When Reed Hastings and Ted Sarandos launched Netflix in 1997, the video watching at home landscape was bleak. It was a miracle to be able to select movies from a database instead of walking up and down the isles at the video rental store. It was a second miracle not to have to wait in line to check out at the video store, and find out your $3 rental was actually $23 after the late fees. And it was a third miracle to get the DVDs in the mail and be able to keep them as long as you liked.
The strategy and foresight of Netflix, building its subscriber base through the postal service while waiting for internet bandwidth to make streaming possible, is a story I never tire of. It would be 10 years before Netflix started streaming in the US in 2007. That is one awesome headstart on anyone that decided to do a video streaming start up as soon as it was possible. Since then, Netflix has grown to over 230 million subscribers in 190 countries.
Of course, 2007 is also the year Steve Jobs dented the universe with the introduction of the iPhone, giving Netflix another screen to sell through. By then, Steve Jobs had also been building momentum with offline media. The iPod was introduced in 2001, but we had to load it from our own music CDs through iTunes on a PC. Buying music through the iTunes online music store started two years after that in 2003. In these early days, Steve Jobs and Reed Hastings had favorable catalog usage rights for content. They had convinced the rights holders that they were an additional revenue stream, so they didn’t have to pay very much to offer their users the movies and songs that were owned by someone else.
But they both knew that when those rights deals came up for renewal, no amount of fast talking was going to convince the rights holders to do another sweetheart deal. So they had to get some content of their own.
In addition to being less exposed to the ever-increasing prices charged by the other owners of video content, Netflix original content drives subscriptions because Netflix does not offer their content to be licensed to any other streaming service. Starting with House of Cards in 2013, the only way to watch Netflix owned content is to subscribe to Netflix. So after paying once to create content, Netflix doesn’t have to pay again, and can use its exclusivity to grow subscriptions.
Netflix is currently spending about $16 billion per year on content, about half of which is original productions, and the other half is agreements with other rights holders. This makes Netflix the 5th biggest spender on original content.
Each of the 190 countries served by Netflix has its own content mix. In the US, there are about 6,000 titles available and last quarter, Netflix reached 50% owned. A major milestone for sure and some analysts calculate that on the current course and speed, Netflix will achieve 75% owned content by the end of 2024.
Netflix spends about 8% of revenue, or $2.5 billion per year on marketing, and most of that is spent on advertising. The advertising is promotion of their original content, so current subscribers will keep subscribing and new subscribers will join to watch the latest new show.
This model is similar to many movie studios. Pay to make original content and pay again to get people to watch it. Top Gun Maverick cost $170 million to make and $125 million to advertise and promote.
There is another prevailing model to attract viewers. Sports. According to Neilsen, 94 of the top 100 TV broadcasts of 2022 were live sporting events (3 soccer, 2 basketball, 1 Kentucky Derby, 1 Olympics, and the rest were football). Some streaming services including Amazon and YouTube are spending many billions for live sports content. Netflix famously does not play in the live sports universe. Ted Sarandos has famously said:
“…we’re not anti-sports, we’re pro-profits, and we have not been able to figure out how to deliver profits in renting big league sports in our subscription model.”
Netflix has their own strategy however. They have gone deep into sports related dramatic content. Starting with Drive to Survive about Formula 1, and expanding to golf, tennis, basketball and soccer. In the US, there are currently 55 titles owned by Netflix in this genre. Unlike live sports, Netflix owns this content forever and it is interesting to watch even years after the end of the season.
Clearly, I am a Netflix fan, and evidently I am not alone. Netflix stock is 25% off its high mark, but it is still trading at over 30 P/E. (I don’t own any Netflix stock and am not making any investment recommendations).
As the transition from the cable bundle to streaming services continues, I think Reed Hastings and Ted Sarandos are going to continue to make great long term strategic decisions and keep Netflix on the rise.
Links and Resources
About Netflix Content Spending: https://variety.com/2023/digital/news/netflix-content-spending-cash-in-2022-1235496740/
About Netflix Catalog by Country: https://surfshark.com/best-rated-netflix-shows-and-movies
More about Netflix Catalog Mix: https://www.ampereanalysis.com/insight/netflix-originals-and-exclusives-now-the-majority-of-its-us-catalogue
About sports on TV: https://www.sportsbusinessjournal.com/Journal/Issues/2023/01/09/Upfront/top-100-telecasts.aspx
Curious About Marketing Payment Policy
Curious About Marketing is a no cost* newsletter. It would seem like a bit of a waste for you to pay someone for this no cost* newsletter. So I don’t recommend it.
At some time in the future, I may change my mind and offer a paid version, or some additional features that would cost money. If so, I will change this statement at the bottom of each newsletter and clearly present the options.
You should feel comfortable forwarding this newsletter to anyone you think would like it.
Thank you very much for reading!
Sincerely yours, Jay
* this used to say FR**, but the use of the word FR** has landed this newsletter in some people’s spam folders. Or maybe FR** is a four letter word that starts with F? Anyway, thank you all for your patience as we figure out how to deliver the newsletter to you as friction fr** as possible.