Netflix CEO Explains Why His Company Keeps Growing

By Daniel B. Kline Markets Fool.com

Netflix (NASDAQ: NFLX) just had a stunning quarter where the company added over 7 million subscribers globally. That puts the streaming leader at 93.8 million total members and that's slightly bigger than the audience for the 11 largest pay-television providers in the United States. That group, which represents about 95% of the market, consisted of 93.65 million customers at the end of Q3 according to numbers compiled by Leichtman Research Group (LRG).

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Even when you just consider U.S. membership, Netflix closed 2016 with 49.43 million subscribers. That's larger than half the total audience for the pay-TV companies referenced above.

Netflix's growth will slow down a little in Q1 as the company projects 5.2 million net additions for the period with 1.5 million in the U.S. and 3.7 million internationally. That's still stunningly quick growth, but the company now has a very solid understanding of how its content drives subscriptions.

Original shows likeDaredevil have helped build the Netflix brand. Image source: Netflix.

It's mostly about content

Netflix CEO Reed Hastings explained during the Q4 earnings call last week, which was transcribed by Seeking Alpha (registration required), that the streaming leader has become stronger as it has grown its library.

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"Think of it as it's a cumulative effect," he said "Very few people will join Netflix just because of a single title. But there's a tipping point. We have one more title that has great excitement, you're hearing a lot about and that triggers you to finally sign up for Netflix."

Chief Content Officer Ted Sarandos elaborated on what his boss said. He drove home the idea that enthusiasm for the service grows as its original content lineup adds more episodes.

"We have multiple seasons of our shows and we see that the audience continues to build cumulatively and therefore the excitement for the upcoming season builds as well," he said. "So, in Q2 of this year, we have new seasons of a lot of our very popular shows, like Orange Is The New Black, Kimmy Schmidt, Bloodline, Sense8, Master of None, and we think that they should have a pretty nice impact on our subscriber growth as well."

It's still a relatively new medium

While the majority of Americans understand how streaming services work, it's still a new technology that some people have yet to embrace. Hastings explained that as acceptance and understanding of the medium grows, so too will Netflix's audience.

"The basic demand creation is increasing as people get more comfortable and more aware of the idea of Internet television where you don't get the commercial interruptions, where you just get to watch when and where you want," he said.

How high is the ceiling?

Netflix has a difficult time predicting its max reach because some of its growth depends on what happens to the traditional cable business first in the U.S., then around the rest of the world. If the cord-cutting trend continues or people start opting for cheaper, skinny bundles, then paying $9.99 a month for Netflix becomes viable for even more people.

What's clear is that through the continuing creation of original content, Netflix continues to build its case with customers. If people are joining due to the appeal of multiple shows that each have multiple seasons, they are likely to be satisfied enough to remain members.

Adding content should help Netflix not just add customers, but limit the amount of people who join for a month or two, binge-watch a couple shows, and then leave for a period of time. That won't be viable when the amount of content people want to watch gets too big.

For many people, at least in the U.S., that tipping point has already occurred. Going forward, every time the service adds a new hit show or another season of an existing success, it strengthens its hold on existing subscribers while adding to its appeal for people who have not signed up yet.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.