The Netflix management team spent a large portion of their 38-minute “earnings interview” for the third quarter highlighting their aggressive push into the film business and their view of streaming competition.
CEO Reed Hastings touted the fourth-quarter slate of films, a nearly billion-dollar array of work from directors including Michael Bay, Martin Scorsese and Noah Baumbach (with casts to match) as “way better than any slate we’ve ever had.” Content chief Ted Sarandos said: “These are big, theatrically ambitious-type films that you’ll be able to watch on Netflix, included in your subscription. It really is a fundamental change in the economics of how people enjoy films.”
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Hastings, Sarandos and other members of the senior management team delivered their comments via video after Netflix reported solid Q3 results. In addition to soundly trumping Wall Street analysts’ estimates for profit in the period, subscriber numbers — the Achilles’ heel of the company’s second quarter — mostly hit the target. In reporting earnings, Netflix differs from the long-established custom of other public companies, which convene dial-in conference calls with multiple analysts and take five to 10 questions over the course of a 45- to 60-minute call. Netflix instead convenes 35- to-40-minute video interviews moderated by a single analyst and posts them to YouTube about two hours after the numbers hit.
This quarter’s interview was striking for its final two minutes. Michael Morris, the Guggenheim Securities analyst who moderated the call, asked an open-ended question to the management team about what they most looked forward to in the months to come. All but Hastings specifically mentioned feature films and not series.
Rivalry in the streaming space — with Apple, Disney, WarnerMedia and NBCUniversal all launching new services in the next six months — not surprisingly took up significant time in the interview.
“It’s interesting to see Apple and Disney launching essentially in the same week after 12 years of not being in the market,” Hastings said. “Disney is going to be a great competitor. Apple is just beginning, but I’m sure they’re going to have some great shows.” Rather than a winner-take-all competition, though, Hastings sees a race with multiple winners. Plus, he said, “All of us are competing with linear TV” and not yet at the same global scale.
CFO Spencer Neumann said the company has tried to adjust its forecast to allow for the fact that “several new competitors are launching and, inevitably, there’s going to be some curiosity and some trial of those competitive service offerings.” He later said he looked forward to “having some of these competitive launches in the rear-view” to enable the waters to calm a bit.
Although some consider it a liability, the company’s $15 billion in content spending in 2019 (on a cash basis) always has been pitched as a plus by the company. “We’re pretty uniquely positioned to deliver scope and scale” across genres as well as feature film and series due to that massive war chest, Sarandos said. At the start of this decade, he noted, reports were circulating that the company’s prized new series, House of Cards, carried an unheard-of budget of $100 million. While “that seemed shocking nearly seven years ago, it’s a bargain today,” he added. While no estimates of future spending were provided, Sarandos articulated the game plan moving forward: “We’re investing forward and trying to win those moments of joy for our members.”
Asked by Morris if the company would soon reach “equilibrium” after a long period of increasing its spending year after year, Hastings noted the global user base of 2 billion for both YouTube and Facebook. “And they’re still growing,” he said. “We’re a fraction of that. … Equilibrium is so far from where we are today, it’s something we don’t think a lot about.”
Sarandos said the opportunity to step up and claim Seinfeld streaming rights starting in 2021 was too good to pass up. “Few titles in the history of television continue to be relevant” 30 years after their premieres. Calling it “comfort viewing,” he said, adding that Seinfeld is a “very elite show” in terms of durability.
Asked about binge releasing as opposed to more incremental, episode-by-episode premieres, Sarandos noted how much he enjoys Succession on HBO, readily tuning in on a weekly basis. “If I liked the show a little bit less, I would burn out on it,” he said. Several unscripted shows on Netflix, he noted, have more gradual patterns that emulate the demand-release-demand rhythms of traditional TV.