How Netflix Addresses Its Toughest Challenges

By Danny Vena Markets Fool.com

Investors are always looking for a peek inside the mind of a business visionary. This can provide insight into the inner workings of a company's management and how it may respond to future challenges. Investors recently had a great opportunity to learn from one of the true luminaries in business today, Reed Hastings, CEO and founder of Netflix, Inc. (NASDAQ: NFLX), the company that revolutionized streaming video.As a keynote speaker at the 2017 Mobile World Congress in Barcelona, Hastings touched on a range of challenges the company faces every day and how they drive the direction of the company.

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On competition

Competition looms everywhere for Netflix, from Amazon.com's Prime, to Hulu, to YouTube, owned byAlphabet subsidiary Google. When asked about competition and the fact that everyone was jumping on the bandwagon in a field that Netflix created, Hastings said:

Netflix is available on a host of devices worldwide. Image source: Netflix, Inc.

We've competition from all sides...They're not really trying to kill us. They're trying to serve consumers. In a way it's wonderful...It makes perfect sense. I mean, 10 or 20 years from now all the video you view is going to be on the internet and one slice of that will be from Netflix. So we're really excited to be at the forefront of all of that...We want to stay at the forefront, continue to innovate, continue to do some of the best programming in the world.

On buffering and broadband challenges

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Netflix recently expanded its service across the globe. Developing nations typically have lower bandwidths and slower speeds than their more developed counterparts. Hastings explained how Netflix wants to address that issue:

Some of you are old enough to remember dial-up internet...now that seems like such a relic. Well, that's what we want to make buffering...We're investing very heavily at many levels, on the network servers, on the interconnects with different [internet service providers] around the world, on the [video encoding] side so that the experience on mobile, on laptop, on the TV is just instant, there's no delay and then that really changes your relationship with the service.

On data caps

Netflix investors and customers alike have been concerned about encroaching data caps by mobile providers. Hastings believes that innovation and efficiency will be the key to a peaceful co-existence:

In the early days of the internet, there's things that we don't all love, and that's things like data caps. What we're going to see is, I think, a number of companies are pioneering ways of offering services to the consumers, where it's unlimited video data, but it's limited to, say, one megabit speeds, so it's a lower speed, but you get unlimited data...that turns out to be very efficient on the networks, so that operator can offer unlimited viewing.

Still, some fear the worst, but behind the scenes, Netflix has been working on its own solutions. Not content to sit on its hands while others innovate, the company is working to mitigate the potential for trouble from data caps:

What we've done is invest in the codex, the video encoders, so that at a half a megabit, you get incredible picture quality on a four and five-inch screen. Now, we're down in some cases to 300 kilobits and we're hoping someday to be able to get to 200 kilobits for an amazing picture. So we're getting more and more efficient at using operators' bandwidth.

Image source: Netflix, Inc.

On resistance from cable operators

It wasn't terribly long ago that Netflix was the archenemy of cable companies. Cord-cutting become the thing that was going to kill cable, and Netflix was to blame. But an interesting thing happened over the course of the last several years:

Many pay television companies thought...we're gonna have a lot of cord-cutting and people not subscribing to video packages...Our most developed market in the US, we have about 50% of U.S. households are subscribing to Netflix and yet the number of cable households ...that's been steady...very little change, despite the fact that Netflix is in half of U.S. homes...Comcast Corporation (NASDAQ: CMCSA) and others realized that Netflix is one more source of entertainment like HBO and they could embrace us...recently Comcast rolled out Netflix integrated into their set-top and it's been a big success.

Netflix is at the forefront of the transition that it initiated a decade ago -- the move from linear television to online streaming. As the leader in this emerging industry, Netflix has taken its unique vision and applied its singular perspective to solving a variety of issues and challenges. Its approach to problem-solving is as pioneering as the service it provides, and investors can rest easy that this company seems ready to face any challenge with innovative solutions.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Amazon, and Netflix. Danny Vena has the following options: long January 2018 $640 calls on Alphabet (C shares) and short January 2018 $650 calls on Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Netflix. The Motley Fool has a disclosure policy.