Netflix Case Study: Is Netflix Building a House of Cards? (Main problem/question, major issues, relevant straegied and recommendations)

Reed understood there was no long-term business in being a rerun company, just as there was no long-term business in being a DVD-rental company. He remembered vividly the allegory used by Ted in 2012: "If we were going to start having to fend for ourselves in content, we had better start exercising that muscle now." 15 But it was not a lighthearted choice for Netflix to take on the large studios it so much depended on. As Nettilix grew more ysuccessful, studios raised their prices, killing margins. In-house production became a hedge against ever rising licensing costs, making it easier for Netflix to say no. Reed smirked when Reuters in 2013 neatly summarized Netflix's strategic intent, explaining that "... the thing that Netflix aspires to, which HBO already has, is an exclusive library of shows ... it also becomes the only place to watch certain shows with cultural-touchstone status. And presto, the decision is no longer whether Netflix is worth the subscription price; rather, the question is whether you can afford not to have it."16 And it all started in 2013 with "House of Cards." Reed kept the article snippet of CNBC, writing at the time, "This is a big deal: It's Netflix's first big debut in the premium original content space, and it puts the streaming video player into direct competition with HBO, Showtime and Starz, for both content and viewers. It's a total transformation of the way Netflix conceives of its relationship with content."17 Of course, Netflix's content strategy was built on its ability to analyze what people wanted to watch, how and when they watched it and how to make sense out of it. Mario Gavira, an industry expert, wrote: "It took them six years to collect enough viewer data to engineer a show that became a worldwide success: House of Cards. Since then, Netflix has increasingly used this formula for content creation achieving success rates of 80% compared to 30%40% success rates of traditional TV shows." 18 At the Q4 2018 investor interview, Reed explained that the sustained content production growth fueled a "virtuous cycle," "The more investment you're putting in, the more people are finding content that they love and the more they have value in the service. 22" Therefore, in 2016, Netflix spent $8.7 billion on content vs. $13 billion in 2018 (refer to Exhibit 1) and expected $15 billion to stay on course with Reed's plan. 23 But investors were showing increasing concern about Netflix's ability to meet its subscriber targets. With that, some voices challenged the sustainability of content spending. Looking at his 2018 consolidated lncome statement (refer to Exhibit 2), Reed was positive despite the market noise. Netflix's revenues had grown from $8.8 billion in 2016 to $15.8 billion in 2018 , demonstrating solid top-line growth. For the first time, the international streaming business with $7.78 billion in revenues overtook the domestic one (refer to Exhibits 3 and 4). Reed made sure to point out in the annual report that the increase in consolidated revenues was primarily driven by the growth in the average number of streaming paid memberships globally, mainly arising from non-US markets. But he also knew that further price increases due to increasing competition and the lower purchasing power of new markets were increasingly less likely to succeed, so future revenue growth needed to come from additional subscribers. In fact, for the financial analysts, subscriber numbers were considered the key indicator for Netflix's business prospects. 24 More subscribers meant more revenues and thus cash to be spent on content used to attract new subscribers