These were only a few of the headlines yesterday as the streaming giant crossed 100M subscribers and stocks soared by 9%. With 51.92M subscribers in the US and 52M abroad, a majority of Netflix’s streaming users are outside the US for the first time.
Rewind back to last July when Netflix had reported its weakest subscriber expansion in two years and shares had plummeted by 15%. Needless to say, Wall Street was far from gushing over the company then.
And therein lies the problem — Wall Street doesn’t seem to understand the complexities of subscription businesses.
As The Financial Buzz points out, “Netflix has indicated to Wall Street it would like to be judged primarily based on its revenue and global operating-profit margins, as opposed to metrics such as its subscriber additions. But many investors have remained focused on subscriber growth as a proxy for long-term financial health.”
While there’s no doubt that the number of subscribers and market share is a big indicator of a company’s success, there’s a lot more that contributes towards success in the Subscription Economy. An equally important measure is LTV or Customer Lifetime Value i.e. the value a business can derive from a customer relationship. In other words, it’s a measure of how much profit a company expects to make from any given customer in the future. Unlike traditional product businesses where it’s all about the number of units sold in a given quarter, subscription businesses are about nurturing and growing the subscriber relationship over time.
And Netflix is one of the few companies that truly understands the importance of LTV and focuses on maximizing it. They are way ahead of most businesses in using data to truly understand their customers and cater to their needs and thus, increase their LTV. But, even though the company has had great success in understanding its US customers, it took time to understand its international audiences and thus, the low acquisition numbers last year. Netflix knows that while increased marketing spend and offers could bring in more subscribers, they may not necessarily be the right type of long- term subscriber. It looks like the company took its time to make the right investments rather than focussing simply on a surge in subscribers. Churn rates a few quarters down the line will tell us if these were indeed the “right subscribers” for the company.
The company has also been consistently investing in original content. Once again, critics had jumped to call it irresponsible and concluded the demise of the company. But, as Zuora CEO Tien Tzuo foresaw it last year when he said – “I suspect Netflix is actually spending more money on compelling local programming, to fuel its expansion into 130 countries and to mine the terabytes of usage data it owns to inform the creation of new shows to further reduce the risk of failure.“
And yesterday, Netflix CEO Reed Hastings told an analyst that the company was indeed reaping the dividends of its big content investments. “When we produce an amazing show like Stranger Things, that’s a lot of capital up front, and then you get a payout over many years,” he said.
When Netflix took a hit at the stock market last year, we had cautioned Wall Street – “This isn’t a story of failure but on the contrary, it’s a story about a very smart and methodical business working its way from being a regional success to a globally successful media business. It’s time Wall Street caught on.”
A year later, the results speak for themselves. Or in headline-speak – Netflix Shares Set to Skyrocket to Highest Price Ever!