Sleep is the enemy as Netflix CEO confesses his YouTube envy

SUMMARY:

Netflix passed a huge subscriber milestone this past weekend, but an underlying slowdown in new sign-ups tells a different story. How long before there’s a plateau that needs to be admitted to?

Crowning glory for Netflix

We have definitely got YouTube envy.

Give the PR nightmares around extremist content and the advertising boycott from major brands that has resulted, that might initially seem like a ‘be careful what you wish for’ comment from Reed Hastings, founder and CEO of Netflix.

But of course he’s thinking about size of audience, particularly this weekend when Netflix was set to pass the 100 million subscriber mark. That’s a major accomplishment, admits Hastings, but pales in comparison to YouTube and other social media giants:

It’s really just the beginning. When you look at YouTube having a billion active users and a billion hours every day. When you look at Facebook’s, multi-billion numbers, we see that the Internet is just a phenomenal opportunity.

There are some important differentiators between Netflix and YouTube, as Hastings acknowledges, that make comparisons far from ‘apples and apples’. He says:

Of course, we’re pay service, not ad supported…We’re not as deep in international as those companies. But we definitely see a big opportunity around the world to just continue to do what we’ve been doing, which is make fantastic content, get people really excited about that content, and then we’re just continuing to grow.

The US domestic market continues to grow, although Hasting concedes that maintaining super-fast rates of growth does get more difficult over time:

Every incremental 10 million is a little harder than the last 10 million, but our content keeps getting better, so those forces offset each other. When you look at the last five years, everyone is worried every quarter about saturation in the US and we’ve just continued to grow. It doesn’t mean it’s going to be inherently forever, but we certainly feel good about the near-term as we’re expanding and just getting bigger content budget, more shows, more marketing and so all of that feels very good.

Fears about a lid on the number of subscribers has been a constant fear for media providers over the years, he points out:

A couple of years ago there was a bunch of fear about the 30 million sub[scriber] wall, with AOL [having] hit that and HBO would hit that. Te thing is everybody watches TV and nearly everybody has the Internet. So I don’t see anything that’s going to stop Netflix from getting to most people in the United States and then eventually hopefully most people around the world. We’re just going to focus on the everyday of making the services better and better.

Mobile experiments

One of the newer features introduced by Netflix has been the ability to download content to watch offline. This was a functional shortcoming that had been noted in terms of differentiation with rivals such as Amazon and the BBC with its BBC Store. This was addressed last year, although Hastings doesn’t appear to regard it as a particularly significant development:

It’s pretty small impact. I mean, you’re not on airplanes or cars that much of your life, so it’s really nice to have when you use it. But at least in Western and more well-off markets, where networks are strong and relatively inexpensive, it’s a modest feature. I think in Asia it’s a little bigger, because you’re off of an inexpensive network a lot of the time. But again, as networks get more modern, I think, we’ll see that [in terms of ] downloading the need for it will go down and down, because basically you want to be able to just click and watch. You don’t want to have to think in advance outside of a couple of narrow scenarios like an airplane.

What’s of more pressing concern is the rise of mobile platforms. Netflix is working on the assumption that the next 100 million subscribers are going to be far more likely to be watching content on mobile than the first 100 million. That assumption is set in stone; the quesiton is whether there are format considerations for original content that need to be addressed. On that point, it’s early days for the Netflix developers, says Hastings:

They’re very experimental, just trying to figure out aspect ratio. So if you think of it, there were movies originally [that] were very widescreen. When they showed on televisions that were 4:3, technology developed pan-and-scan to be able to make that picture look a little better on a 4:3 screen. So we’re just experimenting with variations of that, of trying to figure out how to zoom in, to be able to basically have faces be larger. But it’s super experimental. It’s a neat idea about how to adapt to the future.

As for the competitive landscape, Amazon remains identified in the popular consciousness as the major global rival, although Hastings maintains that the market is so large that the two can co-exist:

We’re like two drops of water in the ocean of both time and spending for people. So Amazon can do great work and it would be very hard for it to directly affect us. Home entertainment is not a zero sum game. HBO’s success, despite our tremendous success, is a good way to illustrate that.

I will say, we do think about all of that and their tremendous track record. On the other hand, they’re doing great programming and they’ll continue to do that. But I’m not sure if it will really affect us very much, because the market is just so vast.

In fact, the biggest competitor he identifies is not even a content provider – it’s the viewer’s own body clock:

When you watch a show from Netflix and you get addicted to it, you stay up late at night. We’re competing with sleep on the margin.

My take

The 100 million subscriber mark is indeed an impressive milestone and one that should be celebrated. But the underlying trends aren’t as upbeat. In the US, the firm added a third fewer new members over the past quarter, while overseas members fell 22%. Meanwhile the firm is looking at spending over $1 billion this year to keep existing subscribers on board and winning new ones. The return of House of Cards in a few weeks will undoubtedly give sign-ups a boost, as will the second series of The Crown, but it’s clearly becoming a more competive market in which Netflix operates. At some point, maybe not that far off unless international revenues grow faster, the firm will need to manage expectations from investors and Wall Street that it’s found its level.

Image credit - Netflix

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