You can hardly blame the New York Times for trusting Netflix. It's not like the company has a record of pulling this crap for more than a decade.

I kid, of course.

From CJR via Andrew Gelman,  

When stock markets closed on January 19, 2021, Netflix posted a press release with its end-of-year financial results. Business is booming, the message went. About a year into the coronavirus pandemic, the company had provided “escape, connection, and joy” to more than two hundred million subscribers. A New York Times journalist had an hour to review Netflix’s earnings report: eleven pages, half corporate-speak, half dense tables filled with accounting metrics—some of them standard, some invented. During after-hours trading, Netflix stock began to rise.

The pressure was on to explain the numbers while standing firm against salesmanship. In its release, Netflix had highlighted operating income. That excluded hefty interest on its debt (the company had borrowed sixteen billion dollars to fund a spree of shows) and the expense of taxes (a year before, Netflix had quadrupled its profit by emptying a tax reserve that it had only recently stuffed). But Netflix’s finance whizzes had turned straw into gold. The Times story duly noted the company’s rising operating income, not the fact that profit was down 8 percent for the quarter—and the drop looked even steeper when compared with the burgeoning sales. (Netflix declined to comment for this piece.) Profit wasn’t discussed in the release; the number appeared as the bottom line of a required financial statement.

But in Silicon Valley, where Netflix is based, growth is king. The pandemic had delivered a boost to subscriptions and paused new productions; without crews to pay, Netflix had piled up extra cash. The company announced, in bold type, “We believe we no longer have a need to raise external financing for our day-to-day operations.” The Times noted that Netflix would still have ten billion to fifteen billion dollars in debt, but said that the company “made enough revenue to pay back those loans while maintaining its immense content budget.” Netflix now makes enough to repay its debt, the story went; “the gambit seems to have worked.”

The article was written, edited, and posted in seventy-eight minutes. Alas, it was wrong. Netflix, in fact, had said that it would pay off only the part of its debt coming due—a billion dollars—and “explore” using the rest of its cash to buy back its stock. (A Times spokesperson said that the paper stands behind its reporting.)

Netflix has been misrepresenting its performance and business model for about as long as it's been in the streaming business.

The two great traditions of creative accounting are found in Hollywood and Silicon Valley, so it is hardly surprising that the company that occupies the intersection in the Venn diagram has done some particularly interesting work. You can find plenty of stories about questionable reporting and dubious viewership metrics. There is, however, curiously little attention paid to the big lie that started it all.

The original Netflix narrative, the story that drove the stock to such spectacular heights and won over virtually all business and entertainment journalists covering the story (at least on the East Coast), was that of a tech visionary disrupting yet another industry and making the studios obsolete.

In defense of Netflix, the current system, where a handful of companies have a stranglehold on the industry, is desperately in need of some disruption. To the extent that this was a conflict between Netflix and Disney, Warner, et al., there's really not a side to root for. It's more of a Godzilla-versus-Rodan situation. All you can do is sit back and enjoy the destruction.

The citizens of Tokyo, in this analogy, might be the investors who bought the stock based on the claim that Netflix was about to produce so much high-quality programming that they would be completely self-sufficient in a few years. The company would have so much great stuff that they could drop everyone else's movies and shows and their subscribers wouldn't mind.

The idea that Netflix was building a content library this massive was always absurd. The current IP landscape is a distillation of almost 100 years of shows, movies, characters, and franchises produced by an international industry. The best of these properties have held or even increased their value decade after decade. Furthermore, the secret to creating new valuable properties was—and is—essentially a black box. No one knows how to create the next Batman, James Bond, or Friends.

It was silly of these journalists to believe that Netflix could do this. It was stupid and negligent of them to believe that Netflix was actually trying.

Here was the dirty little secret of the first few years of Netflix's original programming: while convincing gullible souls at places like The New York Times that they were building this massive content library, they were, in fact, buying nothing. They didn't own House of Cards. They didn't own Orange Is the New Black. They didn't own Unbreakable Kimmy Schmidt. Other than the name "Netflix," they owned virtually nothing. It was true that they were spending billions of dollars producing new programming, but all they were getting for that money was the right to exclusively air those shows for a few years. If Netflix wanted to continue streaming these shows after the license agreement ran out, they would have to either pony up whatever the owners demanded or watch these shows move to other venues. Case in point: Daredevil and the rest of The Defenders are now available on Disney+.

This is a variation of one of the oldest scams in the book: passing off leases as ownership. A business projects an air of success and affluence by giving a false impression of sizable assets. After one of these operations collapses, it is commonly—and in this case, somewhat ironically—known as a house of cards.

Netflix showed no interest in actually acquiring IP until some West Coast journalists and a few obscure bloggers made this enough of a story for investors to start getting concerned. At that point, the company began to make a great show of buying programs outright, though even then the new policy had far more exceptions than Netflix would have people believe. To this day, subscribers spend most of their viewing hours on the service watching pre-existing content like NCIS, Suits, or Gilmore Girls. But even among original programming, many—if not most—of their biggest hits, such as Lucifer and She-Ra, are still owned by other companies.

Perhaps we can't blame Netflix too much for this and other distortions and misrepresentations. They were, after all, just following the age-old mantra of Silicon Valley: "Fake it till you make it." We can and should, however, blame respected and supposedly responsible journalists who continue to let themselves be suckered by the faking time and time again.