Investors generally judge Netflix (NASDAQ:NFLX) on its quarterly subscriber growth. That's a reasonable short-term metric, but it does not tell the full story for the brand.
The streaming leader's growth has been impressive. It gained just under 5 million customers in Q1 to close the quarter with 94.3 million paying users. More than half of that growth came from the company's international markets, which now account for just about 45 million of paying members.
Those are stunning numbers made more impressive by the fact that the company made a profit in the first quarter of $43 million. That's a tiny amount on just over $1 billion in revenue, but it does reverse losses in each of the three previous quarters.
What's missing from these numbers is that Netflix has huge start-up content costs, but the money spent has significant long-term value. That should ultimately allow the company to eventually reduce spending.
How did Netflix work?
When the streaming company began it wasn't a streaming company at all. Instead it charged a monthly fee to rent DVDs to members. People made a list of movies they wanted to watch and the company mailed out a new one when the previous one was returned.
That model, which still exists, involved the company only using outside intellectual property. It bought moves and television shows from studios in DVD form and rented them out. Aside from the physical disc, Netflix owned nothing.
When it began streaming the company also used a licensing model. It paid content companies for the rights to stream their programming for a certain period of time, again not owning anything.
What has changed?
Netflix still licenses some content from outside providers but its originals have become its calling card. That's an expensive proposition as starting a content library from zero has cost the company billions. Those expenses increase as the company creates specific content for the various countries it serves around the world, and as it translates its existing shows into new languages.
So far, the bill for original content is over $15 billion and it will keep rising -- the company is aiming to spend roughly $6 billion on content this year.
The good news for Netflix shareholders is that at some point its archive becomes large enough that it can throttle down on new content. That doesn't mean it won't need fresh shows to entice existing subscribers, but it won't have to fill an empty cupboard.
Shows like House of Cards or Orange is the New Black may be popular, but even among Netflix subscribers it's likely that many more people have not watched them than have.
That growing content library has already lessened Netflix's need for licensing outside shows. Eventually it may not need to do that all because its own catalogue will be more than enough to keep subscribers with a full queue.
This is not a quick path
If a U.S. subscriber joined Netflix today having never watched any of its programs, it would take a long time to catch up on even just its best-loved shows. Just House of Cards and Orange is the New Black have 65 and 68 hour-long episodes between them. Add in the company's Marvel shows Daredevil, Jessica Jones, Iron Fist, and Luke Cage and you have roughly another 65 hours covered.
That's barely the tip of the Netflix iceberg and you can see how a growing library eventually allows the company to eliminate its licensing budget while also eventually (and in some markets it's a very long way off) slowing down its need for the current level of originals.
In addition that logic applies to shows that garner a global audience. Once you have translated Adam Sandler's latest piece of dreck into French or Swedish that's a one-time cost that pays off forever.
Eventually, and it's years away, Netflix can move from growth spending to maintenance mode. It will still need new content, but not at the current volume it produces it, and that will make the company more profitable.