"You know, if you look back in the history of entertainment, it's always been driven by an interplay of storytellers and technology," Netflix CEO Reed Hastings told media this week. "Broadcast TV was and is a miracle". Netflix invited a delegation of journalists from around the world to its Hollywood studio facility for the first time this week, and I was among them. The event also included a visit to the company's Los Gatos headquarters, 500 kilometres north of LA in Silicon Valley. From the company's perspective, it was well-timed. During the week, Netflix won its second Oscar (Icarus, a film about doping in cycling, was awarded Best Documentary Feature), while on Wall Street, the company's shares touched fresh highs, as analysts fell over themselves to praise its growth plans. Netflix is on a roll, and it seems unstoppable. The question many are asking, though, is at what cost?

On top, down under "Australia's a great market for us," Hastings told me over drinks at the company's rapidly expanding LA set up. From his perspective, that's certainly true. Netflix amassed thousands of subscribers in Australia before it even officially launched. It operates the most popular video streaming service in the country - one that has driven significant upheaval in the domestic media industry. But it also doesn't employ a single person in the country, and is yet to release an original Australian show (the first, Tidelands, is currently in production).

Netflix did incur the wrath of former federal treasurer Joe Hockey, though, and does have the dubious distinction of having a tax in Australia nicknamed after it (the GST on imported digital services, which went into effect in July last year). The conundrum Australia faces with Netflix - a highly popular service that contributes little to the domestic economy - is not uncommon. All around the world countries are trying to figure out what, if anything, they need to do about Netflix's dominance, amid fears it weakens the economics of local film and TV production, which in turn risks cultural erosion. Netflix show ads adorn billboards in LA. Credit:John McDuling The Netherlands, for example, is exploring a 15 per cent local content quota that would force the streaming video company to invest more heavily in local productions.

Since the companies Netflix is disrupting in Australia - pay TV provider Foxtel and the free to air TV networks - all face local content requirements, there is speculation a federal government review might recommend something similar for the streaming platform. Yet Hastings thinks such an idea would be a mistake. "Quotas are well intentioned ways for governments to try to make sure there’s investment in local content, to try to strengthen local culture," he said this week. "But, like most things, the regulations often backfire." Put simply, they lead to bad, low-quality shows, he argues. Anyone who has watched the reality TV so prevalent on Australian free-to-air television these days would likely concur.

The example of Canada - where Netflix also has no employees - could be instructive. There have been persistent calls to impose a quota on Netflix there. The company has moved to pre-empt this, announcing plans to invest $500 million in Canadian shows over five years. "We're sympathetic with the goal, which is for any country, how does a country ensure that

Netflix or YouTube or any of the internet companies is investing in those [local] stories?" Hastings said. "And so it's up to us, we think, to get ahead of it and to be investing in all kinds of content... So that we're seen as good citizens and the need for regulation is less." "Of course if something passes, we have to follow it." Building a moat

Netflix began as a DVD rental service, then morphed into an aggregator of TV shows and movies, and is now basically a full-fledged studio. Throughout its history, it has made people who doubted it look foolish. In the early 2000s, when the company was losing money, it held talks with video chain, Blockbuster about a sale. Then dominant (and now bankrupt), Blockbuster baulked at the price - $50 million. Netflix’s market value is now north of $US140 billion, and Blockbuster’s decision is a dinner party anecdote. It is now five years since Netflix realised it could no longer rely on licensing shows from the traditional media companies it was disrupting. Originally, this meant buying exclusive rights to shows made by other studios. Three years ago, Netflix started taking control of the entire, end-to-end production process for its shows.

