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Netflix's Record Subscriber Additions Come Down to This 1 Thing

By Natalie Walters - Jan 29, 2018 at 9:47AM

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Netflix has found the golden formula.

Netflix (NFLX 2.17%) held on to its strong lead in the video streaming space during the fourth quarter. 

With 8.33 million quarterly subscriber additions, the company beat out its previous record from last year's fourth quarter, when it added 7.03 million subscribers. Netflix also easily surpassed its own expectations for 6.39 million additions. 

Investors often consider subscriber growth the most important metric that Netflix reports each quarter, as the number of people that join the platform is a good indicator of how well the company is doing. 

So how did Netflix deliver record subscriber additions despite raising its prices? Let's take a closer look at Netflix executives' comments from the Jan. 22 earnings call. 

A woman and a man lie on a bed and watch Netflix streaming on a TV that sits on a dresser

Netflix proved that content is king when it comes to subscriber growth. Image source: Netflix.

Netflix's not-so-secret secret

Netflix executives said the company added so many more subscribers than even they predicted because the company has learned how to hire great people who don't need babysitting. 

Netflix Chief Content Officer Ted Sarandos summed this strategy up nicely on the earnings call: "hire great people, give them the resources to make great content and get out of their way." 

Two examples of great pieces of content that delighted viewers and drew in additional subscribers this fall were the film Bright and the second season of the hit show Stranger Things, Sarandos said. Not only did these two pieces of content land well in the U.S., but they also became global hits. 

"So when a good story [is] told well, it's a global product," he explained.

And high-quality content is its own best marketing tool, helping Netflix add 6.36 million international subscribers and 1.98 million subscribers in the U.S. in the quarter

A mutually beneficial relationship

Because Netflix excels at producing programming people are attracted to, it was able to raise prices this past quarter without a hiccup in subscriber growth. People felt the value of the service was worth a few extra dollars. 

This is key because in order to keep growing its subscriber base, Netflix will need to produce even better content in 2018. But thanks to its October price increase that didn't ruffle customers' feathers, it has the money to do that. 

It's a beautiful and healthy cycle that Netflix has built itself. 

The best way for Netflix to keep growing is to ask customers for more money so that it can make higher-quality shows and movies, Netflix CEO Reed Hastings said. And its viewers so far seem happy to oblige. Netflix has proved that it uses their money well so the relationship is mutually beneficial. 

"As long as we’re able to continue to improve our content and our whole experience at a remarkable rate, which we can measure in viewing hours and things like that, then asking our customers to help us fund that at higher levels is reasonable," Hastings explained. 

Sure enough, Netflix has kept track of viewing hours -- and the data bodes well for the company. For 2017, Netflix subscribers watched over 50 billion hours of content on its platform. 

A few smaller reasons for the subscriber-addition beat included the growth trend of internet TV in general, as well as Netflix's more conservative expectations for Q4 due to the subscription-price increase, the company noted. 

The year ahead

As long as Netflix continues to hire good talent who make good content, subscriber growth should stay on track. Netflix has clearly come upon the golden formula for a growing streaming platform, and its competitors would do well to take note of why it's working so well.

With a quarter like that, investors should be less anxious about the up to $8 billion that Netflix expects to spend on content in 2018. 

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