Netflix Inc. (NASDAQ:NFLX) has been a big winner since its inception 20 years ago, both as as an entertainment provider and then as a stock, but that success hasn't been an accident. A major reason the company has been so successful -- now worth more than $80 billion and larger than rivals like Time Warner (NYSE:TWX) and the recently acquired Twenty-First Century Fox (NASDAQ:FOX) (NASDAQ:FOXA) -- is the leadership of CEO and co-founder Reed Hastings.
As an enterprise combining Disney (NYSE:DIS) and Fox, and tech giants like Facebook, Apple, and Alphabet, are all preparing for an assault on Netflix and video streaming, it's worth remembering that Netflix has as important a competitive advantage as any other. After all, Hastings has transformed the company from a DVD-by-mail enterprise, to one streaming movies over the internet, to a Hollywood powerhouse that is putting out dozens of original TV shows and movies each year (spending more than any of its competitors on content).
Hastings' ability to see where the industry is going and prepare for it has given his company a consistent lead over the competition. Let's take a look at three times in the past when he has successfully predicted the future.
1. Envisioning video streaming
When Hastings launched Netflix in 1997, video stores ruled. Blockbuster was the king of video entertainment and would continue to be so for the next decade, even as Netflix presented a growing challenge. Shipping DVDs through the mail was a novel idea, but Hastings always saw that as a transitory model to watching video directly over the internet -- what we now call streaming. That's why he called the company Netflix, as opposed to, say, "Movies by Mail."
In its S-1 filing to go public in 2002, Netflix essentially mapped out its streaming strategy, saying, "We continue to monitor additional delivery technologies and, when appropriate, believe that we are well-positioned to offer digital distribution to our subscribers." This was three years before YouTube was founded, and internet video was still in a primitive stage. Yet Netflix was priming itself for the eventual development of streaming technology, cultivating relationships with customers and production studios, developing its recommendation engine, and building brand value. Not surprisingly, Netflix became the leader in streaming, as it had been in DVDs-by-mail.
2. Calling out HBO
In 2011, Hastings called HBO GO, the new on-demand service from HBO, Netflix's primary competition; this was a notable retort to a statement just a year earlier by Jeff Bewkes, CEO of HBO's parent Time Warner, comparing Netflix to the Albanian army. Calling out HBO was a savvy move; it helped redirect Netflix, then making the first season of House of Cards, towards becoming a service generating the kind of critically acclaimed content that HBO is known for. And Netflix has done that over time, as the company nearly matched HBO in Emmy nominations at this year's awards.
In 2013, Hastings doubled down by saying, "The goal is to become HBO faster than they can become us." While it was dismissed by critics at the time, as HBO was the clear king of premium television, that prediction has played out: HBO launched its own streaming service, HBO NOW, while Netflix's brand is becoming increasingly associated with original entertainment.
3. Foreseeing the streaming takeover
Also in 2011, when streaming was just in its infancy and Netflix lost nearly 1 million customers splitting its streaming and DVD-by-mail services, Hastings predicted that half of TV viewing in the country would come through internet streaming by 2021.
Judging by a recent Pew Research Center survey, Hastings' forecast looks prescient. Twenty-eight percent of all U.S. adults said they primarily use an online streaming service to watch TV, but about half of American adults ages 18 to 49 favored streaming. As Netflix and its peers become more popular, streaming services could reach 50% of the total TV market by 2021.
Hastings made a similar prediction more recently, saying at a conference in 2015 that internet TV would grow every year for the next 20, while linear TV would decline each year over that time. While it's too soon to say if that prediction will come true, it seems apt: Pay-TV subscribers are steadily but slowly declining, while Netflix and other streaming services continue to add new members.
With the streaming battle entering its next phase as Disney acquires Fox, pending regulatory approval, it's important to realize how much of an advantage these forecasts have given Netflix. Six years after Netflix started offering a stand-alone streaming service, Disney is finally preparing to do the same, since it's ridden a crumbling cable model for as long as it can.
Netflix has over 100 million subscribers worldwide and an ever-growing library of original content. In fact, Hastings now sees the streaming entertainment pie growing so big that he no longer regards HBO as his company's biggest competitor. Now, he believes it's...sleep.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of AAPL and Netflix. The Motley Fool owns shares of and recommends GOOGL, GOOG, AAPL, FB, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.
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