Today, it occupies eight of the ten lots at one of Los Angeles' most famous studio complexes - the former home of Warner Brothers, where the Looney Tunes cartoons were made. The company will spend $US8 billion on content this year. Far from being aghast at any reckless spending, Wall Street analysts are mostly supportive. "Netflix has emerged as a content powerhouse that is actively building a global moat," UBS analysts wrote this week.f Short-sellers have repeatedly targeted Netflix over the years, arguing its high valuation and growing content liabilities are unsustainable. This strategy has failed miserably. Netflix shares have soared more than 1000 per cent over the past five years, easily outpacing the broader US market (up 75 per cent), and other high-flying tech stocks like Amazon (up 460 per cent) over that period. Still, the faith Netflix supporters have in the company's content spending is remarkable. While it seems like a very high proportion of the shows the company produces are hits, no one really knows for sure.

There is no reliable viewing data for its shows - Netflix doesn't release this, it deems ratings irrelevant since it sells no advertising, and no third party companies even attempt to measure them. The only yardstick anyone really has to gauge the success of Netflix's content spending is subscriber growth and retention, both of which remain exceptionally strong. As so do the profits Netflix is starting to throw off. In 2017, it booked record net income of $US559 million, nearly double the previous high set in 2014. "We're very fortunate that this year our members will send us about $US15 billion of their hard-earned money, and it's up to us to take that money and turn it into great content for their viewing benefit," said Hastings. "So every show we ask ourselves did we spend the customer’s money well. Did we create a show that lots of people want to watch compared to the cost?"

Part of the reason analysts at UBS are so bullish on Netflix is the company's growing focus on shows designed for markets outside of the US. The thing is, some of these shows are starting to resonate globally. For example, Dark, a sci-fi thriller and Netflix's first German language production, has won rave reviews in the US and Australia, and appears to be building a strong audience in English-speaking countries. More than 90 per cent of viewing for the show happened outside of Germany, Netflix claims. "Amongst the millions of Netflix members outside of Germany who saw this German TV series, my guess is the large majority of those members have never seen a German television series before in their life," chief product officer Greg Peters said. The German series Dark has been a big success for Netflix. Credit:Netflix

Other shows that initially failed to gain traction on traditional TV, such as UK produced End of the F---g World, have found global audiences due to Netflix, it says. "End of the F-ing World out of the UK, Channel Four had the first

rights there in the UK, did okay. And then it came onto Netflix in the UK and did

extraordinary, did [well] around the world also," said Hastings. For a local film industry, a global hit would surely be a bigger coup than perfunctory content designed to satisfy a quota. If that is the case, patience over Netflix's first Australian release might be warranted. The secret to its success

Netflix's apparent success in Hollywood seems to have much to do with its origins in Silicon Valley. That is certainly the narrative the company is attempting to push. During the media tour, the company showcased the dazzling array of technologies that underpin the streams it pumps out to its 118 million worldwide subscribers. Netflix is famous for the investments it has made in its back-end infrastructure. It does this to ensure consistency of its streaming (i.e. to make its shows look easy on the eye) on hundreds of different devices its users own, and on the varying degrees of internet quality they enjoy. It also invests heavily to minimise outages (it claims that in 2017, the service was available and working for users 99.97 per cent of the time). The company is also constantly making subtle improvements to its products. This week, for example, it announced Snapchat-style vertical video previews for its shows on mobile devices - news that seemed to excite US tech journalists. Perhaps more interesting, though, is how the company has leveraged business concepts common for consumer tech companies - a ruthless focus on user experience, rigorous data analysis - to make smarter bets on shows.

For example, it classifies all of the shows on its platform into hundreds of sub-categories, and captures and analyses reams of data on user behaviour. It uses this information to power its recommendation algorithm, but also to help determine the audience potential (and appropriate budgets) for shows it creates. That's in stark contrast to the traditional process of green-lighting shows in Hollywood, which is based more on intuition and tribal knowledge than hard numbers. Netflix has also has set up a team to build apps, designed to streamline some of the antiquated processes that are commonplace in Hollywood, where production sets are mostly comprised of freelancers, and paperwork still proliferates. It is building apps to manage show budgets, scripting and crew administration. Unstoppable

This all might sound heretical to creative types, but high profile actors, directors and creators are rushing to work with Netflix at the moment. For example, last month, it struck a $US300 million deal with TV mega-producer Ryan Murphy (the man behind shows like Nip/Tuck and Glee). The reaction among investors suggests the tech meets Hollywood approach is working. "Netflix seems to have just about every secular trend going in its favour," wrote Macquarie analysts this week. Netflix seems so far ahead of the competition it begs the question: can anyone stop it? Disney, perhaps the most illustrious company in all of Hollywood, is at least determined to try. The company struck a $US60 billion deal to buy entertainment assets from Rupert Murdoch's 21s Century Fox Group last year, a deal that would give it control over a truly ridiculous portfolio of content.

