Don’t underestimate Netflix’s power to flip the script

There was a time when Netflix’s main competition was traditional TV serving up Columbo reruns. Today, it’s a different story. YouTube is a formidable foe. The stock is down roughly a quarter this year, and Netflix said on Tuesday that its fourth-quarter earnings would fall short of expectations. But the company is doing the right thing — namely, doubling down on what put it ahead in the first place.

While the company says membership is growing in every region, Netflix’s share of overall viewing has shrunk. The 7.8 per cent of overall US TV viewing it claimed in July is roughly half that of Alphabet-owned YouTube. Over the past year, analysts have shaved their expectation of Netflix’s US and Canadian revenue over the next decade by roughly $10bn, according to Visible Alpha.

Undeniably, YouTube is directly competing for the same eyeballs. Yet Netflix has so far decided to zig as its rival zags. Co-CEO Ted Sarandos has said that Netflix is “definitely not” in the user-generated content business. Instead, he and his co-head Greg Peters look to be doubling down on what Netflix does differently, namely produced films and television programmes.

That’s a wise move. Media companies that have tried to blur the lines between short-form user video and the slick Hollywood kind have had few successes. Think of YouTube’s unsuccessful attempt to move to Hollywood with YouTube Originals, and Meta’s experiment with Facebook Watch. Yet investors don’t give Netflix much credit. As its shares have slid this year, the S&P 500 is up about 12 per cent. That’s mostly because of tech stocks — but Netflix theoretically is one.

The problem is that audience-pleasing creativity is hard to quantify — and what numbers there are aren’t all flattering. This year, Netflix took home the lowest number of trophies at the Emmys in more than a decade. Content spend is rising. On the positive side, last week’s job cuts could free up another $500mn, reckon analysts at Rosenblatt Securities. The appointment of Peter Rice, a veteran of theatrical film-making who worked in the past with Walt Disney and indie studio A24, could also help put making better films back in the limelight.

That’s not to say there is nothing for Netflix to learn from YouTube. It could tap into creator culture by giving YouTube stars ready for the big leagues a home for podcasts and TV shows. MrBeast’s move to Amazon Prime shows the potential. But by focusing on making more Oscar winners, at least it would double down on territory YouTube has struggled to conquer.

Netflix’s recently retired founder Reed Hastings once claimed the company’s primary competitor is sleep — which, after all, is another thing potential customers could be doing with their eyeballs. Sleep is also, though, the one luxury the company’s current top brass can hardly afford.

gaia.freydefont@ft.com