NETFLIXED: Reflections On The Streaming Giant's Q3 '21 Earnings

Business titans are the new rock stars. Society celebrates the successful, anointing genius status to those who reach the top rung. At the same time, society can (and will) turn on a dime, instantly heaping derision on those same captains of industry if they fall from grace. We see this playing out right now with Theranos and once high-flying founder Elizabeth Holmes. She was the next big thing. Until she wasn’t. Is she a fake and fraud? Or did she merely fail after doing what countless others do - “fake it until they make it?” A jury will decide.

Consider this a tale of two other business titans — both of whom have been lionized, but one who now also faces the deafening roar of hate. The first is Reed Hastings, founder and CEO of streaming juggernaut Netflix. The second is Adam Neumann, founder and former CEO of once-darling WeWork. Hastings is widely hailed as being one of the foremost business visionaries of our time. After all, he built a seemingly invincible company that now, as of today (Q3 2021 earnings), boasts about 214 million subscribers worldwide and a market capitalization of $280 billion. Neumann, on the other hand, is now widely castigated as being a con artist who bilked billions. At one point, WeWork planned to go public at a near $47 billion valuation, but it then cratered 80%. All thanks to Neumann, so the story goes. Neumann, the grifter - the quintessential cautionary tale.

But like most things in life, these stories aren’t so simple. No one can dispute Neumann’s core brilliance of re-imagining commercial real estate, transforming them into inspiring, open and cool cathedrals to entrepreneurialism. So what did he do wrong? Like any self-respecting Silicon Valley-inspired entrepreneur, he pushed a sexier central story of tech-dom that drove significantly loftier financial multiples. Sophisticated investors like SoftBank ate it all up – that is, until certain more sober financial analysts began to dig deeper and poke holes in Neumann’s tech story. That’s when the dominoes began to fall. And now this former hero is a monster.

But is there actual proof of fraud? Neumann sold an aspirational, audacious dream, and he sold it extremely effectively. Who’s to say whether Neumann did or didn’t believe the “tech” tale that he preached and made investors swoon. Founders frequently believe their own stories, even when their pitches don’t hold up to scrutiny (which they frequently don't). That’s the Silicon Valley rule, not the exception. Pitch decks are filled with financials that always rise logarithmically up and to the right. Always.

Now let’s take the legend of Reed Hastings. He alone saw the streaming opportunity and grabbed it (at least, so his story goes). But upon digging deeper, significant holes can be poked in Netflix’s story as well. While certainly not equating those with WeWork’s or Theranos’s, a credible bearish “House of Cards” case can be made. Yes, Netflix is frequently profitable in an accounting GAAP sense. But the gap in its story is that cashflow positivity remains elusive; the company was cashflow negative once again in Q3. And its debt load of billions has generally risen over time to pay for ballooning content budgets that will reach $17 billion this year alone (the company reports long-term debt of about $15 billion as of Q3 2021). Those content budgets will only continue to rise in the face of mounting cutthroat competition.

Hastings justifies these realities by convincing investors that Netflix’s Herculean historical growth can continue endlessly. But Netflix U.S. and Canadian subscriber growth is essentially non-existent at this point. The company reported only 70,000 new subscribers in just-reported Q3 '21, and it actually lost U.S. and Canadian subscribers on quarter earlier in Q2. That means it still has fewer paid subscribers in those regions than it had earlier this year in Q1 '21. Netflix also faces massive challenges overseas by the likes of Amazon and Disney (which amassed over half of Netflix’s global subscriber count in less than two years). Netflix’s basic business model is also knee-capped, because it essentially sells only one product – content. Its gargantuan competitors, on the other hand, can use their streaming services primarily to market other core products. Apple TV+ is one big commercial for iPhones and Macs. Amazon Prime Video lures us in to subscribe to free shipping so that we keep shopping.

Does this mean that Hastings is pulling a fast one on us? Of course not. He likely authentically believes that his business recipe can work endlessly. But even if he doesn’t, you can’t fault him for being a great salesperson who knows how to “sell the dream” to a world of few doubters.

Stories are never as simple as they seem, and we humans like to place our narratives into clean boxes. We are happy to crown, but we are also happy to crucify. Certainly, there’s much brilliance at the top of the heap of the business world. Take Reed Hastings, for example. But let’s also not forget that there’s much brilliance all around us that we simply never see. Let’s not christen kings of business and lionize them as titans of genius too easily. And let’s not chastise others too mightily for “sins” frequently revered by financial interests. Instead, let’s dedicate ourselves to digging deeper - and to understand the role that timing, contacts and serendipity also play in all success stories.

Business titans are mere mortals, after all.