Netflix is the world’s leading internet television network with over 100 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day. But the company’s drive to market leadership includes plot twists and cliffhangers as surprising as those in the company’s original films and TV shows. TCV has been a strong supporter and timely investor for nearly the entire journey. As Barry McCarthy, CFO of Netflix during its formative years said: “We received a lot of great advice from TCV. And while our business model was successful, our path wasn’t easy. Netflix wouldn’t be alive today without TCV.”
TCV already knew Hastings before he had the idea for a DVD-by-mail company in 1998. The firm made its first investment in 1999, the year that Netflix scored its first strategic breakthrough: switching customers from one-time rentals to monthly subscriptions. The company grew rapidly, but then the tech crash of 2000 arrived, wiping out billions of dollars of market value for tech companies and delaying the company’s IPO.
Amid this turmoil, TCV led a recapitalization of Netflix in 2001, at a time when investors were wary of online businesses and Netflix in particular. In addition to supporting the company during this turbulent time, TCV subsequently invested in the IPO. “The tech crash was indiscriminate, and investors were highly skeptical of Netflix’s DVD subscriber model,” observes Hoag, who has served on Netflix’s board of directors since 1999. “The investment rationale for Netflix was as strong as ever, but investors were spooked. So we stepped up.”
By 2005, Netflix was shipping a million DVDs a day but was also attracting ambitious competitors. Blockbuster, the in-store rental chain, had more than 8,000 locations and announced plans to enter the mail-order business. Redbox was racing to scale up its kiosk-based DVD rental service and take business from both Netflix and Blockbuster.
It looked like the DVD rental business was heading for a price war and Wall Street began backing away. Once again, TCV made additional open market purchases that showed its confidence in the company. Netflix’s early lead and expertise proved victorious in the DVD wars, and the company continued growing rapidly.
Meanwhile, the company had been quietly investing in a next-generation streaming service, which was launched with little fanfare in early 2007. While the market reaction was initially muted, streaming growth accelerated dramatically over the next few years as device penetration increased, broadband adoption grew, and the company improved its service. By 2011, streaming revenue was on pace to soar past $1 billion, and Netflix’s market capitalization was approaching $15 billion. Having been a long-term, patient investor — and with sunny skies overhead — TCV had fully exited its 12-year investment.
In July of 2011, Netflix announced a plan to split its mail and streaming services into two companies, requiring customers to pay for two subscriptions if they wanted both DVDs and streaming. While the strategic decision was sound — it would have allowed the company to invest more heavily in the content needed to drive the subscription service — customers were unhappy, churn increased, and the stock plummeted.
Believing in the strategy and team, and having seen this movie before, TCV injected $200 million of fresh capital into Netflix in the fourth quarter of 2011 via a private placement and subsequently made additional open market purchases. Once again Netflix proved resilient and brought subscribers back into the fold. In 2012 the company began its major international expansion and moved into original programming.
Having innovated back in 1999 by pioneering the mail-order DVD subscription service, Netflix has grown into the internet TV market leader today. While the stock is up dramatically from its IPO price, a little-known fact is that the stock initially declined from IPO levels. The journey has not always been a smooth one. TCV stood with Netflix every step of the way, through good times and difficult moments. As Netflix continues on the path to the mountaintop, TCV is still on the journey.