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Netflix Rising

Arts & Culture | April 28, 2014

In January, Robin Wright took center stage at the Golden Globe Awards ceremony and admitted—with confidence—that she had nothing to say. In a gold gown hugging her strong frame, Wright gripped the prize in her hands, stumbling over words to show her appreciation for her historic award. In her brevity, the star of the acclaimed House of Cards managed to thank Netflix and the show’s creators for allowing her to create a character that she could “mold out of marble.”

As Wright celebrated, Netflix did a dance of its own. Netflix, too, had made something of a masterpiece out of hard and doubtful marble—an undertaking that nearly left them for dead.The DVD rental and online video streaming company was almost a cautionary tale in 2011 when a series of poor strategic decisions led to plummeting stock values. Today, however, the company is enjoying the title of this year’s top-earner for Standard and Poor’s 500 and Wright’s award as the first web-only TV winner at the Globes. What was almost a disaster suddenly became a Wall Street success story.

The comeback was a surprise to say the least. Back in July 2011, Netflix’s stock celebrated a high of $300 per share. But this financial profit led to a series of hapless decisions that put the company in a vulnerable position: subscription prices jumped from $11 to $16 overnight, and Netflix lost nearly 800,000 subscribers in the vital third quarter. Critics jumped to blame Netflix’s management team for the catastrophe, citing the firm’s insensitive price hikes during a vulnerable time of recession. This calamity was coupled with an announcement that the DVD and streaming services would be separated. That plan was ultimately given the kibosh, but the once-soaring stocks felt the pain. And, just a year later, Netflix shares went from an all-time high to an all-time low. At a rate of $53 per share, Netflix was left for dead.

In October 2011, The New York Times Magazine ran an article titled, “Reed Hastings Knows He Messed Up.” Hastings, the CEO of Netflix, knew exactly what was happening—and wanted some slack. In the interview with the Times Magazine, Hastings said, “[Netflix] simply moved too quickly, and that’s where you get those missed execution details.” Hastings went on to describe the subsequent “internal reflectiveness” as a result of the decisions. “We know that we need to do better going forward,” he said. “We need to take a few deep breaths and not move quite as quickly.” When asked if he would consider stepping down for the benefit of the shareholders, Hastings replied, “No, not for a second.” Citing the leadership failures as “martial missteps,” Hastings spoke positively about the future of Netflix, hoping that the site’s critics would back off: “It’s a mistake to measure everything by what happened last week or last month.”

To a certain extent, he was right.

A little over a year later, Netflix’s first original show, House of Cards,made a quiet debut. Following soon after came Orange is the New Black. While Netflix was on the brink of becoming a has-been, it reworked its strategy and held true to the most honest of business goals: customer satisfaction.

 In a competitive battle before the 2011 calamity, Netflix outbid HBO for the rights to 26 episodes of Beau Willimon’s House of Cards for $100 million. The series, a dark political drama starring Kevin Spacey and Robin Wright, would eventually be the company’s saving grace; the launch of House of Cards helped the company post $1 billion in quarterly earnings after its 2013 premiere, not to mention the additional rave reviews and nominations. With a second season up on the site, as well as a confirmed third season in the works, House of Cards is amassing a sizeable cult following.

In July 2013, Netflix did it again. Orange is the New Black, an unapologetic prison “dramedy” directed by Weeds’ Jenji Kohan, helped the company earn even more money—and viewers. By the end of the same month, Netflix boasted over 30 million subscribers, both domestic and foreign—a sure sign of growth from 16.9 million subscribers in 2010. Orange is the New Black has held on tightly to the coattails of House of Cards:the second season premieres this June.

For Hastings and the rest of the team at Netflix, the answer to their woes was more than just adding millions of subscribers—it was creating a new cultural phenomenon with the introduction of addictive original content: binge watching.  

 According to a survey conducted by Netflix itself, binge watching is defined as “watching between 2 to 6 episodes of the same show in one sitting.” Sixty-one percent of Netflix users said that they binge-watch regularly, which is no surprise. Though Netflix guards its viewing figures carefully, an outside network estimates that nearly 10 percent of Netflix’s US subscribers watched the first 13 episodes of House of Cards season two during its premiere weekend. That’s roughly 660,000 people watching 12 hours of online TV in two days. For Netflix, that’s good news.

Netflix’s April 2013 white paper—a company report addressing progress and proposals—suggested that the shift to original content would propel the company to the forefront of modern television. In the paper’s summary, the company claims that internet-TV will replace linear TV, apps will replace channels, and that “Netflix, HBO, and ESPN are leading the way” in this regard.

In the white paper, Netflix examines the success of online original content instead of regular TV episodes. “[Linear competitors] have to attract an audience for Sunday at 8pm, say. [Netflix] can be much more flexible. Because we are not allocating scarce prime-time slots like linear TV does, a show that is taking a long time to find its audience is one we can keep nurturing.” Nurturing is the right word. With over 40 million viewers today, Netflix can be sure that new subscribers will not only catch on, but also catch up with their content—especially if they binge watch an entire first season in one weekend. The white paper also notes Netflix’s ability to “commit to a whole season, rather than just a pilot episode.” According to the company, this liberty allows for more “creative storytelling.” With original content in its own hands, Netflix can vary runtimes per episode based on storylines, do away with week-to-week recaps, and change what constitutes a “season.” Netflix believes this makes it “easier to attract talent.” And in January, Robin Wright’s Golden Globe was proof enough.

From near death to a high position on Fast Company’s Most Innovative Companies of 2014, Netflix has had a turbulent career. Stocks at around $450 per-share in today’s market are a far cry from $53 three years ago. A few poor decisions were quickly remedied by the success of original content, which has givenNetflix its underdog narrative. Today, Netflix is clearly leading the way in internet-TV, with competitors like Amazon, Hulu, and HBO following closely in its shadow. But what’s beyond the success of House of Cards and Orange is the New Black? What will Netflix do next to stir the media pot? How will the company stay relevant? Spending $2.5 billion on content each year means pushing subscribers to pay more, but as Netflix has learned in the past, no one likes opening their wallet.

With the past in mind, Netflix has a challenge ahead. To keep its place at the forefront of online-TV, Netflix must continue to invent addictive content without angering its subscribers with increased prices. As the tango between satisfaction and price rolls on, the online-streaming mogul deserves to revel in its successes, thanks to a winning actress and a loyal band of House of Cards binge-watchers. And hey, even Obama is watching.