In a 2013 article in GQ, Netflix Chief Content Officer Ted Sarandos laid out the then-nascent streaming company’s challenge:

“The goal is to become HBO faster than HBO can become us.”

In yesterday’s Q4 2018 earnings interview, CEO Reed Hastings, while not referencing Sarandos’ statement, laid out facts that showed Netflix has achieved — or even exceeded — this goal that seemed audacious six years ago:

  • Hastings noted that the majority of Netflix’s engagement is with its original programming, not with the vast library of content licensed from movie studios and TV networks.
  • He noted that this changes the economics of the business, front-loading its content expenses vs. the current licensing contracts, which spread payments over time.
  • He also likened the 80 million households that he reported have viewed the Q4 hit Bird Box to the kind of culture-moving moments that major TV shows and movies have created in the past. HBO was central to this years ago with series such as The Sopranos.
  • He also noted that the majority of Netflix’s marketing spending is not in subscriber acquisition but in promoting its major original series.

In other words, the value proposition to consumers is now compelling content that you can’t get anywhere else, not a vast library of movies and TV shows you can view on demand. Sounds like HBO to me, and it verges on a TV network or movie studio model: Invest lots of money in production, invest more money in marketing to build an audience, and hope the audience shows up and pays.

All the executives hit repeatedly on the concept of “engagement” as the future of the company (setting the stage, I believe, to wean Wall Street off of valuing them by net paid subscriber additions that, at some point, must plateau).

But if engagement is the key metric, Wall Street will measure them against movie studios and expect a consistent series of blockbuster hits quarter after quarter. Miss a quarter, and watch the sell ratings pile up.

This confronts Netflix execs with two big questions:

  1. Can Netflix avoid the peaks and troughs, the hot and cold spells, that all other content producers go through? Back in House of Cards days, it touted the consumer data that made its creative decisions more reliable than the gut instincts that traditional studios rely on. We haven’t heard much about this since then. Did its data inform decisions around hits such as Roma and Bird Box?
  2. Does its subscription model buffer it from this boom-and-bust cycle? If a movie bombs at the box office, the studio’s revenues suffer immediately. But if Netflix goes through a cold spell without a big hit, will consumers cancel their subscription quickly? Or will it take an extended cold spell to drive consumers away?

But these are good questions for a management team to wrestle with. They are signs that the business is maturing and that it can turn its attention from the frantic scramble to meet ever-increasing Wall Street expectations for net new subscribers to managing the dynamics that will make or break Netflix’s future as a content company for the streaming age.