Netflix's Second Million-Dollar Competition

By Anders Bylund
September 21, 2009 | Comments (3)

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The final results of the Netflix Prize are in: Netflix (Nasdaq: NFLX) is sending out that $1 million check to Team BellKor's Pragmatic Chaos. And the next million-dollar race is already on.

After three years of hard work and a dramatic race to the finish line, BellKor used movie ratings on a five-star scale to predict the film tastes of Netflix subscribers 10% better than the company could do on its own. It took three years for some of the finest analytical minds in the world to clear that hurdle, so let's leave that method alone.

Now, Netflix is moving on to the next challenge: predicting movie ratings with no ratings history to lean on. Instead, the next $1 million Netflix Prize relies on demographic data and previous rental history. That sounds a lot harder, but also more valuable to the company. Deducing movie tastes without asking for user input should make the ratings system instantly valuable to new subscribers, as well as lazy or shy ones who can't be bothered to rate what they're watching.

This dedication to a high-quality ratings service speaks volumes about the Netflix mindset. Blockbuster (NYSE: BBI) seems to settle for just building a large library of ratings through Facebook widgets and the like. You don't see Blockbuster making news when it comes to making those rating clicks work for the company.

This is Reason #501 why I believe in Netflix for the long haul. CEO Reed Hastings attacks the movie-rental business from an engineering point of view. His company works hard to turn reams of raw data into useful information and then into action plans. If the DVD format drops off a cliff in five years, this commitment to quality data makes Netflix into a contender for leadership in the all-digital era.

And if nothing else, Netflix is sitting on a valuable portfolio of patents, designs, technology, and movie-industry relationships. A big, rich competitor in the digital video space could buy Netflix just to get all of those delicious tools.

  • I could see Apple (Nasdaq: AAPL) buying Netflix to improve its iTunes movie store -- and to apply Netflix’s techniques to its own music ratings as well.
  • Amazon.com (Nasdaq: AMZN) could come knocking and get an instant upgrade to product ratings on everything from books and movies to clothing and flashlights.
  • Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT) might be less likely to jump into the movie-rental business, but they care about data quality and would find a use for Netflix-style engineering. And Hastings sits on Mr. Softy's board already.

But personally, I hope Netflix stays independent and grows into a large cap on its own.

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Google is a Motley Fool Rule Breakers recommendation. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor selections. Microsoft is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in Google and Netflix, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like. The Motley Fool is investors writing for investors.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2009, at 7:41 AM, deadlysaber wrote:

    Congress last week began hearings about whether to discontinue Saturday mail delivery, close local branches and other measures to try to balance the postal service's budget. On the national news last night was a story about how a small town in Maine fought to retain its lone street mailbox. I say desperate times call for much bigger measures, and my suggestion is to sell the entire USPS outfit to Netflix, lock, stock, and ... Well, you don't want to say certain words around postal employees - at least until they become Netflix staffers. More on that in a moment.

    It isn't so far-fetched when you start to think about the possibilities. After all, Netflix is keeping the USPS afloat with more mailings of DVDs than McDonalds sells burgers. They have more than 50 distribution centers around the country, all of them in locations that are more secret than Dick Cheney's bunker. They certainly understand how to run a distribution network, they have the machinery and the personnel. Plus, something that would warm the cockles of my Republican wife's heart, I can't believe that I am saying this but having a truly private mail carrier might actually bring some economic sense to our mail system. How would this look? Here are my suggestions: First all, all mail would be one size and have to be sent in those familiar red mailers. That would mean that anything larger would have to use some other carrier, such as Fedex or UPS. International mail? Same thing. Magazines? Well, this is hard for an old magazine editor like myself, but they will have to change to the Netflix form factor if they still want to be mailed. Junk mail? Same deal.

    ------------------

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  • Report this Comment On September 27, 2009, at 9:23 AM, jjdenike wrote:

    recently noticed in local area supermarkets that not only RedBox but Blockbuster as well are both offering $1.00/night vending machines for DVDs. How is this not going to affect Netflix's growth curve?

    jjd

  • Report this Comment On September 28, 2009, at 4:11 PM, marhu wrote:

    The simple answer to jjdenike is "Selection." A vending machine can never contain as many different choices as a mail-order service. Unless the vending machine has a live internet connection and can burn DVD's on demand. Oops, never say never.

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