This analysis was first published in SvD Näringsliv, in Swedish, on April 19th, 2024. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Netflix beat all expectations when it presented its quarterly results. The company is a profit machine — but it increasingly resembles a perfectly ordinary media company. How do you justify the valuation then?

It has been described as one of the largest Swedish drama investments ever. The new adaptation of “Ronja Rövardotter” recently premiered on Netflix. But it was not the Americans who made the big investment in Astrid Lindgren.

The first two lines of the opening credit remind you of who did: “Netflix presents — a Viaplay Group series.” After Viaplay collapsed, Netflix was able to pick up the finished series and claim half the glory. The timing was perfect — for this kind of major production, there will not be many coming from either Netflix or anyone else in the near future. Acquiring a finished work from a rival is therefore ideal.

Netflix’s focus is now on profitability, after many years of what seemed like near-limitless growth. The shift is visible in its financial reporting. Previously, the company talked almost exclusively about subscriber growth. Now it is trying to operate more like an ordinary company — revenues and profitability.

And from next year, Netflix will stop reporting the total number of subscribers per quarter altogether. The figure has started to become misleading, they believe.

In the early days there was no profitability to speak of. But that looks very different now. On Thursday evening, the company reported its results for the first quarter of the year — and Netflix beat all expectations. Profit increased by a full 51 percent compared with the previous year. The company also beat market expectations on both revenues and new subscribers.

In keeping with becoming more like an ordinary company, one of the key drivers of success is something as simple as pricing. How do companies normally increase revenues? They raise prices. Which is exactly what Netflix has done. But to capture more price-sensitive customers, they have also added advertising to the cheapest subscription tier. Forty percent of all new customers now choose that option. The ads create a new revenue stream — still small for now, but growing.

Another much-discussed change has been getting people to stop sharing subscriptions. If you are logged in from many different locations simultaneously, Netflix will now issue a warning and offer the option to purchase a separate account — even allowing you to migrate your own profile so the system remembers what you have watched. They forgive your past piracy — but now it is time to start paying.

Content has also contributed positively. The latest season of the reality series “Love is Blind” was watched 20 million times, while the drama series “Griselda” reached over 66 million viewers. A notable new addition for Netflix is live sports — including a boxing match between Mike Tyson and Jake Paul — and in January they announced a deal with WWE, the American wrestling league.

The shift in content strategy is tied directly to the focus on profitability. The company’s new film chief, Dan Lin, has a mandate to produce cheaper and simpler films than before. A select few prestige projects are still being greenlit to keep the awards conversation alive, but the general ambition — and budget — is substantially lower. Lin began his new role by laying off ten percent of his staff, then reorganising those who remained. The message was clear: this is a new era.

Quality, however, is a relative concept. Expensive productions are not necessarily more popular than cheap ones. Netflix has had considerable success with stand-up specials, for example — Ricky Gervais and Dave Chappelle were both among the most watched content during the quarter. They certainly charge well for their time, but from a production standpoint, stand-up is remarkably cost-efficient.

Despite these strong results, Netflix’s share price fell in after-hours trading. When every metric is pointing upwards, what more can the market want? Part of the problem is that Netflix’s stock has already risen enormously compared to a year ago — up 89 percent — and the company is now approaching the peak valuation it reached at the end of 2021.

The challenge for Netflix is to sustain that valuation — but for different reasons than the last time. Then, it was still low interest rates and cheap money driving growth. Now, Netflix’s CFO Spencer Neumann talks about steadily rising profit margins. That sounds rather like an ordinary media company. So why should it be valued on the stock market like a tech company? That is the question Netflix needs to answer.