The Second Act of Netflix
In 1998 Netflix was formed with a simple idea: rent DVDs by mail under a subscriber model: no late fees, and you don’t have to leave your house. The company went public in 2002 with annual revenues north of $75 million. The virtual model was one originally embraced by the marketplace: Netflix owns or leases warehouses, but did not take on the cost structure of either retail operations or content production. The stock bounced around a bit in the sub $50 range, and then in 2009 started to climb.
In the fall of 2010, with the stock closing in on $200 a share, Netflix came under attack from short sellers who believed the evolution into streaming and away from DVDs would significantly reduce margins. For the most part, the company withstood the fervor. Hedge fund manager Whitney Tilson even penned a public explanation of his short position, and Netflix CEO Reed Hastings advised him to cover the short. The stock continued to rise, hitting $295 a share in July of 2011. But the rest of the year it crashed hard, with increasing competition and a general acceptance that the same business model that had catapulted its rise had serious flaws. As 2012 dawned, Netflix stock was under $75.
Fitzgerald wrote that there are no second acts in American lives, but Netflix seems to have risen from a premature grave. The company ended 2012 with a surge in both subscribers and profits and on the recent valentines day, Netflix closed at $187. Part of this growth is due to a shift in the business model. Netflix recently released House of Cards, its first original programming, which drew considerable attention and seems to have prompted subscriber loyalty. So in searching for a solution to its business model, Netflix is moving back to the idea it once fled: sinking millions of dollars into producing content. The Atlantic magazine explains why spending $100 million on House of Cards may make sense, but it’s not a sure thing. It is a rare business model that can stake a claim to perpetuity, and the story of Netflix’s continued evolution might itself make a compelling film.