Amazon and Disney Better Pay Attention to These Netflix Secrets

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Netflix (NASDAQ: NFLX) is killing the video-streaming game.

That means Amazon (NASDAQ: AMZN) and Disney (NYSE: DIS) are finding themselves in a position they aren't used to: Second place.

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If these big-cap companies want their online video platforms to compete with Netflix, they should be scouring Netflix's most recent earnings call, where executives gave an inside peek into why things are going so well.

While each platform will need to create its own economic moat (something that makes it unique), it's wise to learn everything you can about your top competitor. This is especially true if that competitor just reported 8.33 million quarterly subscriber additions -- a new record for Netflix.

Let's look at four lessons that executives at other companies can take away from Netflix's fourth-quarter earnings call.

Lesson 1: Hire the right people and give them free rein

Netflix executives have learned that if they hire the right people, their jobs become a lot easier. With top-tier scriptwriters, producers, and directors, Netflix can churn out high-quality content that leads to record-breaking subscriber additions like we saw this past quarter.

The company's chief content officer, Ted Sarandos, summed this strategy up nicely on the earnings call: "Hire great people, give them the resources to make great content, and get out of their way."

By hiring good people who produce good content, Netflix is able to raise its prices when it needs to in order to fund even better content and, in turn, gain even more subscribers. It's the perfect formula.

Netflix CEO Reed Hastings said that after raising subscription prices in October, the company wasn't sure how people would react, so it was cautious on its guidance for the quarter. Turns out, people are happy to pay a few extra dollars so long as the content is good. Hastings explained,

Fortunately, Netflix has kept track of viewing hours, and customers seem very intrigued by the content it's putting out. In 2017, Netflix subscribers watched over 50 billion hours of content on its platform.

Lesson 2: Spend big bucks on content

Netflix has never shied away from spending the big bucks where it matters: on content. That's because the company understands that its survival depends on keeping current subscribers entertained and on luring in non-subscribers with high-quality movies and shows.

Netflix raised investors' eyebrows back in 2016 when it spent $5 billion on content and estimated it would spend $6 billion on content in 2017. But after seeing the company's subscriber growth, investors should be less nervous about its new $8 billion content budget for 2018.

And the company plans to continue increasing its content spend. Executives know that to keep growing its subscriber base, it needs better and better content.

"It is $8 billion...for this year, but it will definitely, of course, be higher in 2019 and 2020," Hastings said. "So don't think of $8 billion as some new plateau. Instead, it's just a point in time as we grow both the revenue and our content budget."

Lesson 3: Don't be afraid to spend on marketing

Netflix's shows do well just by word-of-mouth marketing, but that isn't enough to satisfy the company. It's going to spend more on marketing in 2018, because the executives have determined that the money is well spent, according to Netflix CFO David Wells.

The company said in its note to investors that it's taking marketing spend up slightly faster than revenue for this year; marketing will go from about $1.3 billion to approximately $2 billion. "We're seeing feedback that spending a little bit more marketing is actually going to be better for the business overall, because it amplifies the value of the content," Wells explained.

By pushing its shows on subscribers and potential subscribers, Netflix is hoping to squeeze every bit of value out of the top-notch shows that it's paying top dollars to produce. Netflix understands that its best marketing product is its own high-quality content, like Stranger Things Season 2 and the new hit show The End of the F****ing World.

Netflix chief product officer Greg Peters noted that the company isn't just hoping its marketing dollars are working in its favor. Netflix has run extensive experiments that show spending more on marketing is worth it, for both viewing hours and new-subscriber signups.

Lesson 4: Pay attention to the audience over critics

Last but not least: Netflix is the people's streaming platform, not the critics' streaming platform.

The prime example of this lesson came last quarter when Netflix released the sci-fi film Bright, starring Will Smith. Critics tore the movie apart, which was concerning, given that Netflix reportedly spent $90 million to make it.

However, viewers ate the film up. Sarandos said it was one of Netflix's most-watched pieces of original content ever. This is backed by the high 86% rating audience members gave the film on Rotten Tomatoes, versus the dismal 26% rating given by critics.

Netflix understands that its success isn't dependent on a small group of film critics. Its mission is to appeal to the everyday film and TV-show viewer.

"The way we reconcile it is that critics are an important part of the kind of artistic process, but ... they're pretty disconnected from the commercial prospects of the film," Sarandos explained. "We look at it as if people are watching this movie and loving it -- that is the measurement of success."

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.

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