Why Reed Hastings will be such a tough act for Netflix leadership to follow

Opinion

At the heart of the Netflix phenomenon lurks a serious structural flaw.

You never forget a meeting with Reed Hastings, the Netflix founder, however brief or however long ago.

In part it is the sense of presence bequeathed by what he has achieved as founder of a postal video service who turned it into the streaming giant that has rattled the foundations of the Hollywood movie industry.

It is also about the short, abrupt sentences that say this man does not tolerate fools gladly, or even at all, combined with the knowledge of his internal management style that found “average” performance totally unacceptable and insisted that only the very best would do.

What then for Netflix as Hastings gives up day-to-day-control, despite very obvious continuing challenges?

What is absolutely clear is that this is certainly not the usual corporate melodrama where founder skills are exposed as inadequate and they have to be hustled out the door if the company is going to be saved for the longer term. Nor is there the monstrous disruptions caused by a change of ownership such as Elon Musk’s unwelcome arrival outside the Twitter headquarters.

Hastings will remain as executive chairman, although his main lieutenant Ted Sarandos, who has always been in charge of the content side, will be a co-chief executive alongside former chief operating officer Greg Peters.

It seems much more like a managed continuity rather than a revolution at the top.

In a very American way Hastings, who is 62, wants to start spending more time giving some of his $3.6bn away, in his case through philanthropic educational projects.

He is a bit like a mini-Bill Gates — ‘mini’ because, after all, he is only worth £3bn — rather than a Rupert Murdoch who still seems to relish remnants of the daily corporate treadmill at the age of 91.

Hastings is certainly going out with a bang — All Quiet On The Western Front has received nine Oscar and 14 Bafta nominations. It was courageous to make such a film in the German language with English sub-titles, although German critics have attacked the fact that it has strayed too far from Erich Maria Remarque’s seminal anti-war novel.

A strong business despite belts tightening

Netflix, like all the other multiplying media streaming groups, are facing increasing strain from the impact of Covid/Ukraine — induced belt-tightening in many markets which has led to a slowing of any rise in subscription numbers, where they have not actually gone into decline.

This week’s new research by Kantar found that British households cut more than 2 million subscriptions to streaming services such as Netflix, Amazon’s Prime Video and Disney+ last year.

In viewing terms, Netflix in particular may have received a great boost from the Royals in the shape of the latest series of The Crown and the Harry and Meghan documentary series.

According to Kantar, many UK households still have multiple streaming subscriptions but almost 900,000 homes gave up entirely on streaming services last year. The number of homes with at least one paid-for streaming service fell from 17.12 million in 2021 to 16.24 million, although there were signs of a modest recovery in the final quarter. The UK may, of course, be a particular basket case as it marked the third anniversary of Brexit by becoming last of 15 — behind even Russia — in the latest IMF economic growth tables.

Elsewhere, there will still be pressure on Netflix subscription growth, which may hit the dreaded “average” category. The introduction of the basic ad-supported subscription tier last year, something that Hastings swore he would never do, was the clearest indication of the financial pressures the company has been facing.

The share price has always been volatile and it has only taken a small blip in subscriber momentum to lead to dramatic plunges. Yet Netflix looks financially secure as long as the high operating profits can service the odd $15bn in long-term debt used to fund the ambitious programme schedule.

Unless the “new” regime somehow manages to make a muck of it, 231 million subscribers worldwide by the end of the year still amounts to one hell of a business.

Mediocrity headache

At the heart of the phenomenon that is Netflix, however, there has always been, and remains, a serious structural flaw.

Hastings and Sarandos did a brilliant job in persuading the Hollywood studios to hand over their programme libraries for modest sums. The boys from Netflix must have seen like suckers handing over real money for all those lightly used catalogues.

We all know now what folly that was with the studios almost conniving in their own downfall by ultimately creating a powerful streaming opponent that has even managed to disrupt traditional cinema distribution.

That was then. The studios finally woke up and launched their own streaming services and we can be sure there never will be sweetheart deals ever again for Netflix.

That, of course, leaves Netflix with a massive headache. The marketing offer has always involved a few big-ticket hits to boost subscriptions and drag along the average items, which often attract less than average audiences.

With Netflix having to make more of its own content to replace the missing Hollywood deals, there is a danger that the overall quality will decline and that the subscribers will start to notice. Even a $17bn a year programme budget doesn’t protect anyone from making clunkers.

And that, according to the data, is exactly what is starting to happen. According to Sunday Times analysis of results on the Internet Movie Database website the marks out of 10 given to Netflix productions by millions of subscribers have started to fall from a high of 7.7 in 2013 to 6.5 last year.

A number of productions from Apple and Disney have had higher appreciation ratings, and reactions to some Netflix TV series has been dire — a 4.7 for a Love Island-style series called Too Hot To Handle and a 5.5 for Snowflake Mountain.

That seems like a decidedly average performance, certainly compared with the old days when House of Cards pulled in a clear 9.

Oscars for All Quiet on The Western Front could merely disguise the problems posed by having to produce more and more of their own films and TV series that subscribers are willing to watch and continue to pay for.

The post of executive chairman of Netflix may turn out to be more time consuming than Reed Hastings the philanthropist has in mind.

Raymond Snoddy is a media consultant, national newspaper columnist and former presenter of NewsWatch on BBC News. He writes for The Media Leader on Wednesdays — read his column here.