Netflix Positioned for Subscriber Boom with Social Media Integration

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

Having been a member of Netflix (NASDAQ: NFLX) for several years, I utilized the discontinued feature that allowed for recommending films to friends and family.  Surprisingly, it went beyond expectations as it essentially made every aspect of one's rental queue available to those invited into a customer’s friends list.

Most people who would want to make recommendations would probably still want some degree of privacy but it seemed to be an "all or nothing" choice.  After the service was discontinued by Netflix a few years ago, it seemed as though Netflix was remarkably behind the times.  The service has long begged for a Facebook (NASDAQ: FB) "Like" or "Share" button on the information page for each film.

After years of wondering what’s been taking Hastings so long to wake up to the growth opportunities Facebook integration would present for Netflix, I was shocked to learn the reason.  I learned that the sages in Washington had actually crafted a law that posed legal challenges to people -choosing- to share their movie recommendations on a service like Facebook.

During the late Justice Robert Bork's failed confirmation, a Washington City Paper reporter named Michael Dolan talked a video rental store clerk into giving him Bork's account records, which was the catalyst to legislators crafting the Video Privacy Protection Act (of 1988).  The purpose was to prevent anyone from disclosing what titles a customer had checked out. It is difficult to fathom how any law could deprive American citizens of the right to -willingly- share their favorite films with their friends on a website they have joined without coercion. 

Anyone with even a morsel of sense can distinguish the difference between a video store clerk, without the knowledge of the customer, disclosing their customer’s rental history to a reporter versus allowing a customer their right to consciously “opt in” to a feature with the very objective of sharing their rental choices with their invited friends.

According to headlines this past week, the law has been updated to finally allow for such a service. Now that Netflix is able to catch up American customers to the 21st Century, I would suggest that Hastings consider giving customers an alternative to his agenda of "frictionless sharing," which is the term for the feature Netflix previously offered.  There is no reason why we should have to open our entire queues to those with whom we want to make a recommendation.

Getting Facebook integration right the first time could be detrimental to the tremendous growth in subscribership the opportunity presents.  Just as word of mouth can make or break a film's success, it could do the same for Netflix.

For example, the most commonly shared items on social media are news columns and blogs. There are millions of those on the Internet and tens of thousands of sources from which they are offered. Millions of these articles converge through Facebook. However, with online film distribution there are only a handful of platforms on which to view these films and they all charge money in various manners for valued films. Unlike with news distribution, which struggles to extract a few dollars from readers, most movie watchers have no reservation about paying and are accustomed to doing so.

Netflix is the standard for bringing American consumers online film content and when members see their family and friends giving personal recommendations of films on the Netflix platform no less, those Facebook members who are not yet Netflix members will be presented with the most powerful thing that Facebook has been trying to cultivate with other products and services: the coveted –personal- referral.

If I’m on Facebook and suddenly see that Aunt Tilly is “sharing” her love for laundry detergent or toothpaste, I’m thinking either Aunt Tilly is being offered a coupon, or someone has hijacked Aunt Tilly’s identity.

On the other hand, if I see Aunt Tilly is recommending The King’s Speech on Netflix “Watch Now,” I’m going to assume that she really watched and liked the film.  The beauty is that her recommendation should take me right to the page with the description, ratings and a play button. 

As long as Netflix CEO Reed Hastings doesn't force the odious "frictionless sharing" upon participants, I look for Netflix to experience an explosion of new subscribers resulting from a daily avalanche of referrals.  For the reason that film viewing is such an integral part of the lives of our media obsessed culture and the ease of extracting discretionary spending on films, I look for Facebook to acquire Netflix. They both stand to benefit from one another immensely.  Although Facebook can show Netflix the subscribers, Netflix can immediately "show Facebook the money."

Facebook has the leverage with their much higher market cap of $57 billion to Netflix's $5 billion but one can easily argue that there is a great deal of "good will" in FB's stock price and that Netflix is undervalued at present compared to other content providers and their past stock price history, which was three times what it is now.  Their revenues and earnings are not as far apart.

Netflix’s margins have been declining during the transition to online streaming.  Nevertheless, I believe they will be unstoppable as long as they have a palatable sharing feature.  I believe perhaps dogmatically that Facebook would fail in attempting to become the standard that Netflix already is.  I don’t care how big they are.  It isn’t that simple to implement what Hastings is implementing.  It reminds me of how people believed that Wal-Mart would dominate video rentals and banking and everything else. 

Facebook would be better allowing Netflix to remain separate, accretive to earnings and focus on synergies rather than trying to make Facebook the distributor in name.  Keep the Netflix brand.  We like it for some reason.  I’m not saying Hastings is a Steve Jobs but I do believe that like Jobs, he played the outcast for a time and will once again be hailed as a media genius. 

 


Scott Ryan Anderson has a long position in Netflix and no position in Facebook. The Motley Fool owns shares of Facebook and Netflix and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and 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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