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Netflix is one of the web's top entertainment companies and one of the tech sector's best comeback stories, but sometimes management makes it hard to trust its success.
The company reported earnings yesterday that beat estimates, but left investors disappointed. One reason was that all the original programming Netflix is spending big on doesn't appear to be attracting very many new subscribers. Another possible reason: leading up to the second-quarter report, Netflix announced it would do away with the company's traditional earnings-call format in favor of a video chat, which featured analyst Rich Greenfield and journalist Julia Boorstin asking Netflix managers a variety of questions.
Netflix refuses to reveal any hard viewership numbers
Many observers interpreted the unorthodox new format to mean that Netflix had a big quarter and wanted to draw attention to a solid performance. But when Netflix reported that domestic subscriber growth had failed to hit the higher end of its forecast, all those lofty expectations tumbled down. Where the earnings-call theatrics succeeded was in illustrating just how much Netflix gets away with in its dealings with the media.
Netflix likes to compare itself with HBO, the Time Warner-owned premium cable channel launched in 1972, even though HBO must disclose when one of its shows is a stinker. Not Netflix. It refuses to reveal any hard viewership numbers. Without a challenge from Wall Street or the media, the company can call any of its five original TV series a hit, just so long as the shows, which include House of Cards, Lilyhammer, and Arrested Development, meet some vague set of benchmarks set by Netflix management. CEO Reed Hastings and Ted Sarandos, Netflix's chief of content, said a show is a hit if Netflix decides to renew it, and that Netflix renews shows if it concludes that the money spent to produce a series isn't better spent elsewhere. That's not a very high threshold to meet.
Sarandos suggested everyone should be satisfied that these are hit shows because people are talking about them in Starbucks
Sarandos suggested that everyone should be satisfied that these Netflix originals are hit shows because people are "talking about them in Starbucks" and because all the series are drawing "TV-sized audiences." Netflix's take feels like spin. Does anybody think Lilyhammer would be a hit on HBO or AMC?
Netflix already acknowledged that Arrested Development, the former Fox series that Netflix revived and relaunched in May, was good enough only to drive a small increase in subscriber additions. That shouldn't come as a surprise. Despite the show's loyal following, the initial hoopla built around the series was replaced soon after its release by mixed critical reviews and — using Sarandos' Starbucks metric — lukewarm word of mouth.
There's no question that many people see the company's $8 per month subscription fee as a good value
The most believable thing said during the presentation was when Hastings noted that Netflix's ability to draw subscribers isn't tied to any one title. "People subscribe with us for a variety of content," Hastings said, "not just a single show." That rings true. Netflix's streaming library is light on new movie titles, but the company is very good at suggesting alternatives, such as foreign and indie fare. And while Netflix isn't adding 1 million subscribers every quarter as it did over one six-quarter stretch two years ago, there's no question that many people see the company's $8 per month subscription fee as a good value. Still, with so much murkiness surrounding Netflix's big investments in original programming and the question of whether they're paying off, investors might be smart to question the company's lofty stock valuation.
Whether Netflix's original content is truly making a big difference in viewership, Hastings says that subscribers won't have to pay more in the short term. Downplaying analyst suspicions that the high cost of content would force Netflix to raise the price of its service, Hastings said he was confident that there won't be any price hikes in the next 12 months. Earlier in the day, Netflix announced that it would start offering original documentaries and comedy programs, and Sarandos elaborated during the earnings call, saying that the company could one day produce its own movies as well. If they do, though, don't expect box office-like info from the company. Netflix wants to sell a single subscription package to everyone, whether they be analyst, investor, or customer.
