Netflix isn’t tech or media, it’s entertainment

Co-founder and CEO of Netflix Reed Hastings

Albert Llop | Anadolu Agency | Getty Images

For more than a decade, investors have debated whether Netflix should be considered a media company or a technology company. Now Netflix co-founder and co-CEO Reed Hastings has given an answer.

Netflix’s culture, as outlined in Hastings’ new book “No Rules Rules,” is emblematic of a Silicon Valley tech start-up, emphasizing radical honesty and transparency and doing away with corporate traditions such as vacation policies and end-of-year reviews. Its technology-driven recommendation algorithm sets it apart from other streaming video companies, as does its user interface.

But as media companies such as AT&T’s WarnerMedia and Comcast’s NBCUniversal develop subscription streaming services of their own, Netflix has started to look more similar to traditional media.

In an interview, while Hastings quibbled with the word “media,” he said Netflix was best defined as “an entertainment company.”

“Media tends to involve advertising,” Hastings told CNBC’s “A View from the Top.”

“Tech, I mean, we’re tech-powered, but we’re not really like Microsoft, that’s in multiple areas of tech, or Google. We’re a single application, a single service. It’s all about entertainment. We have more employees in Hollywood than we do in Silicon Valley. Two-thirds of our spending is on content. So we’re really an entertainment company.”

While the correct classification for Netflix may be semantics, it can have real-world relevance in how investors value companies. Netflix has a much higher price-to-earnings ratio than other entertainment companies, including Disney and Lionsgate. Those companies have begun attempting to turn themselves into entities that look more like Netflix in recent years with the development of global streaming services such as Disney+ and Starz. So far, investors have balked at giving traditional entertainment companies the same valuation multiple as Netflix.

Still, Hastings said it was possible for traditional media companies to compete with Netflix — if they’re willing to focus completely on streaming. He applauded Disney for putting new release “Mulan” on Disney+ immediately (albeit for $30 extra) while noting WarnerMedia did not put its new blockbuster “Tenet” directly on HBO Max. It remains to be seen if either company will continue to put new movies directly on streaming services after pandemic quarantines are lifted across the globe.

“All it takes is focus and commitment,” said Hastings. “Let’s look at Warner. They did not put ‘Tenet’ on the HBO Max service, but Disney did put ‘Mulan’ on it. So you’d say Disney’s incrementally more committed to their service than Warner. So it’s a matter of degree. I’m sure they have good reasons in those cases. We’ll see.”

Hastings also predicted traditional media companies will continue to consolidate in an effort to compete with Netflix, such as Disney’s acquistion of the majority of Fox and Viacom’s merger with CBS.

“I think you’ll also see continued combinations of the existing players, just like you saw with Fox and Disney coming together,” Hastings said. “Typically you bulk up to take on the other guys.”

Read the full Reed Hastings Q&A here.

Disclosure: NBCUniversal is the parent company of CNBC.

WATCH: Netflix co-CEO Reed Hastings on the growth of FAANG stocks during the pandemic.

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