Netflix Takes a Bow
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Netflix (NASDAQ: NFLX) continues to be one of the best S&P 500 stocks of 2013. Not that long ago Netflix was the object of scorn for many of its own customers as well as investors. Those days are long gone. The stock is up over 100% within the first quarter of 2013, and shares now trade around $176, up from a 52-week low of $53 a share. Would you like to give Reed Hastings a bow and admit that Netflix deserves a round of applause?
An interesting metric from Reed Hastings was posted on the Netflix Facebook page—Netflix subscribers viewed 4 billion hours of programming. Time Warner Cable (NYSE: TWC), Comcast (NASDAQ: CMCSA) and DISH Network (NASDAQ: DISH) can't be happy about these numbers.
Providing that much programming in such a short time-span is groundbreaking. If Netflix was a channel, it would be the most-viewed channel on cable, dish or network television. Why? Many simply cannot pay for dish or cable. Many don't see the need—most of the good programming is available online, on iTunes, or (gasp) via torrents anyway. Network television is just downright awful. More importantly, consumers are just comfortable not having cable or dish. Many more are all too comfortable not watching anything on network television, unless it involves Peyton Manning or Tom Brady.
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Comcast continues to take shots at Netflix. Comcast tried capping its residential broadband customers in an attempt to throttle Netflix. When that failed, Comcast introduced tiered data pricing to stem users from enjoying Netflix. None of these tactics worked—they've only highlighted Comcast's lack of innovation.
Time Warner Cable has been slightly more diplomatic—they've been in discussions with Netflix about how both companies can work together to deliver Netflix content. This a step in the right direction, but still showcases the lack of yet another traditional media company to innovate—simply cutting deals is not enough.
Dish Network has been late to the online entertainment party and appears to be conceding to Netflix. Dish Network's current management team does not want to compete with or run a modern web video company—they want a slice of the growing smartphone audience. This strategy may prove successful, at least Dish Network is doing more than simply playing spoiler or schmoozer.
The very fact that Comcast, Time Warner Cable and Dish Network are not producing exceptional original programming is the primary reason Netflix will continue to grow while these traditional media companies will struggle to maintain the status quo. Cable providers and Dish TV can no longer charge people more and more each month without adding value—those days are over. The most cost effective way to add value, increase viewership and create licensing opportunities is simple—tell a good story.
Hollywood carries a love-hate relationship with Netflix. They hate Netflix because they are in large part the antithesis of Netflix. Hollywood needs the "appointment factor" to be relevant—red carpet anyone? Appointment is in Hollywood's blood. These days appointment entertainment consumption is waning fast. Who has the time or conviction to rush home to watch a program? Who does this anymore? Anybody using Netflix is not watching live TV or going to the movies. People have lives—entertainment is just a tiny sliver of their life. They are in a word, sensible. The Netflix model just speaks to this sensible, yet quality conscious consumer—the very antithesis of Hollywood.
But let's remember what folks do with Netflix—mainly watch old movies and reruns of Television shows. Hollywood is Netflix's greatest supplier of content. If Netflix may be the enemy, then why is Hollywood so delighted to provide Netflix content? Why don't these studio's hire developers and BUILD their own Netflix? The same reason the music industry allowed Apple to take music distribution away—laziness. Hollywood will continue to bristle about Netflix, but will ultimately do nothing but continue to provide Netflix content. Some in the entertainment industry see Netflix as a real threat and just aren't willing to be part of Netflix.
HBO is a prime example. AMC Networks (NASDAQ: AMCX) and a smattering of others know selling valuable original programming on Netflix isn't worth it—it kills the whole subscription model. Other media companies aren't worried—but they should be. The cash Netflix pays for reruns is lucrative for traditional media companies and producers, but the profits Netflix makes will be used to further erode traditional media's already fading viewership. Right now Netflix is playing that old game—start out with reruns while looking to the future. Relying on the content of others has provided Netflix an audience, but Netflix needs to grow the business. Growth for Netflix is in original programming—creating shows people love.
Netflix's foray into original programming is exciting. It's just like AMC all over again. The vast majority of thrilling programming is in the 100 hour cable television program. This type of programming is pure gold for Netflix, but original programming is not cheap to produce. Netflix will spend $3.8 to $4 million per episode. This is high, but Netflix will have $0 marketing cost to push their original programming—they'll will use algorithms and big data to find an audience for their original programs.
The Netflix original program, House of Cards is undoubtedly the first of many original shows that will take Netflix to another level. With Hemlock Grove and Orange is the New Black in the pipeline, Netflix is positioned to become the place for stellar original programming. Netflix will have exclusivity of their original shows for four years. Once that time has elapsed Netflix and show producers can then re-sell the content to linear cable channels.
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Not many broadcast or cable systems will make this kind of a commitment—producing original scripted programming. Those that do, such as AMC or Starz, have been rewarded. Breaking Bad, Mad Men and Spartacus have seen excellent returns on investments for AMC and Starz. AMC has hit pay dirt by simply telling a good story. Meth cooks, zombies and Don Draper—no wonder AMC's price target is $75 a share. Even the History Channel has followed suit with its hit show, Vikings. Netflix wants some of that action, and with their bankroll and customer base Netflix will get that action.
As Netflix continues to take audiences from traditional television to online entertainment, profits are likely to soar. Helping boost Netflix stock are the continuing high cable and dish subscriber fees coupled with the consumers changing taste. Not to mention Netflix has no real competition. No one sans Kim Dotcom seems to want to build a "for pay" online entertainment website these days. As Netflix continues to cut deals for content while producing high-quality, proprietary original programming, the Netflix stock—like its original programming, is certainly worth watching.
Check out this video from House of Cards star Kevin Spacey about the original drama series made exclusively by and for Netflix.
John Moore has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. 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!