Here’s Why Netflix Is A Lot Stronger Than it Looks Right Now
Netflix (NFLX) reported earnings after the close on Monday, and the stock immediately dropped 8% in after-hours trading. So why do I argue that CEO Reed Hastings is leading this company brilliantly? Because he sees a future that some others find difficult to grasp; he has pushed resolutely toward it even through potholes and sudden twists in the road; and the further he goes, the more knowledge he amasses about how to do it better. Those are all things that excellent leaders do.
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Hastings’ most important strategic move now is spending billions to create original TV programming that he can sell to online subscribers worldwide, about 600 hours of such programming this year, the same quantity that HBO plans to produce. This strategy may seem breathtakingly audacious—or, as some would say, insane—considering that Netflix was barely in the original programming business just four years ago. But it had been in the business of renting DVDs and streaming existing movies and TV shows for many years, accumulating and analyzing growing mountains of data on what its customers like. To attract high-profile Hollywood talent for its entry into original programming, Hastings had to commit to a two-year deal instead of commissioning a pilot show, as most established networks do. But that was okay. Unlike established networks, Netflix had all that data on its customers. Hastings knew they love political drama, actor Kevin Spacey, and director David Fincher. So he risked significant money by signing them to two full seasons of House of Cards, confident it would be a hit. And it was.
Hastings is ferociously expanding original programming on that same principle, and while not all his bets will be right, they will all expand his mountain of customer knowledge, which every day becomes more difficult for competitors to match. Investors weren’t delighted with Monday’s earnings report—the company lowered its forecast of subscriber growth in light of a price increase—but the stock’s performance in the bigger picture remains impressive. Since House of Cards debuted in February 2013, the S&P is up 38%. Netflix is up 304%. Investors think Hastings knows what he’s doing, and I suspect they’re correct.