Live By Growth, Die By Grow
Netflix is far and away the most successful video streaming service in the world. With 130M global subscribers and north of $15B in annual revenue, it’s amazing to see how far the company which used to send us movies on CDs by mail has come. With that success also comes the expectation of continued growth, sort of the like the corporate version of a hamster wheel that keeps going faster and faster.
Late Monday Netflix found out what happens when the hamster wheel slows down even a little. During their Q2 Earnings call Netflix reported weaker than expected subscriber growth. They still grew by adding 4.5M new worldwide subs, but that was half a million short of their 5M projection. Wall Street’s reaction was immediate, with an after hours selloff that resulted in a 14% drop of their share price.
So why did Netflix get taken behind the financial woodshed for growing slightly less fast than was expected? It’s because growth is the one thing investors have been buying into all along. Netflix uses unending growth as it’s North Star. That justifies its continued investment in content development, which is up to an estimated $16B in 2018. Netflix is spending this money to create new video content on the assumption that new users will keep coming – insert a “build it and they will come” Field of Dreams analogy here. So any deceleration of sub growth, no matter how small it is, takes the shine off their entire business strategy and sends investors running for cover.