Netflix Disrupts the Television World
Crystal is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a company attacks industry norms, we pay attention. Just as Apple radically disrupted the record industry and altered consumer habits with iTunes and the iPod, Netflix is now turning network television on its head with an entirely new content distribution model.
"House of Cards" debuted on February first and is one of several original Netflix productions to be distributed on a web-only platform in an attempt to directly compete with cable behemoths, such as Time Warner’s HBO channel.
Netflix (NASDAQ: NFLX) also changed the rules in how they presented the series. In breaking with the traditional scheduled show times, Netflix released the entire series at once- all thirteen episodes. Binge viewing and social media support groups sprung up across the internet on the weekend of its release.
"House of Cards" is directed by David Fincher, known for "The Girl with the Dragon Tattoo," and "The Social Network" and stars Oscar-winning actor Kevin Spacey. The narrative is anchored in power, politics, and drama- topics we humans find sinfully delicious.
Skeptical investors flinched at the first rumors of this foray into original content production. Netflix excels at content distribution and deviating many millions of dollars to license a show that had not even entered production was seen as a major risk. Official numbers on the cost have not been released, but SFGAte.com (among many) are reporting rumors in the $100 million dollar range for 26 episodes of "House of Cards."
Netflix CEO, Reed Hastings is poising his company to directly compete with HBO. As a part of the Time Warner (NYSE: TWX) family, HBO relies on cable distribution to support its plethora of programming. In 2012, HBO expanded its international presence and increased its digital licensing fees, according to Nasdaq.com.
Yet, Netflix has a potential advantage over HBO or any other traditional broadcast or cable network. Netflix has data on its side- tons of it- in the form of user habits and algorithms. Utilizing the company’s access to the viewing habits of their subscribers, Netflix can structure the creative production in a way that appeals to customers. The company can also make an educated guess on how many people would connect with specific story narratives based on their existing consumption habits using trackable data.
The following quote from Wired sums it up perfectly. “We know what people watch on Netflix and we’re able with a high degree of confidence to understand how big a likely audience is for a given show based on people’s viewing habits,” company communications boss Jonathan Friedland said. “We want to continue to have something for everybody. But as time goes on, we get better at selecting what that something for everybody is that gets high engagement.”
Netflix continues to build its licensing archive of popular entertainment as well. In December 2012, Netflix beat out Starz for the first-time distribution rights of Disney films fresh out of the theaters in the United States, starting in 2016. The Walt Disney Company, (NYSE: DIS) is a household staple for children (and kids at heart). All of Disney’s live action and animation productions are included in this exclusive Netflix distribution, including Pixar, Marvel Comics and recently acquired Lucasfilms. Such a feat places Netflix in a position traditionally reserved for cable broadcast networks.
Creating original content based on existing customer habits and expanding distribution from content beasts such as Disney provides a strong growth platform for the company. And if their hunch is right on "House of Cards," investing in stellar original content with little creative constraints will keep Netflix in this sweet spot of disruption.
crystalstreet has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!