Even after 20 years, Netflix keeps surprising the marketplace. The company keeps surprising financial analysts by enjoying a soaring market capitalization even as it spends an astounding amount of money to create new content. Although the company’s stock price was hit by the technology stock downturn from earlier this year, Netflix came roaring back with an impressive quarterly earnings report April 16 to approach an all-time high value. Netflix continues to demonstrate an ability to adapt, innovate, and endure the short-term messiness that comes with innovation in order to achieve long-term gain.

The April 16 Netflix quarterly earnings announcement was a testament to the company’s success. Netflix announced:

  • An additional 7.4 million subscribers for the first quarter of calendar 2018, surpassing analyst projections of 6.5 million new subscribers
  • A 43-percent year-over-year revenue for the first quarter – which, according to Netflix, is the fastest pace for a quarterly revenue increase in Netflix’s history

Netflix also said – and this is the part that makes analysts nervous – that it would spend $7.5 billion to $8 billion on content. But that cash overlay – and it is significant – is in line with expectations. Consequently, Netflix’s stock began to climb in after-hours trading.

The numbers are important, obviously, but in context of meeting analysts’ expectations. Recently we saw Walmart deliver some impressive financial results, but investors punished its stock because the numbers delivered below analysts’ expectations.

But visionaries such as Netflix CEO Reed Hastings don’t get led around the nose by analysts. They grow their businesses by adapting to customer needs. Netflix has morphed from a business that rents movie discs to a streaming service, network for binge-watching TV, and then a content creator and distributor.

These kinds of marketplace shifts can incur some short-term messiness. Not long ago, Netflix faced public embarrassment by attempting to split its business into two companies, one for streaming and one for DVD rentals. The two-headed monster known as Netflix and Qwikster baffled industry watchers and angered customers and who were forced to navigate two separate sites for streaming or DVD rental, and Reed Hastings eventually killed the idea.

Since then, Netflix has made the bold move to start creating its own content – an action that has:

  • Created a war with Disney (which doesn’t quite like the idea of making Disney content available on a site that has started developing competing content)
  • Caused a rift with the Cannes Film Festival, which turned its nose up at Netflix’s attempt to market Netflix originals as Cannes-worthy award candidates

Now look at the results:

  • Disney is taking its content from Netflix
  • Netflix is not participating in Cannes in 2018
  • Netflix’s stock price is surging

What Netflix is doing well is anticipating and meeting consumer demand – for fresh, original TV shows, daring documentaries, and movies that anyone can binge watch. Adapting to consumer demand is proving to be a winning approach for Netflix. In fact, the company’s one serious mis-step – the attempt to create Qwikster – resulted from adapting before really understanding what consumers wanted.

For the rest of 2018, the main challenge for Netflix will be continuing to develop content to increase its users and keep butts planted in sofas watching a stream of content, especially outside the United States. Meanwhile, to manage costs, Netflix will seek to develop more shows in-house rather than rely on more expensive third-party studios. In its earnings letter to shareholders, Netflix emphasized that the development of original content “allows us to reduce our reliance on third-party studios and forego the corresponding license premiums we’ve historically paid.”

Netflix’s next transition is under way: from content creator to independent content powerhouse.

Saul Delage

Saul Delage

VP Growth