Streaming Video Is Changing: Here Are 3 Reasons to Bet on Netflix

Netflix moving away from what brought it to the dance is actually a good thing for investors.

Jul 21, 2014 at 3:35PM

Right before users' very eyes, the streaming video business is changing. Netflix (NASDAQ:NFLX) was first to the party in streaming, and many would argue that its first-mover advantage is reason enough to believe in the company. However, it's unrealistic to expect that a company will maintain its dominance just because it was first. The good news for investors is that Netflix is changing with the times, and there are three reasons to think that its dominance will continue.

There is a reason television works
One of the more significant changes in the streaming video industry is the transition from a focus on movies to a focus on television shows. Originally, movies seemed to be the hook that would bring subscribers into the fold. Investors shouldn't forget that Netflix started as a movies-by-mail business.

The great part about movies is that users know the names of blockbuster hits, and this creates a buzz for the service. Rather than buying these titles on DVD or Blu-ray, users can watch and pay less than $10 a month to do so. When Amazon.com (NASDAQ:AMZN) started its Prime Instant Video business, the company followed Netflix's lead with movies.

In a similar way, Outerwall (NASDAQ:OUTR) launched its Redbox Instant Video business with a focus on blockbuster movies. This sounded great in the beginning, but what Netflix seems to have realized before its peers is that movies are a one-shot deal.

Great movies can be watched several times, but then the user is left looking for something else. In this way, Netflix and others are constantly looking for something for their users to watch. By contrast, great television series have multiple episodes per season, and years worth of seasons.

This is the first reason to believe that Netflix will continue to dominate: the company knows the value of great television shows. In fact, according to a recent study, Netflix carries 32% of the top 75 television shows from the past four years. By comparison, Amazon Instant carries just 12%, and Redbox Instant has almost none.

By comparison, only Hulu carries more, with about 51% of these television shows. However, Hulu has significantly less to offer overall than Netflix. The bottom line is that Netflix is changing with users' tastes and this bodes well for the company's performance in the future.

Investing for the future
The second reason to believe that Netflix will continue to dominate is the fact that the company is investing in new television series. Furthermore, it knows how to make these series work. Hit shows like House of Cards and Orange Is the New Black draw in new users. More important, future seasons of these hits should keep users from defecting.

For those who think Netflix is just a two-trick pony, children's hits like Turbo FAST, and future series from both DreamWorks and Marvel, suggest more great things in the future. By comparison, Amazon Instant is running shows like Under the Dome and Extant, but has no hits that garner the same attention as House of Cards.

Things are slightly better at Hulu, but the company's production of originals is inconsistent. Shows like Rev, Behind the Mask, and Whites all have unique storylines, but users are left wondering when or if new seasons will be authorized. Where Redbox Instant is concerned, the fact that Outerwall rarely mentions the service is reason enough to doubt the service's potential.

Back to the beginning
The third reason to believe that Netflix will continue to dominate is that the company's beginnings was in hit movies, and Netflix is continuing to invest in this area. Though television shows bring more long-term users, movies still have a pull that television shows don't.

Looking at the top movies of the last 50 years, Netflix carries the lead here as well. The company has 12% of the top 50, and ironically Redbox Instant comes in second at 7%. Amazon Instant carries about 6% of the top 50 movies. While Hulu has far more of the top television shows, Hulu has almost nothing when it comes to top movies.

The bottom line is that there are good reasons that Netflix is growing users at a 20%-plus annual clip. Users want top shows, original content, and a wide swath of hit movies as well. As you can see, just because Netflix was first into the business doesn't mean that it is resting on its laurels. If anything, the company offers a better value than ever.

Your cable company is scared, but you can get rich
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. 

 

Chad Henage owns shares of Apple. The Motley Fool recommends and owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool recommends DreamWorks Animation. 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.

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