The message from Reed Hastings and Ted Sarandos was crystal clear: Don’t expect Netflix to jump into the media M&A frenzy just because everyone else is.
Netflix’s co-CEOs exhibited their usual cool confidence on Tuesday during a 41-minute video interview to discuss the company’s second-quarter earnings results. The numbers showed that Netflix lost 430,000 subscribers in the U.S. and Canada for the quarter. Its short-term global growth projections are slowing some amid the turbulence caused by the pandemic. But that is no cause for alarm in Los Gatos, executives reassured.
“The growth patterns of our business over the long term is remarkably consistent and steady,” said Spencer Neuman, Netflix’s chief financial officer.
Netflix is responding to the changing competitive landscape in streaming by making a big move into video games. The plan is to offer its 207 million-plus global subscribers access to games and related content as an add-on, meaning no extra charge to subscribers’ monthly bills.
Lest that be interpreted by Wall Street or rivals or media reporters, Hastings articulated his vision for adding new layers to Netflix’s global business. The company has been expanding in consumer products, an e-commerce site and now gaming, but none of those are designed to be profit centers on their own. It’s all about supporting the core mission attracting and retaining subscribers to the core subscription product.
“We’re a one-product company with a bunch of supporting elements that help that product give incredible satisfaction for consumers and a monetizing engine for investors,” Hastings said.
The laser-focus on improving the core product without branching out too far in other areas has been key to Netflix’s meteoric growth. When pressed by Fidelity Investments analyst Nihdi Gupta on whether it is considering any M&A activity given the market conditions, Neumann didn’t hesitate to answer: “It has to accelerate our strategy with a low distraction costs. We’re pretty picky.”
Sarandos added: “It’s got to be right in the middle of the strategic core of what we’re doing.” Moreover, Netflix knows what it does well and what it doesn’t do at all. That’s one of the factors that has kept them from going too deep into the sports rights business.
“Our fundamental product is on-demand and advertising-free,” Sarandos said. “Sports tends to be live and packed with advertising.”
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Buying a studio with a big vault of IP, as Amazon is with its pending $8.5 billion purchase of MGM, would fit that description. But Sarandos doesn’t sound like an executive shopping for a transformational transaction — despite heated speculation that more Hollywood brand names will change hands in the near future.
Referencing media M&A, Sarandos mused, “When are they one plus one equals four, versus what most of them tend to be, which is one plus one equals two.”
Hastings pointed to Disney’s 2019 acquisition of 21st Century Fox as a ground-shifting event that allowed Disney to be more competitive as a general entertainment player in streaming beyond its kids and family stronghold. But the surprise mega-merger of AT&T’s WarnerMedia and Discovery? Not so much, in Hastings’ view.
“Time Warner-Discovery, if that goes through, that helps [them compete] some but not as significant as Disney-Fox,” Hastings said. As he has said many times before, Hastings emphasized that streaming, just like TV of old, is not by definition a zero-sum game. “There’s plenty of room to grow without taking away from the other streamers,” he said.
Sarandos enthused that even with a choppy quarter impacted by ongoing pandemic-related issues, the runaway ahead is long and lucrative.
“We’re just scratching the surface as to the potential for the business,” he said. Team Netflix has the benefit of being able to focus on enhancing its core product “while everybody else is trying to figure out how to unwind businesses and restructure businesses and put together enormous populations of employees,” Sarandos said.
(Pictured: Ted Sarandos)
