There used to be a debate about Netflix: Is it a technology or media company?
That debate has fizzled in recent years and clearly ended on Thursday, with Netflix's announcement that Ted Sarandos would join Reed Hastings as co-CEO. Sarandos, who lives in Los Angeles, has spent two decades at Netflix, leading the company's mammoth move into original content.
"It's a unique company in that they really have almost two headquarters," said Gil Simon, chief investment officer at San Francisco-based SoMa Equity Partners, which has nearly 10% of its almost $3 billion in assets in Netflix shares. "Clearly the core competency of the company is acquiring and producing content."
Netflix said Thursday that it added over 10 million global subscribers in the second quarter, bringing its total to 192 million. BMO Capital Markets estimated Netflix would spend more than $17 billion on content this year and more than $26 billion by 2028. Only Disney's film and TV budget significantly outpaces Netflix.
Sarandos is the person responsible for putting Netflix's money to work. From last year's Martin Scorsese hit "The Irishman" to Netflix's new action film, "Extraction," Sarandos has been doing the deals, even with Hastings as CEO, operating out of the company's official headquarters in Silicon Valley.
"While Reed was the visionary, Ted is the future," Simon said. "He's networked within the creative community and his ability to bring on A-list showrunners and film producers is the secret sauce."
Over the past few years, all the other big content companies have started to look more like Netflix, creating their own streaming services and platforms to capture eyeballs. Now Netflix's digital service, once an island in the cable TV universe, is the leader in a very crowded space. The result is Netflix increasingly looks more similar to every large media company.
Sarandos told GQ seven years ago that Netflix's goal was "to become HBO faster than HBO can become us." He succeeded. AT&T, which acquired HBO in its Time Warner deal two years ago, is now trying to turn HBO into something that resembles Netflix, broadening out HBO to HBO Max, a service that includes family shows and mainstream sitcoms.
Where Netflix wants to avoid the media comparisons is on Wall Street.
Netflix trades much more like a high-growth tech company than a content behemoth. With a market cap of over $230 billion as of Thursday's close, it's now among the 20 most-valuable U.S. companies. Netflix has a comparable market value to AT&T, even with one-ninth the revenue, and it carries a price-to-earnings ratio of 106, compared with 41 for Disney, which has streaming growth opportunities of its own with Disney+ and ESPN+.
But Netflix continues to show that its hefty content investments are paying off. Operating income surged 92% in the second quarter from a year earlier, and net earnings per share jumped to $1.59 from 60 cents.
Sarandos doesn't talk much about the stock price, but he can spend hours discussing Netflix's ability to invest so much more than anyone else on a film while still making it profitable. At an investor event with UBS in December, Sarandos described his work with Scorsese and "The Irishman," a 3½ hour mobster film that was viewed by more than 26 million people in its first week. It was a movie that even Scorsese acknowledged couldn't make it into the theater.
"We're basically making the movies that would otherwise be difficult to make," Sarandos said. "They're premiering on Netflix and being produced the way that the filmmaker wanted to make it and we could make it."
As his budget gets bigger, one area that excites Sarandos is animation. At the December event, he said 2022 and 2023 will be big years for the company on that front.
He expects animation features "maybe four to six times a year" bringing in "everyone who's created great animation for every animation studio during the last decade."
That was all before the coronavirus, however, which has forced the film industry to halt much of its production.
Netflix said Thursday it has made the most progress resuming production in Asia Pacific and never fully shut down in Korea. It has resumed some production in Europe as well as two stop-motion animation projects in Oregon and two films in California. The company warned that "current infection trends create more uncertainty for our productions in the US."