The world’s largest SVOD company shows no sign of slowing down. Netflix has earmarked US$6 billion in cash to spend on content this year, while carrying billions in long-term debt and hundreds of millions in negative cash flow on its books.
Pictured (from left): Ted Sarandos, Reed Hastings
Co-founder and CEO Reed Hastings, speaking alongside chief content officer Ted Sarandos at this year’s APOS conference, pledged to hold course, banking on investment in big-budget movies and shows ahead of revenue, in the quest for greater scale.
“Other internet companies are much, much larger,” Hastings told the assembled delegates.
“There’s an incredible opportunity for us if we can produce the right content. I keep saying to Ted: spend more money. We will raise the money, spend more money,” he added.
“I hope that free cash flow is negative for quite a while, because it’s a sign of great growth, and that we have found great projects to invest in.”
Netflix expanded its reach to almost everywhere in the world at the start of the year, bar China, North Korea, Syria and Crimea, forming a global network that can support a wider mix of programming.
Little has been done to localize pricing or content for these new markets however, limiting the audience to affluent consumers who can pay by credit card for the time being.
“The way to think about it is, we just enabled access to Netflix and the content we have global rights for, including our global originals,” Sarandos said.
“People are excited but it’s barely been optimized for local access, particularly in Asia. That’s what we are working on every day. It’s an ongoing process of launching in Asia that just started 100 days ago.”
For Netflix, the internet offers an opportunity to create a global media service, not just a global media brand. Success hinges on backing the right shows.
Popular programming with widespread, often multi-country appeal, provides the strategic bedrock for growth.
These shows help ward off local competition and pressure on consumer pricing, the two executives argued, while consumer demand makes service integration more appealing to distribution partners on the ground.
Such deals can provide a better view of tastes across the world, helping direct programming spend.
Data analytics also benefit from greater scale and an increasingly diverse audience mix.
“We have a very broad range of consumers, and a very broad range of content,” Hastings said.
“This ability to match people with the content that they like best is very important to the system, and has been from the very beginning. It’s a huge area of investment for us.”
A unified approach
Expansion, however, also means more competition from lower-priced rivals and more market-specific regulations and censorship. Big studios are also still cautious on global licensing.
Nonetheless, Netflix is maintaining global pricing and content where it can, encouraged by earlier traction from growth markets in Latin America.
Other parts of the service, however, may adapt for a global audience.
Offline viewing has been excluded so far, for example, as it adds complexity to the core service. That trade-off could change, now Netflix serves more countries with slower internet speeds and smaller WiFi coverage.
“We are more open-minded about it than we have been in a while, mostly because of the new emerging markets that we’re getting into,” Sarandos noted. “For our core business, it’s a pretty small use case.”
The price equation, meanwhile, is based on perceived value.
“If consumers are watching Netflix for 10, 20, 30, 40 hours, it is a very inexpensive product,” Sarandos explained. “It is incumbent on us to get that viewing up, and to justify that price point.”
Great content expands consumer demand, Hastings contended, giving room for Netflix to grow as a differentiated service alongside pay-TV incumbents and other SVOD hopefuls.
“Even with Netflix growing to 50% of US households, pay-TV is steady at 100 million,” he said.
“There is a lot of talk about cord cutting but overall the numbers are steady. The impact Netflix has on the existing ecosystem is overstated," he added.
"What’s understated is the interest of consumers in spending a little bit more, to have one more experience.”