Entertainment Business

“We Don’t Have Any Advertising, So We Don’t Sell Any Data”: Can Netflix Take Over the World Without Turning Evil?

Netflix appears to be making a strategic calculation by describing itself as an “entertainment company.” Silicon Valley, after all, has become synonymous with the exploitation of user data and an alluring target for wannabe trust-busters. But C.E.O. Reed Hastings may also have a more altruistic purpose in mind.
Reed Hastings
Reed Hastings in 2014.By Marko Priske/laif/Redux.

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I had heard rumors about the coffee and snacks at Netflix’s gleaming corporate office in Los Angeles. Hollywood insiders had described them to me at length: Vitaminwaters and salted seaweed and fruit and even a heaping pile of bacon in the mornings. Then, of course, there are the La Marzocco espresso machines, the Ferrari of cappuccino-makers. “They have these La Marzoccos, right there, in the lobby, and anyone can use them!” one film director told me, evincing the same level of excitement as my three-year-old when he finds a lollipop at the bottom of his lunch bag. “There’s free shit everywhere!”

These details—the coffeemakers, the unlimited peanut M&Ms, and enough free popcorn to feed Beverly Hills—might seem trivial. But as someone who has covered Silicon Valley for over a decade, they speak volumes. Earlier this week, during a two-day press event at its L.A. headquarters, Netflix chief product officer Greg Peters made a bold claim about the $160 billion company. Netflix, he said, is neither “a content company or a tech company.” Instead, he argued, it is an “entertainment company” that merely uses technology to tell stories in a more compelling way.

But of course, Netflix doesn’t look or feel like a traditional entertainment company. Corporate offices usually reflect the ways in which different industries converge on similar aesthetics and perks. Walk into any newsroom across the country and journalists and editors are all wearing the same business-casual clothing and drinking the same shitty coffee (which they almost certainly had to buy). Walk into any Hollywood studio and you’ll be offered a “water” and led to a waiting area to stare at movie posters, even though there are few actual use-cases for movie posters anymore. The tech industry, meanwhile, exhibits its own unique culture, complete with microbrews and nitro coffee on tap, free cafeterias, and incredibly fancy cappuccino machines. Tech companies, in other words, look just like Netflix. That’s because Netflix, as I realized this week while attending the two-day press event, isn’t really a movie studio. It isn’t a TV studio, either. If you ask me, it isn’t really even a media company. (Most media companies rely on ads to pay the bills, and Netflix certainly doesn’t). At its core, Netflix is a tech company. And because of that, most people have been looking at the company all wrong.

While Netflix spends billions on content, its true competitive advantage is its ability to use data to figure out how to deliver the exact right content to the exact right consumer. Traditional cable companies cannot do this, of course, which is one reason why 33 million Americans have cut the cord. More significantly, competitors like Hulu and Apple haven’t figured out how to do this yet, either. For example, if I open my Apple TV and you open your Apple TV, we’ll see pretty much the same movies offered: Top Hits and New & Noteworthy, and so on. Yet if you and I open Netflix, we’ll be presented with two entirely different slates of content, each one personalized. The home screen is constantly in flux, choosing different displays and packaging to lure viewers to original programming they may have overlooked, measuring response rates, compiling data on our preferences—even factoring in our location and the size of the screen we’re watching—and pushing those insights to studio execs.

All this is happening on a global scale. In one part of the tour, journalists were invited into two separate sessions that showcased just how aggressive Netflix is with international expansion. In one session focused on dubbing, we watched an astounding display of the company taking an animation and overlaying dozens of different languages over the characters, allowing it to quickly re-distribute content around the globe simultaneously. In the other session, the company showed how it re-titles, designs and hyper-specialized titles, designs, descriptions and images for specific regions and dialects, taking into account what might not translate from region to region. In all instances, Netflix data teams are tracking how people are reacting to content in each corner of the globe, and applying that learning to future content that is created, dubbed, and designed for global distribution. Netflix has teams of people and machines paying attention to what people are saying on social media across the world. A show that tests well in Turkey or Brazil might find a home as a reboot in English, but presented to the audience in an entirely different way.

