Original Content Could Be Huge for Netflix Stock
Knowing that its rivals are closing in, Netflix, Inc. (NASDAQ:NFLX) is ramping up its original content strategy. Creating its own content has worked wonders for NFLX stock, especially with the company’s early success with House of Cards. I’m a firm believer that investing in exclusive programming is how Netflix will maintain its lead.
That’s why I’m still bullish on Netflix stock. Hulu LLC and Amazon.com, Inc.’s “Prime” streaming service are aggressively pursuing a portion of Netflix’s market share, but original content makes the hill a little steeper.
It’s the same principle we used to see with traditional programming. People were (and still are) willing to pay an additional fee for channels like HBO, simply because their shows are exclusive. Hits like The Sopranos and The Wire kept customers attached to the HBO brand.
On the flipside, HBO had to deliver great quality. If customers paid for premium content, then HBO shows had to be a cut above standard programming.
Likewise, Netflix has to lock in its customer base with addictive programming that can’t be found anywhere else. By all accounts, Netflix is extraordinarily good at executing that plan.
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This year, Netflix original shows collected 34 Emmy nominations, including three for Best Series. The company’s first feature film, an emotionally wrenching movie called Beasts of No Nation, garnered a lot of Oscar buzz for stars Idris Elba and Abraham Attah. (Source: “Q3 15 Letter to Shareholders,” Netflix, Inc., October 14, 2015.)
Netflix also signed a deal with Marvel Studios. Four Marvel TV shows, including Daredevil and Jessica Jones, are only watchable on Netflix. The heavy investment into original content is draining the company’s cash flow, but a little short-term damage is necessary to survive. Netflix needed an insurance policy to keep its competitors at bay.
It took a while, but everyone has finally accepted the conclusion that CEO Reed Hastings arrived at years ago: the Internet will replace cable TV. Seems obvious now, doesn’t it?
Netflix became the new distribution channel, but its market share was not guaranteed. Laying cable to individual houses requires physical work; therefore, the necessary infrastructure shuts out smaller competitors.
Comparatively, the Internet is more democratic than that. Market power is earned through customer loyalty. Netflix can’t afford to keep licensing content and just hope for the best. As studios have more options of who to sell their content to, the bargaining position of Netflix grows weaker. If the company keeps getting outbid, then viewers get upset about the service’s lack of content. More and more people will switch to another provider and Netflix stock would come crashing down.
The only way to prevent that from happening is through its original content strategy. Netflix had to become both the distributor and the content creator.
Looking Ahead for Netflix Stock
Another component of Netflix’s success is that rivals aren’t as smart. I don’t mean the executives at Hulu and Amazon aren’t brilliant people, but the algorithms that offer up suggestions for viewers aren’t as smart as Netflix’s algorithm.
Netflix has been operating for much longer and has been learning about customer preferences. Knowing what customers are likely to watch solves a lot of cash allocation problems; it helps Netflix know what content to bid on and when to retire old shows.
The sophisticated data analytics gives NFLX stock a competitive edge, but the original content strategy is what will cement it as a market leader.