Netflix Is Investing for the Long Haul

Netflix  (NASDAQ: NFLX  )  is scoring content deals one after another in its ongoing effort to be a larger player in the global entertainment space. The company recently added a lot of content for its Canadian market, and is adding more originals to bolster its ambitions to be top dog in the Internet TV space. Netflix is moving ahead and investing heavily to grow its international subscriber tally. 

Acquiring global and regional content
With more than $1.1 billion of cash in its balance sheet, Netflix is constantly looking to add more content for existing subscribers, plus attract new members around the world. Netflix is already profitable in its Canadian segment, and the company is building on that momentum by signing a number of new deals for Canadian households.

The company recently added several local Canadian shows from the Canadian Broadcast Corporation. In addition, Netflix struck another deal with Comcast's NBC to add a number of popular films and TV shows, including Suits and Downton Abbey, for the Canadian market. Netflix will likely adopt this strategy of adding a wide assortment of content in different regions after it achieves profitability in that particular market. 

Netflix has also been adding many one-off documentaries and comedy specials from popular artists, available on Netflix only. It added comedy specials from acclaimed comedians like Russell Peters and Aziz Ansari, and it is also adding a documentary on Mitt Romney's presidential campaign, which will air in January 2014. Such a wide breadth of Netflix-only shows will drive the company's churn rate to record lows and grow its customer base considerably.

Well ahead of peers
Netflix's lead rival in the Internet TV space, Amazon  (NASDAQ: AMZN  )  has a much smaller subscriber base. Amazon is still mum on the number of subscribers it has for Prime Video, but Amazon's Jeff Bezos disclosed in the last earnings report that Amazon added "millions'' of Prime subscribers.

Assuming that Amazon Prime has 15 million paying members, it would be extremely difficult to extrapolate whether the customers picked up a Prime subscription for the fast shipping or for the video content. Amazon recently upped the minimum price for free shipping from $25 to $35, which might have been a major contributor encouraging millions of Amazon shoppers to sign up for Prime. 

However, Amazon is still investing heavily on Prime Video. The company recently unveiled a number of original shows, but reviews were less than stellar. But, Amazon is still surging ahead and building more original shows, plus signing content deals with more studios. However, for now, Netflix is significantly ahead of Amazon in the Internet video space, and that lead is almost certain to remain intact for the foreseeable future.  

Building a cult fan base
Netflix had phenomenal success developing original shows in 2013, and the company is building on that momentum. The company is about to air the first season 2 of a Netflix original, Lilyhammer, in mid-December. Additionaly, the company will debut season 2 of the Emmy-winning political drama House of Cards in February 2015. 

After winning the Emmy's, House of Cards has likely seen an increase in viewership on Netflix, which will enable the company to grow the fan base for the intriguing political drama. This strategy of developing seasons for an audience is in line with HBO's strategy and will pave the way for a future price increase. 

Some of the most popular shows on TV, like AMC's  (NASDAQ: AMCX  )  The Walking Dead and Breaking Bad, have steadily built a large audience after their first seasons, once those shows where available on video-on-demand. As a result, subsequent seasons of Netflix originals enable Netflix to develop a broader dedicated audience for shows like House of Cards and Orange is the New Black.

However, not all shows have been lucky. AMC dropped The Killing for the second time at the end of season 3 and cut Low Winter Sun after its first season. But, Netflix is reviving shows with a built-in audience for its original library. Netflix recently signed an agreement for AMC's cancelled show, The Killing. AMC dropped the show because ratings were below expectations. Now, Netflix will bring a fourth and final season, available exclusively on Netflix, which should be a great boost for Netflix's original strategy. 

Going forward
Netflix is doing a fantastic job of investing heavily in content for its subscribers. The company is spending a lot of money producing expensive original shows in an effort to build the franchise. Netflix is dedicated to delivering a great experience to its International subscriber base and making customers happy. The price and value of a Netflix subscription is increasing, which in turn will enable the company to add more subscribers in the future, mostly from the International segment. 

Profit from the war for your living room
Television, as we know it, is on the verge of a transformation. The companies that prevail in this epic disruption could go on to earn their shareholders untold sums of money. And the companies that lose could very well end up in bankruptcy court within a matter of years. With this in mind, our top technology analysts created a groundbreaking free report that sorts out the likely winners from the losers. In doing so, they reveal the handful of companies that are best positioned to make their shareholders exceptionally rich over the next few decades. To download this invaluable free report before the rest of the market catches on, simply click here now.

Read/Post Comments (4) | Recommend This Article (2)

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 December 11, 2013, at 4:13 PM, AceInMySleeve wrote:

    Check out the search traffic for Amazon's shows on Google trends in comparison to Netflix.

    Given enough time and losses maybe Amazon starts applying pressure, but holy cow is it a wasted effort thus far.

    Meanwhile content providers are made happier by the illusion of competition existing with Netflix, so it might actually be beneficial that Amazon exists.

  • Report this Comment On December 11, 2013, at 5:18 PM, dinopontino1 wrote:

    Amazon Instant just released their shows a month ago? They're both just ok, imho but I didn't really like any of the Netflix shows either.

    Netflix is under severe pricing pressure from amazon instant. If you use Amazon mom, prime/instant is FREE. That's right, become an Amazon Mom and prime/instant is free. ie, $0. $0/month is a great deal.

    "that lead is almost certain to remain intact for the foreseeable future."

    I find this laughable. Netflix paid $100 million plus for season 2 of House of cards. Amazon could come in and pay more season 3 and poof, it's gone from Netflix forever. House of Cards is available on Amazon DVD for $14/used. Netflix doesn't OWN this show.

    All of this said, I still love netflix, I just don't see them winning this war.

    They're beaten on price on the low end from Amazon, they're beaten on content on the high end, (HBO GO. Game of Thrones is more popular than all shows on Netflix combined.) Comcast is selling an HBO-BROADCAST HD SPORTS cable package for $30/month which seems like a pretty good deal to me.

    I don't think this war will be decided in 2014 but I expect it to go downright bloody in 2015 as other streaming services start offering high end proprietary content.

  • Report this Comment On December 11, 2013, at 5:40 PM, AceInMySleeve wrote:

    So the clear formula to beat Netflix is to charge nothing and outspend them on content. The bar is set at 2.5B$ in content (and increasing).

  • Report this Comment On December 11, 2013, at 6:47 PM, duuude1 wrote:

    Agreed Ace - spend like crazy and get this result:

    AMZN has 1/20th of the network traffic compared to NFLX!!

    I'm long Amazon as well as Netflix - AMZN for their outstanding internet retail business and NFLX for their outstanding internet video subscription service.

    Amazon Prime subs are apparently taking advantage of the free shipping - and not so much of the free video content. 1/20th of the traffic??

    There are several possible outcomes here:

    - AMZN will continue to invest in content and provide it free for Prime customers as now (I think this is not likely based on the data above - it's throwing money away)

    - AMZN will stop investing in licensing content for streaming and instead will focus on PPV (this seems like a high probability)

    - AMZN will break out streaming video as a standalone service separate from Prime and then ramp up licensing and originals investments to try and compete with NFLX directly for subs (AMZN is not dumb - they won't do this)

    Competitors? It's like a bunch of kids with their ducky inner tubes around their waists, getting ready to jump in the pool with Michael Phelps saying "yeah, we can catch him".

    NFLX stock will continue to be very volatile as "investors" panic and sell every time another content provider and their grandma starts up an online video distribution site - and they'll see like HBO GO that it's a crap-load harder than they thought.

Add your comment.

DocumentId: 2757413, ~/Articles/ArticleHandler.aspx, 4/18/2014 3:16:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...