Netflix has the swagger of a company that knows it’s kicking ass, even as it lives in fear of losing its title. In early October last year, Netflix’s stock plunged about 7 percent in a single day, based mostly on investor fears of looming competition. Five months later, the stock is back up, but Wall Street is wary. As I noted earlier this year, Netflix’s growth to nearly 140 million users has been fueled by a lot of debt. While the company generates $1.4 billion a month from its users, Netflix has also borrowed more than $8 billion to create original content. (The company has existing debt of about $11.8 billion.)

More significantly, the streaming-video on-demand market is about to become crowded with companies with very deep pockets. Apple, WarnerMedia, and Disney are collectively worth over $1.2 trillion. (Disney officially closed on its $71 billion conquest of 21st Century Fox earlier this week.) Apple has $285 billion in cash on hand. Disney and WarnerMedia won’t need to borrow a penny to create hundreds of hours of new content; they’ll just siphon the money from their other hugely profitable businesses. Can Netflix, which had about $3 billion in negative cash flow last year, keep up?

When I posed a variation of this question to Reed Hastings, Netflix’s co-founder and C.E.O., during a Q&A session on the Netflix Lot, he at first joked that he would take on the competitions “with difficulty,” but then seemed to argue that more competition was good for Netflix. “They’re going to do some great shows. I’m going to be envious. They’re going to come up with some great ideas. We’re going to want to borrow those,” Hastings said, referring to competitors like Apple and Disney. “We will make this a better industry if we have great competitors.” Sure, sounds good in theory, but I can’t imagine deep down, Netflix isn’t slightly worried about what the coming year or two will bring.

But, like all good tech companies, Netflix is still trying to decide who it wants the media to believe it is competing against. Facebook, for example, has insisted time and again that it is not a media company because it doesn’t pay people to create content. Yet Facebook puts advertising against content created on its own site, which sounds awfully like a media company! Why make this irrational distinction? Because Facebook relies on advertising dollars from—where else?—media companies. If it admits what it really is, Facebook might be held to the journalistic standard applied to media outlets. Or worse, it could lose money by being priced like one.

Netflix appears to be making a similar calculation by describing itself as an “entertainment company.” That might be a signal to investors, about how to value the stock moving forward. It may also be an attempt to set expectations as executives prepare for the looming arrival of Disney+ and WarnerMedia, and other streaming rivals with deep pockets. During his Q&A sessions, Hastings made a point to say that “Amazon entered streaming also in 2007, the same time as Netflix,” as if to downplay the significance of this bloodcurdling new era of competition.

Hastings may have more cynical reasons to distance Netflix from Silicon Valley, which has become synonymous with the exploitation of user data and an alluring target for trust-busters like Elizabeth Warren. But I also believe that Hastings’s intentions for Netflix’s 150 million or so subscribers are largely benign. While Netflix is clearly a tech company first, and a content outlet second, the company isn’t selling your data to advertisers or the Trump campaign or—god forbid—the Russians. Its relationship with consumers is holistic, and mostly wholesome. The worst you can say about Netflix is that it’s constantly analyzing our addictions to develop ever more potent digital narcotics. You can blame millennials and machine learning for Netflix original movies like Christmas Inheritance, El Camino Christmas, The Christmas Chronicles, A Christmas Prince, and A Christmas Prince: The Royal Wedding.

Hastings himself is unlike almost every other tech founder I have encountered. Though he’s on Twitter, he never tweets about himself to boost his own ego. He doesn’t throw verbal grenades simply to get attention. He doesn’t disparage his users, pick fights with the media, or take advantage of a lack of regulatory oversight to screw over consumers. Like almost every other tech company around today, Hastings could clearly make billions selling data about Netflix users to advertisers. But unlike Mark Zuckerberg and Jack Dorsey, Hastings has chosen not to. In fact, he was adamant that Netflix consumers’ data is never used against them. “We don’t have any advertising, so we don’t sell any data,” he said confidently on Monday as translators in countless languages fed information to almost 60 journalists from around the world. “We don’t import any data, so we’re completely secure, isolated, just the data that helps us serve our members ever better.” And you know what? Unlike most other tech C.E.O.s, I actually believed him.

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