Please ensure Javascript is enabled for purposes of website accessibility

Netflix's Next Billion-Dollar Opportunity Is Not What You Might Think

By Danny Vena - Updated Apr 21, 2017 at 4:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Netflix is best known for its ubiquitous streaming service and self-produced content. That has given rise to another potential blockbuster opportunity.

Fans of quality television shows have had much to be happy about over the last few years. In what has been called the golden age of television, there have been significant changes in not only the devices used, but also how shows are consumed. The advent of streaming video and the proliferation of smartphones and tablets have been the catalysts that have transformed content consumption.

Programs that didn't fit into the neat little boxes or conform to the formulas used by studio executives might never have seen the light of day in the past. In recent years, though, those programs are not only produced, but have become huge hits with cult-like followings. One company at the center of that trend is streaming giant Netflix, Inc. (NFLX 3.55%). The company is not only responsible for developing the technology that gave rise to streaming, but it is largely credited with originating the practice of binge-watching or binge-viewing -- watching the entire season of a show in one (or several) sitting(s).

Three kids on bikes in the woods at night, looking concerned at fourth unaccompanied bike on ground.

Netflix's Stranger Things has become a cultural phenomenon. Image source: Netflix, Inc.

Blockbuster opportunity

RBC analyst Mark Mahaney believes that Netflix could generate sales of more than $1 billion annually from sales of merchandise for its wildly popular original programs such as nostalgic '80s sci-fi thriller Stranger Things, perplexing mystery series The OA, and adult animated comedy BoJack Horseman. In a recently released note to clients, Mahaney said, "We view this as a highly reasonable step by Netflix to further promote and market its original content and other offerings." He further observed that while this will be years in the making, "We see this as a development that signifies the coming of scale of an increasingly ubiquitous global entertainment company."

Netflix merchandising ambitions are still in the nascent stages. In early December 2016, merchandise for pop-culture phenomenon Stranger Things debuted at Hot Topic and its charitable spin-off BoxLunch. After a seemingly successful trial run, Netflix posted a job listing earlier this year for a merchandising and promotion manager to administer licensing of "books, comics, gaming toys, collectibles, soundtrack and apparel" to "establish a licensing and merchandising approach to help amplify fervor around key titles by developing new channels for consumers and communities to interact with Netflix."

Worldwide fan base

Netflix offers movies and TV shows in more than 190 countries to over 100 million subscribers worldwide, and an ever-increasing percentage of those shows are owned by the company. At Goldman Sachs' 25th annual Communacopia Conference last September, Netflix CFO David Wells indicated that over the long term, Netflix plans to have about 50% of its library composed of self-produced content.

Netflix landing page featuring Daredevil.

Marvel's Daredevil was a hit on Netflix. Image source: Netflix, Inc.

Emulating the master

Investors looking to understand the magnitude of the opportunity need look no further than The Walt Disney Company (DIS -1.11%), which reported nearly 10% of its revenue -- $1.48 billion -- came from its consumer products and interactive media segment. The two companies collaborate on several highly successful streaming series including Marvel's Daredevil, Jessica Jones, and Luke Cage series, leading to the upcoming The Defenders, though the properties remain with Disney.

Obviously, this has taken decades to achieve and Disney has a far greater treasure trove of intellectual property to draw from, but Netflix has plans to spend $6 billion on content in 2017 alone. This will eventually result in a library of characters that will no doubt provide a rich pool from which to draw. Netflix just reported $2.6 billion in revenue in its most recent quarter, so for now this won't be moving the needle. It does, however, represent a substantial opportunity to engage its fans on another front and builds the foundation for a potential blockbuster future revenue stream.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$183.48 (3.55%) $6.29
The Walt Disney Company Stock Quote
The Walt Disney Company
$103.14 (-1.11%) $-1.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.