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Netflix's (NASDAQ: NFLX ) new original series House of Cards has pulled in piles of critical praise since debuting on the streaming service last month. And yet, the bears point out, it couldn't possibly attract enough new subscribers to justify what Netflix had to pay for it.
That's probably true, but I think it's a too-narrow way to look at Netflix's investment. The show doesn't need to be a marketing hit to generate a good return for the company.
Sure, at a quick glance the math looks rough. We know that the company paid $100 million for two seasons. As the argument goes, it would need to sign up over 1 million new subscribers at the current rate of $7.99 per month -- and keep them on the service for a full year -- to get that investment back in new revenue. Considering that Netflix only managed to add about 5 million streaming subscribers in the U.S. for all of last year, expecting 1 million new subs based on this single title would be unrealistic.
But Netflix isn't just interested in getting new subscribers. Even more important is keeping the masses of current customers happy. Netflix has made a point of allowing streamers to easily break out of the service. As CEO Reed Hastings said in last quarter's conference call, "[W]e really want to make it easy to quit." That's a smart long-term strategy, as long as you have great content to convince users to stay, or to entice them back after taking a break. Otherwise, customers can take their business to rivals like Amazon.com. The e-tailer's Prime video service has been shelling out for exclusive content too, most recently in an agreement to stream CBS' new show Under the Dome this summer.
When viewed as more of a tool to keep subscribers from jumping ship to competitors, it's clear that Netflix has a good shot at getting its money's worth from the House of Cards investment. The company started this year with 25.5 million domestic streaming subs. To make $100 million more in revenue, it would need those members to stick around just half a month longer than they otherwise would have.
Could compelling exclusive content be enough to move the needle on subscriber churn? You bet. One early survey of Netflix users by the investment firm Cowen found that 86% of subscribers said House of Cards made them less likely to cancel their subscription.
There are two ways that Netflix can raise its membership rolls: adding a new subscriber or keeping a current one from canceling. It's with this second group that the company's original content investments could really pay off.
Can Netflix fend off the burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.