Growth Of On-Demand Video Bodes Well For This Content King

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, the Nasdaq Composite Index fell by a fraction to 3,160, while the Philadelphia Semiconductor Index came down by 0.3% and the Morgan Stanley High Tech 35 Index fell by 0.1%. So how is it that on the same day Netflix (NASDAQ: NFLX) picked up more than 2% to $179 in after-hours trading?

Chief Executive Officer, Reed Hastings, claims to have the answer when he spoke at a Morgan Stanley investors conference in San Francisco. According to him, it’s all in the data. Its new series ‘House of Cards’ will be one in a long line of carefully planned out original series that will skyrocket Netflix back to its rightful place as a leader in the industry.

Netflix has not always been able or willing to cater to the world of ‘my way, right away’ – an odd choice for an ‘on demand’ movie streaming company. Its simple strategy of movies and TV shows for immediate streaming was just a cheaper, more efficient method of entertainment that gave power to the consumer. No longer did they have to pay for channels they didn’t want and the tedium of commercials before, between, and after their shows. 

But this system gave Netflix an even more powerful tool that it could use in its battle against other on demand programming like Comcast (NASDAQ: CMCSA): data. The company is able to collect intelligence on what people watched and when, which allowed them to conjecture the ‘why.’

No other company on the planet has more information on movie and television watching habits and preferences than Netflix, and that is where the company has an advantage over other companies trying to jump into the internet or online video provider market. Amazon is rolling out its new ‘Prime Instant Video’ and Hulu is focused on TV episodes as close to original air date as possible.

According to a news release:

Netflix CEO Reed Hastings insisted today that the rise of rivals Amazon Prime Instant Video and Hulu Plus has actually helped the relationships his video streaming service has with studios.

The competition has led to bidding in the marketplace for programming, allaying studios' fears of Netflix dominance in video streaming.

"One fear they had is that we would run away with the prize.... They don't feel as strategically vulnerable," Hastings said at Morgan Stanley's Technology, Media & Telecom Conference this morning. "It's an overall healthier situation than it was two years ago."

Some estimates claim that more people watched movies streamed online than on DVD last year. Who better to know what was watched than the company that has unparalleled access to viewers’ opinions and can review over 30 million plays a day, four million ratings, three million title searches, and information about the time of day when shows were watched. Netflix can also find out on what devices movies or shows were watched.

But how will it use this information to its advantage?

The war for content

Netflix can use this information to determine what type of content to acquire. And in today’s market, content is the name of the game.

Other companies have been trying to get a leg up on Netflix by gaining exclusive rights on content. Comcast, for instance, made a deal with HBO, owned by Time Warner, to extend the licensing agreement into the next decade for a select number of comedies and drama series. Netflix, in response, has also made deals with Time Warner for exclusive rights to eight of Warner's drama TV series. Names include proven favorites like ‘West Wing’ and ‘Revolution’, ‘Fringe’. It even has rights to the new premier series starring Kevin Bacon, ‘The Following.’ It has also announced a deal to acquire the exclusive pay-TV rights to Disney's films beginning in 2016. Netflix became the first Internet-subscription video service to get those kind of rights.

Unlike Netflix, Comcast is choosing to focus on a deal with GE, which combined all of NBC's media content with Comcast's in a joint venture majority owned by Comcast. Comcast has added minority-owned networks and created kid-friendly videos and PSAs in addition to more local news on its NBC-owned channels. The success of the deal is evidenced by Comcast's recent decision to buy out the 49% of the joint venture owned by GE.

Netflix recently announced a partnership with Dreamworks (NASDAQ: DWA) to bring all new original kids television shows to Netflix. The move is part of Netflix's strategy at original programming, as well as movies and shows with a wider consumer appeal.

This deal is beneficial for both companies. Dreamworks attempted expansion into television could benefit from this as it would have a platform to reach consumers. It also gives these movies extra ‘thrust’ after the big screen, allowing for sequels and bigger box office results. For Netflix, this move is undoubtedly based on research. If this is what people are watching, Netflix will benefit by being the exclusive provider.

During 2012, Netflix only added about 5 million additional paying users in the domestic market. However, the company is expected to see huge growth from international markets, primarily throughout Canada and European market. It also expanded into the UK, Ireland, and four countries in Scandinavia. That has helped to boost revenue, but send profits lower and lower.

This year, however, it is able to capitalize on these new markets, and one can be more bullish on Netflix for its potential in growing revenue as well as subscribers. Current estimates call for the company to grow revenues by 18% this year to $4.26 billion and another 15% next year to $4.9 billion. Below is a table that shows how Netflix's revenue has grown.

 

 

Summary

To capture a higher market share and grow rapidly in the international arena, Netflix needs to develop high quality content. It can develop such content by using data from current subscribers – an advantage no other company has.

Netflix share price once reached the $300 mark, but investors had a tough year in 2012. Even so, Hastings is leading Netflix in the right direction, and using an informed approach to do it. I predict shareholders will see some positive movement with Netflix in the coming months.


StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation and 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!

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