Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



What Netflix CEO Reed Hastings Learned from the iPhone

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Simplicity is at the core of Netflix (NASDAQ: NFLX  ) . At least, it used to be. JPMorgan analyst Doug Anmuth was keen to spot that the phrase "simplicity is at our core" was removed in recent months from the company's long-term view. Hastings responded that he took a lesson from Apple (NASDAQ: AAPL  ) with a little help from his friend.

Can a less-simple Netflix continue to grow in the face of competition from simple offerings from (NASDAQ: AMZN  ) and Outerwall (NASDAQ: OUTR  ) ?

Source: Netflix

An Apple genius
When Apple released the iPhone its design was simple (one button), its interface was simple (touch anywhere), and its capabilities were simple (whatever Apple said you could do with it.) Apple made the device so simple that a three-year-old could understand it.

Apple unlocked a lot of value when it opened up the iPhone to developers and created the App Store, though. In 2013, Apple generated $10 billion from the App Store.

On Netflix's conference call, Hastings said that an iPhone without apps is simpler, but it's not better. Instead, he's shifting his focus to simplicity as an input -- its basic product of video streaming. Then the company can match functionality with consumers at different price points in much the same way that the iPhone does through tiered products -- 5s, 5c, 4s -- and then uses the App Store to add further functionality.

This transition to tiered pricing started last April when the company introduced a premium service for $11.99 that allowed customers to stream to four separate devices simultaneously. More recently, the company started testing a $6.99 price point and a $9.99 price point; each of these new price points features varying levels of functionality. In his letter to shareholders, Hastings said the company hopes to overhaul its pricing to a "good, better, best" offering.

Not too complex
Hastings hasn't diverged too much from his goal of simplicity, however. When asked about adding pre-roll advertising before videos begin playing, he said the company has no plans to go toward advertising. It doesn't fit into the company's model of giving the customer complete control over his viewing experience. Additionally, Chief Content Officer Ted Sarandos said the rights to add advertising cost more.

Additionally, the tiered pricing plans will not offer different content, just different functionality. Current content licensing won't allow the company to provide certain content to some subscribers and not from others. With competitors like Amazon and Redbox bidding for exclusive rights against Netflix, part of the sway for Netflix is that it has significantly more subscribers. Tiered content takes away that advantage.

Potential price hike
The last time Netflix tried to raise prices, it faced some serious backlash and a significant sell-off in its stock. Of course, that was three years and millions of subscribers ago. To ease investors and subscribers, Hastings said in his letter to shareholders that "existing members would get generous grandfathering."

Still, efforts to increase prices could be an opportunity for Amazon Prime and Redbox Instant to add new subscribers that may have otherwise chosen to subscribe to Netflix. Amazon already undercut Netflix on pricing with its $80-per-year Prime service, and although a low-tier offer from Netflix could offer a competitive price, consumers may see more value in Amazon's offering.

Meanwhile, Redbox Instant offers the combination of rentals from Redbox kiosks with video streaming, undercutting the price of a dual membership to Netflix's streaming and DVD-by-mail service. Although Redbox Instant's catalog doesn't measure up to Netflix's, the service is a relative newcomer and has the backing of telecom giant Verizon (which has shown an increased interest in video in recent months.)

Stream different
Netflix wouldn't be the first company to copy Apple in some form. With 33 million domestic subscribers and hopes of doubling that in the long term, Netflix may be keying on tiered pricing for future growth.

With significantly more competition than the last time the company tried to raise prices, however, Netflix may be opening the door for other streaming video services to capture more subscribers. Of course, Apple wasn't afraid to let its competitors take the bulk of the smartphone market, and it's worked out fine for the company so far.

The future of entertainment is within your reach
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2807020, ~/Articles/ArticleHandler.aspx, 9/3/2015 9:42:56 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...

Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

Today's Market

updated 26 minutes ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:00 PM
AAPL $110.37 Down -1.97 -1.75%
Apple CAPS Rating: ****
AMZN $504.72 Down -5.83 -1.14% CAPS Rating: ***
NFLX $101.06 Down -4.38 -4.15%
Netflix CAPS Rating: ***
OUTR $61.69 Up +1.42 +2.36%
Outerwall CAPS Rating: ***