company to differentiate itself from competitors and gain control over its content pipeline.

Over the years, Netflix has continued to innovate and evolve. In 2018, it experimented with interactive storytelling with “Black Mirror: Bandersnatch”, allowing viewers to choose their own story path. While more recently, it announced its expansion into the video gaming market, a move aimed at diversifying its content portfolio and maintaining subscriber engagement amidst rising competition.

Co-founder, Reed Hastings, continues to serve Netflix as its executive chairman, having been pivotal in shaping the company’s trajectory since its inception. His vision and leadership have steered the company through key pivots and expansion, including the transition from DVD rentals to streaming and the subsequent international rollout. Hastings’ influence in the tech industry extends beyond Netflix and he is known for his unique approach to corporate culture, emphasizing freedom and responsibility, which has been widely discussed and emulated. His ability to build and scale successful enterprises was also demonstrated with his first venture, Pure Software, which created tools for software developers, and also went public in 1995.

Ted Sarandos is one of Netflix’s co-CEOs, who since joining the company over two decades ago has been a driving force behind the company’s original content production, steering its evolution with the successful launch of several series. His transformative approach to content acquisition, distribution, and production has earned him industry-wide recognition, including his inclusion in Time Magazine’s 100 Most Influential People of 2013 and the Producers Guild of America Milestone Award in 2019.

Fellow co-CEO, Greg Peters, has also been a significant part of the company’s growth and transformation. With prior roles including Chief Operating Officer, Chief Product Officer, and International Development Officer, he has played a crucial role in the company’s global partnerships with consumer electronics companies, internet service providers, and multi-channel video programming distributors, which have enabled it to deliver content across a wide range of devices and platforms.

Netflix’s service is a broad and ever-changing catalog of movies, television series, documentaries, and increasingly interactive content. With thousands of titles spanning genres, it offers a diverse array of visual narratives that cater to an equally diverse audience. From casual viewers who watch a few hours a week, to binge-watchers who devour entire seasons in a single sitting, the platform caters to the entire spectrum of viewing habits. Moreover, with its extensive international catalog and localized content, it attracts viewers from different cultural backgrounds and language groups, truly making it a global service.

One defining feature of the Netflix experience is its sophisticated recommendation algorithm. This advanced tool curates a personalized content feed for each subscriber, analyzing their viewing habits and preferences to suggest new titles. This highly tailored approach enhances user engagement and satisfaction, aimed at fostering a deep connection between the customer and the platform.

Several subscription plans are available, accommodating different viewing needs and budgets. From a basic plan that provides standard-definition streaming on one device to premium plans that offer high-definition and ultra-high-definition streaming on multiple devices simultaneously. These diverse plans make the platform accessible to a wide range of customers, from individuals to families. Most recently, ad-supported plans have given price-conscious consumers even more choices.

Netflix is charting an ambitious path to sustain its revenue and earnings growth in the future. In a digital landscape where consumers have many options, the company is leveraging its position as a leader in streaming engagement. For years, Netflix has primarily been a subscription-based platform, however, the introduction of an advertising-supported tier and a renewed focus on monetization, are shaping the future of the company.

The increasing costs of subscription services, with Netflix’s main plan doubling in price over the past decade in the US, poses a barrier for many potential viewers. This new ad-supported tier is proving to be an effective tool in capturing these consumers, which now accounts for about a quarter of new sign-ups in the US according to data from Antenna. Analysts’ concerns that this new tier would lead to many existing customers downgrading have proved unfounded, as the majority of people signing up for this plan have been new or lapsed customers, not current subscribers seeking a cheaper option. Netflix remains confident that it will eventually generate as much, if not more, revenue from customers on this advertising tier, as its numbers recently hit five million, six months since launching.

The introduction of the new tier is timely as the company also intensifies its crackdown on password sharing. Widespread account sharing is estimated to be in excess of 100 million households. This move is expected to force millions of users to stop using their family’s or friend’s accounts, leaving them with a decision: quit Netflix, or pay for a subscription or new paid-sharing options. The strategy has shown early promise, as seen in Canada where paid membership has grown larger than before the launch of paid sharing.

In addition, advertising is set to generate new revenue streams. By offering advertisers a platform to reach a vast and engaged audience, Netflix is capitalizing on a key strength of traditional broadcasting models. Early indications suggest that advertisers are responding positively, with the engagement on the ad tier exceeding Netflix’s initial expectations. In 2022, Netflix viewing across Nielsen’s Top 10 most watched lists was three times greater than all competitors combined and five times greater than its nearest challenger, Disney.

Moreover, Netflix’s partnership with tech giant Microsoft in creating a programmatic private marketplace is set to make the buying of Netflix ad inventory a streamlined and efficient process. Collaborations with Integral Ad Science and Double Verify, aim to further validate campaign engagement to leverage advertising to its full potential.

A continued focus on engagement and content is also crucial to Netflix’s strategy. The platform’s Top 10 lists illustrate consumer tastes are incredibly diverse. By consistently delivering the right titles to the right audiences at the right time, Netflix aims to increase the likelihood that members will choose Netflix the next time they turn on their TV or recommend the service to their friends.

Netflix has consistently delivered an impressive growth trajectory year after year, solidifying its place as a global entertainment juggernaut. As of the end of 2022, the company boasted over 231 million paid memberships and managed to generate a record $32 billion in revenue for the year. The 6% increase on 2021 was somewhat tempered compared to its previous history of 20% to 30% growth each year.

The company kicked off the first quarter of 2023 with a burst in subscriber growth of 1.75 million, largely due to the rollout of its low-priced plan, a stark contrast to the loss of 200,000 subscribers sustained at the same time last year, and also resulting in $8.16 million in revenue for the period.

While Netflix’s operating margins saw a small decrease, mainly due to an increase in content amortization, coupled with solid investments in technology and development, the company posted $1.31 billion in profit last quarter, narrowly exceeding analyst estimates.

Looking ahead, Netflix expects revenue growth to accelerate throughout the second half of 2023, as it more broadly rolls out paid sharing and grows the advertising business. Consensus estimates have the company closing out 2023 with total sales of $33.91 billion for year-over-year growth of a little over 7%. While full-year earnings per share are also forecasted to increase a modest 13% from $9.95 per share in 2022 to $11.24 in 2023. EPS growth is pegged to increase between 25%-30% in subsequent years as momentum from advertising continues to create value.

The streaming industry has become an increasingly crowded space, with technology and media giants alike vying for market share.

Established technology companies like Amazon with Prime Video, Apple with Apple TV+, and Google with YouTube Premium have entered the fray. Each of these giants benefits from extensive resources and broad customer bases, leveraging their existing ecosystems to promote their streaming services.

Media conglomerates like Disney, WarnerMedia, and NBCUniversal with their platforms Disney+, HBO Max, and Peacock, respectively, also benefit from their decades-long legacy in content production. These companies have a treasure trove of content, including popular franchises and exclusive rights, which they can leverage on their platforms.

Traditional cable and satellite providers have also evolved to offer internet services, such as Sling TV and DirecTV Now. These platforms appeal to customers looking for a more traditional TV viewing experience, including live broadcasts and a broad range of channels.

While the competition is fierce, Netflix has managed to build a leadership position in the market with a robust original and diverse content portfolio. Furthermore, Netflix has made substantial inroads in international markets with local language content, something many competitors are only beginning to explore.

Emerging from its first quarterly contraction in subscribers in over a decade, Netflix’s strategic push to attract more sign-ups through new affordable plans and ad-supported options has boosted its outlook to not only set the stage for renewed growth, but maintain its leading position in the on-demand entertainment sector.