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THE INC. LIFE

Netflix Bet That $8 Billion and the Obamas Would Keep It On Top. So Far, That Bet Is Paying Off

The competition is getting fierce, but Netflix still dominates streaming–and inspires startups in every industry.

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BY Sophie Downes - 03 Dec 2018

PHOTO CREDIT: Getty Images

Editor's note: Inc. magazine will announce its pick for Company of the Year on Monday, December 10. Here, we spotlight a contender for the title in 2018.

In 1997, Reed Hastings and Marc Randolph were looking for ideas for a new e-commerce business. They wanted it to be "the Amazon.com of something," Gina Keating writes in Netflixed: The Epic Battle for America's Eyeballs. They hit upon online DVD rentals, and in April 1998 launched Netflix.com, a mail-order service offering fewer than 1,000 movies. Twenty years later, that business has evolved into a global video-streaming juggernaut and production company with 6,000 employees and 137 million subscribers, and its impact on the startup community can't be overstated.

Indeed, you can't swing a VCR without hitting a new startup that bills itself as "the Netflix of" something. Paul Verna, principal analyst at market research firm eMarketer, attributes this to Netflix's comparatively "clean" success story. "It's easy to attach yourself to the Netflix narrative because it's so simple and so devoid of asterisks and detours," he says, referring to the absence of user privacy scandals and product failures like those befalling other high-profile tech companies. Netflix is not ad-supported and provides only one product, so it has no other revenue streams to buttress its business model--or complicate it, depending on your perspective. That's both a liability and a strength, Verna adds.

2018 has been a year of incredible growth for the company. It has added nearly 20 million subscribers globally and is charging toward its stated goal of creating 700 new original shows and movies. Yet that success has spurred its rivals forward. Disney and Apple are on track to enter the streaming world next year, and Hulu and Amazon are racing to attract subscribers and release their own prestige titles, making Netflix's brand of market domination in the coming years far more uncertain.

"Netflix is going to have to do something bold and different--some kind of pivot or reinvention," Verna suggests, noting that the competition is only going to get more fierce in the years to come. In the company's latest earnings call, Hastings, the CEO, said Netflix is more focused on creating high-quality content than on beating its competitors. "Someday there will have to be competition for wallet share; we're not naive about that," he said. "But it seems very far off from everything we've seen." (Netflix refused to grant Inc. an on-the-record interview for this story.)

Doubling Down

Netflix's landmark algorithm initially set it apart from its streaming competitors, but its broader willingness to defy received wisdom and follow where the data leads has kept it one step ahead. One example is the company's prescient investment in stand-up comedy specials, which previously weren't seen as having wide appeal but proved wildly popular among a streaming audience.

This year, the company has doubled down on its investment in original content, which began in 2013 with House of Cards and gained steam with hits like Orange Is the New Black and Stranger Things. Last October, Netflix announced it would sink $8 billion into content in 2018; outside estimates have placed that spending closer to $13 billion. This push includes international titles made for markets from Thailand to Norway, and a new production hub in Albuquerque. The ultimate goal, the company says, is to offer 50 percent original content within a few years.

A screengrab from Netflix’s

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"What we're trying to do is take many bets," Hastings said at a press event in March, according to Quartz. "Some of the content, maybe it won't work. But that's part of being aggressive and trying new things. We're willing to try."

The company pays dearly for all of this content, however. To produce just one Stranger Things episode, Netflix reportedly shells out as much as $8 million. But executives and investors are sanguine about this constant cash burn. Even critics acknowledge that it's working.

Matthew Ball, the former head of strategy at Amazon Studios, writes on REDEF that Netflix is uniquely positioned to create and acquire more and more shows. Ball argues that because bombarding viewers with choices brings more eyeballs to the platform--and Netflix's algorithm can put even the most niche programs in front of the right eyeballs--the company isn't risking too much, even if not every new show is a hit.

And there's still more to come. This year Netflix spent big to book talent like Barack and Michelle Obama; Ryan Murphy, who co-created Glee and American Horror Story; and Shonda Rhimes, who created Scandal and other prime-time hits. It'll likely further chase recognition typically reserved for traditional production houses. After winning two 2018 Academy Awards and 23 Emmys (the same number as HBO), it announced in October that it would release three films in theaters before making them available for streaming--a hint at further Oscar ambitions.

Bigger, Bolder Gambles

As the company hurtles forward, however, there are bound to be public embarrassments and internal missteps. Chief communications officer Jonathan Friedland was fired in June after using the N-word in a meeting. And last month, a Wall Street Journal article described a culture where managers are encouraged to apply a "keeper test" to their teams and fire anyone they wouldn't fight to keep, and employees live in fear of being let go. The company espouses maximum transparency, which includes sending email announcements explaining exactly why someone is leaving, a practice some employees find mortifying, according to the Journal. Netflix offers generous salaries, and allows hundreds of executives with a director title or higher to see how much their colleagues make; Hastings even wanted to make salary data available to all employees, but opposition from other executives killed that plan. The company provides a year of paid leave to new parents, far more time than any other major tech company, a Recode survey found, but has considered rolling that back after many employees took full advantage of it.

It's hard to argue with relentless growth, which Netflix has been delivering even as it takes bigger and bolder gambles. The company continues to add subscribers at record rates (though Verna warns that user growth will plateau before long), and briefly became the world's most valuable media company in May, when its market cap overtook Disney's at $152.6 billion. A Cowen & Co. survey of U.S. adults found that Netflix is more popular than cable, YouTube, or Hulu for watching entertainment on television (the gap between Netflix and other platforms is even wider among Millennials). As it releases ever more offerings and encourages users to binge-watch, the company freely admits that it wants to eventually claim every moment of its customers' free time. Hastings once said sleep was the company's biggest competitor--and added, "And we're winning!"

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