🗞 Netflix: Entering The 4th Evolution

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 📺️ Netflix: The 4th Evolution

• 📊 5 Impressive Charts from Earnings Season Week 1

Let’s dive in!

Featured Story #1

Netflix: The 4th Evolution

Netflix was founded in 1997 by Reed Hastings and Marc Randolph.

Hastings, who was a bit reluctant to get into another startup after he’d already sold a software business of his own, supposedly became encouraged after receiving a $40 late fee from Blockbuster.

This sparked what we can now call Netflix’s 1st evolution.

Netflix v1: DVD by Mail

In the late 90’s, DVD-by-mail was still a novel concept.

Netflix was the pioneer in the space and their model was fairly straightforward.

They had a massive content catalog on their website that customers could rent from. Once a customer selected the DVD they wanted, Netflix would mail it to them through the US Postal Service. Simple.

While this simple strategy caught the eye of many customers, it had its downsides. Netflix experienced high churn, non-returned DVDs, and excess inventories for its lesser known titles.

So they instituted 2 major changes; a recommendation algorithm and a subscription model.

The logic for the recommendation algorithm was fairly obvious. It would encourage customers to rent more movies and Netflix could prioritize the lesser known titles to help increase utilization across the entire catalog.

The subscription model, on the other hand, was a gamble. And one that paid off in a big way. Not only did this increase repeat purchases, but it forced customers to return existing rentals before they could receive their next one.

This shift to subscriptions would eventually pave the road for Netflix’s future.

Netflix v2: Streaming

Netflix’s 2nd evolution came in 2007.

In January of ‘07, Netflix launched “Watch Now”, an online browser app that power users could subscribe to in order to stream movies without ever purchasing a physical DVD.

Adoption was gradual at first as the technical infrastructure wasn’t really in place for most households to consume content this way. But starting in 2008, Netflix would begin partnering with hardware manufacturers to become pre-installed on their respective devices.

By 2012, Netflix began breaking out its streaming revenue, which to some investor’s surprise, was larger than the original DVD rental business.

Netflix v3: Original Content

Despite the explosive growth in streaming, there was a massive hurdle standing in the company’s way.

Netflix was licensing all its content from other companies which put a potential ceiling on profit margins. So in 2013, in order to decrease its reliance on other brands, Netflix began investing in its own content.

The cost of production quickly ate away at Netflix’s unit economics and before long the company was losing billions of dollars a year in free cash flow.

However, as Netflix continued to enhance its offering with new original content, more and more subscribers climbed on board. As the fixed cost of content production began to spread across 50 million subscribers, then 100 million subscribers, and now more than 300 million subscribers, the economics improved significantly.

Netflix v4: Live Events

As we enter 2025, you could say Netflix is now entering its 4th evolution. That is combining its unrivaled distribution and original content with live events.

Throughout the last several months, this push into live events was on full display. The streaming giant aired the Jake Paul v. Mike Tyson fight, 2 NFL Christmas Day Games, and several comedy specials.

Now generally speaking, sports production can be a fickle business as historically most of the profits accrue to the sports leagues themselves and not the studios. But when you can pair sports/live events with great original content, it’s a recipe for supercharging subscriptions.

And that’s exactly what happened. The 4th quarter content slate led to Netflix’s largest ever quarterly increase in subscribers.  

In the words of Netflix CEO Ted Sarandos “some folks came in for the fight and some folks came in for the games, but they stuck around for Squid Game.. for Carry-On… for Black Doves”

Earnings Season Week 1:

Charts of the Week

Earnings season is officially upon us!

This week marked the first real week of quarterly reports, and as always, there were plenty of KPIs that stood out.

1.) BlackRock - ETFs AUM Inflows

BlackRock, one of the world’s largest alternative asset managers, reported its largest ever ETF inflows this quarter, adding $143 billion in just 3 months.

This helped the financial giant reach $11.5 trillion in Total Assets.

Performance since earnings: +6%

2.) Interactive Brokers - Total Accounts

Founded in 1978, Interactive Brokers is one of the largest US-based brokerage platforms. However, despite being almost 50 years old, the company is still growing its total accounts at more than 30% per year.

Performance since earnings: +14%

3.) American Express - Average Fee per Card

One of the largest credit card and payments networks in the world, American Express, has not only increased its total number of cardholders by 28% over the last 5 years, but those cardholders are paying 77% more on average just to be able to have an American Express card.

Performance since earnings: -1.5%

4.) Intuitive Surgical - DaVinci Systems Installed Base

Intuitive Surgical, the leading manufacturer of invasive robotic surgical systems, added 363 new DaVinci systems to its installed base this quarter. That takes the total to just under 10,000 units, which has grown at a 12% rate over the last 5 years.

Performance since earnings: -4%

5.) Charles Schwab - Total Assets

Charles Schwab, the largest brokerage platform in the US by assets, officially crossed $10 trillion in AUM this quarter. While Schwab’s 19% AUM growth is likely attributable to strong equity markets, the company also hit a new record of active brokerage accounts during the quarter.

Performance since earnings: +7%

Meme of the week

This week, OpenAI and the new US Presidential administration announced “The Stargate Project”.

The project is a joint venture funded by OpenAI, Oracle, Softbank, and investment firm MGX that plans to invest $500 billion into AI infrastructure over the next 4 years.

While this mega-project is certainly ambitious, many people including Elon Musk have questioned where this $500 billion in financing will ultimately come from and hinted that the $500 billion price tag is merely to draw attention to the project.