And it is is clear Disney, which has been hit by "cord-cutting", wants to use this content for a full-fledged assault on Netflix. Last year, it said it would pull all of its shows from Netflix in 2019. It also acquired back-end streaming provider BAMtech. For his part, Hastings doesn't seem worried about another formidable rival. Asked whether the Disney Fox-combination could represent the biggest threat Netflix has faced so far, he said: "It's hard to say. I don't think so particularly. I would say they're both great producers of content, combined they'll be even more of a producer". Rupert Murdoch with Jerry Hall and Lachlan Murdoch at Kirribilli House in December for drinks with the Prime Minister. Murdoch has sold his entertainment assets to Disney.

The company's own complacency represented a bigger challenge, he added. "If we produce great series and great movies, customers will love us and we'll continue to succeed," he said. "If we get distracted by trying to copy other people...we'll never succeed at that." Hastings has famously clashed with old media competitors in the past - most notably HBO (the maker of Game of Thrones) and cable giant Comcast (the owner of NBC). Yet he now seems remarkably relaxed about the widening array of rivals trying to thwart his company. Over drinks he remarked that Stan, the joint-venture between Fairfax Media (publisher of this story) and Nine Entertainment Co - and his biggest competitor in Australia, had actually helped Netflix, presumably by boosting consumer awareness of streaming.

The company is now even trying to distance itself from the Netflix versus old media narrative. And it is not entirely spin. Netflix is increasingly striking partnerships with telcos and pay TV companies, to bundle services together on single bills, and to make Netflix available on set-top boxes. It has signed such a deal with Murdoch-controlled Sky in the UK and Germany. Last week, Fairfax Media revealed talks over a similar arrangement between Foxtel and Netflix have taken place in Australia. Loading Foxtel, which recently appointed a new CEO, has been hit by the Netflix effect, losing subscribers for the first time last financial year.

This week its owners, Murdoch's other vehicle, News Corp, and Telstra, struck a deal to merge Fox Sports (owned by news) into Foxtel. The deal paves the way for a float of Foxtel on the ASX. That could ultimately put the pay TV company in a stronger position to acquire sports rights - something Netflix this week reiterated it will never bother with. "We're not doing live sports," said Hastings. "We're doing our thing, our thing is great movies, great TV shows, we're only this far in." "We don’t do news, we don’t do sports. But what we do do, we try to do really well." Tech-lash

Another less predictable threat to Netflix's dominance could be the growing anger and cynicism towards tech companies in the US. Unlike other tech CEOs, Hastings, who also serves as a director of Facebook, at least acknowledges that there is a problem. "Do I worry about the impact of the internet? Of course as a human being and as a citizen, absolutely," he said. "I'm an optimist...but we have to be able to be honest that not everything about the internet is fantastic. And so as long as we can have that mature conversation, we can get to a good place." Illustration: Joe Benke To be sure, the streaming giant is not the focus of this growing anger – that would be Facebook, and to a lesser extent Google. But it could still easily end up collateral damage.

A chilling example of that emerged this week. The shuttle buses operated by tech companies to transport workers on the 50-plus kilometre journey from San Francisco to Silicon Valley have disturbingly been targeted by random attackers firing pellet guns. Recently Netflix's bus was hit by a pellet - shattering one of its windows. Anti-tech sentiment is rising in the US, where inequality has, by some measures, hit its worst levels on record, and where anger over the role Google and Facebook have played in the political process is mounting. This sentiment has always been strong in Europe. But it is a fringe issue, at best, in Australia.