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Netflix Thinks Its Product Will Eventually Sell Itself

By Adam Levy - Feb 1, 2018 at 5:33PM

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But for now, its marketing expense is exploding.

Netflix (NFLX 2.90%) management appeared to say two contradictory things on its fourth-quarter earnings call.

CFO David Wells noted "spending a little bit more on marketing is actually going to be better for the business overall because it amplifies the value of the content." In the letter to shareholders, Netflix said it's going to increase marketing spend from $1.3 billion to $2 billion this year, a huge jump compared to growth in years past.

But CEO Reed Hastings later added, "We're always also trying to improve the product and the organic reach, social and PR of the title marketing, where you end up having to spend less on paid marketing." Netflix already benefits from tremendous word-of-mouth and free publicity, but right now, its data says it's worth it to spend more on marketing. Will Netflix really ever see its marketing spend decline?

Two kids watching Netflix on a laptop.

Image source: Netflix.

Netflix's marketing efficiency is getting worse

What's interesting about Netflix's decision to increase its marketing spend is that over the last three years, its marketing spend has become less and less efficient in the United States. In 2015, Netflix spent $56 in marketing per new subscriber in the U.S. That number more than doubled by last year to $113.

In its third-quarter letter to shareholders, management explained, "We spend disproportionately in the U.S. to generate media and influencer awareness for our programming which we believe, in turn, is an effective way to facilitate word of mouth globally." But that would imply improved efficiencies internationally, where Netflix is growing like crazy. Nonetheless, 2017 marketing spend per new subscribers is only slightly lower than in 2015, and that was before Netflix expanded globally.

But Netflix points to its data, which says spending more on marketing "is wise." That is to say, the days of $50 domestic subscriber additions are long gone. Netflix is now courting the holdouts, who need to be given every reason why they're missing out by not subscribing. Netflix still maintains that it can attract 60 million to 90 million subscribers in the U.S. It's at 53 million now, so there's a long way to go.

Netflix can be a self-marketing machine

Netflix's business has a lot of characteristics that should enable it to reduce its marketing spend and still see relatively strong growth. It has a simple product with massive appeal and a huge base of fans that willingly evangelize the service.

In fact, it sounds a lot like Apple (AAPL 1.62%) in that regard. Apple has historically spent very little on marketing, especially when compared to its chief rival in the smartphone space, Samsung (NASDAQOTH: SSNLF). Apple stopped disclosing its advertising expenses in 2016, but it spent just $1.8 billion in 2015 and $1.2 billion in 2014. Comments in Apple's 2016 10-K filing indicate advertising spend may have declined that year. By comparison, Samsung spent $10.2 billion on marketing in 2016.

Netflix should eventually reach a point where it can be like Apple. Spending less on marketing while competing companies look to win new customers by outspending each other, or by offering several different platforms, each with their own marketing budgets.

For now, investors will have to live with continued cash burn from the increase in content spending and the marketing budget that goes along with it.

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