Netflix x First to Scale

Processing Netflix’s latest quarterly report, I’m struck by the same thing you are: that is A LOT of loot.?

Off a healthy $9.8B revenue figure (+15% YoY), Netflix generated $2.9B in Operating Profit - a (staggering) operating margin of nearly 30% “that appears reasonably sustainable,” according to one analyst. Think about that: while everyone else in the space is throwing a parade for breaking even (and I am not taking anything away from operating in the black), these guys are throwing off 30% margins.?

This got me thinking back to my b-school days in the mid/late nighties, at the dawn of the commercial web. I had just launched SmartMoney.com in 1996 (the entire personal finance sector was us, the Motley Fool and The Street) and all everyone was talking about was the power in being “first to market”. Amazon (94), Yahoo (IPO in 96), Priceline (98), Google and Paypal (both launched in 98) all were first or nearly first to market. But so were Netscape, Webvan (forebearer of Instacart), Excite and Ask Jeeves , Geocities, Broadcast.com and many, many others. Maybe these companies were too early for consumer behavior or maybe “first mover advantage” is not the end-all, be-all??

Which brings us back to Netflix. Rather than think about their origins, it’s increasingly clear (even reductive) that its staggering quarterly performance is more a function of First to Scale that First to Market.

While everyone is trying to finesse their sub numbers to appear as competitive as possible with select reporting (Amazon, Apple), Netflix’s 282M subs provides the org with tremendous financial leverage.?

?? $2.9B quarterly profit allows it to outspend rivals (if it wants to) on its original content slate. We saw this spending-race game play out badly for many of the other players in the space from 2019 to 2023 and it's a lever Netflix can continue to flip.?

?? Its audience size and viewership scale enables it to be a critical value accelerator for licensed content (ie, Suits, Girls5eva, Your Honor, even Sex In City which enjoyed the Netflix Bounce). While Netflix’s relationship with rival studios is largely a symbiotic in the near-term given their need for cash (and Netflix’s abundance of cash), it provides Netflix with a viewership advantage that manifests in the sector’s lowest churn rate (Per Antenna, Netflix churn was just 1.9% at the end of Q1 vs 5% for the rest of the sector).?

?? Enables the company to quickly financially scale its ad tier. Simple math (all things being relatively equal): bigger audiences, larger slice of the CTV media mix, faster top-line growth. Oh, btw Netflix’s ad membership was up 35% QoQ.?

While this First-to-Move vs First-to-Scale assessment may be a little reductive, a largely sustainable 30% operating margin really illustrates the distance between Netflix and everyone else in this space. No surprise it added like $30B in market cap this morning.