Netflix, Inc. (NASDAQ:NFLX)‘s stock price has popped more than 32% since the start of this week–an insane move for any publicly traded company, let alone one with a $12 billion-plus market cap and a beta below 1.0. In fact, over the past six months, Netflix shares have returned more than 260%, easily the best performance among the entire large-cap equity universe, according to FinViz data.
While a stock this grandiose is covered by bloggers from every angle, there’s something that has flown under the radar of Mr. Market today; Netflix, Inc. (NASDAQ:NFLX)’s epic “Long Term View” document just uploaded to its investor relations page.
The 11-page document reads more like a manifesto than a mission statement, and literally begins with a quote from Francis Underwood, the main character of Netflix, Inc. (NASDAQ:NFLX)’s smash hit original show, “House of Cards.”
The quote reads as follows:
“Look at the bigger picture.”
Simple, elegant and to the point.
It’s clear that in this document, Netflix is taking a look at the bigger picture, and is sharing it with its shareholders, rather than keeping them in the dark.
It’s actions like these that should endear the streaming content provider to its investors–potential and current–as it’s rare to find such open-ness in today’s tech world, aside from accidentally pre-released earnings reports, that is (looking squarely at you, Google).
Back to the point, Netflix, Inc. (NASDAQ:NFLX) revealed many interesting tidbits, the most important of which we’ll cover here. After all, when something this big is presented publicly, and no one is talking about it, it can provide early readers with a leg up on their competition, so to speak.
The Netflix document starts out with the following three thought points:
“Over the coming decades and across the world, Internet TV will replace linear TV.”
“Apps will replace channels, remote controls will disappear, and screens will proliferate.”
“As Internet TV grows from millions to billions, Netflix, HBO, and ESPN are leading the way.”
The first point is relatively universally accepted, as demographic information among younger age groups already indicates that this shift is well on its way, as Internet is teens’ and young adults’ preferred medium to digest digital content.
The second is something we’ve begun to see with content providers like Time Warner Inc (NYSE:TWX)‘s HBO and The Walt Disney Company (NYSE:DIS)‘s ESPN, which are mentioned alongside Netflix, Inc. (NASDAQ:NFLX) in the third point. It’s no coincidence that HBO is mentioned by name–the company has publicly stated that they view the Time Warner subsidiary as their primary competitor. What’s more interesting, though, is that ESPN is mentioned explicitly, as Netflix hasn’t shown a strong interest in providing sports-related content as of yet.
More specifically, Netflix, Inc. (NASDAQ:NFLX)’s document mentions the following:
“In addition to Netflix, most of the world’s leading linear TV networks are moving into Internet TV. The WatchESPN app runs on many Internet platforms and is specifically designed to showcase sports. ESPN will keep improving their app to try to stay ahead of MLB.tv, which is another terrific Internet TV sports app. The HBO GO app makes HBO’s films and series much more accessible than on HBO’s linear channel. The BBC iPlayer app in the UK provides a rich and popular on-demand interface for a wide range of BBC programming. The other major linear networks are not far behind.”
A key competitive driver that many Netflix investors likely forget about is the fact that existing “linear” TV providers, as the company calls them, are in the process of moving into more organic structures, be it via web browser-based or app-based technologies.
We’ve listed four such revelations from Netflix’s document, let’s take a look at 17 more.
Check them out on the following pages:
“Simplicity is at our core.
We are commercial-free unlimited-viewing subscription TV. We don’t have pay-per-view and we don’t have advertisements. Those are fine business models that other brands do well. We choose to be the best at our model, and to have our brand stand for commercial-free, unlimited viewing, low flat monthly fee.”
-Netflix Long Term View, page 3
On its focus: “We don’t and can’t compete on breadth with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google. For us to be hugely successful we have to be a focused passion brand. Starbucks, not 7-Eleven. Southwest, not United. HBO, not Dish.”
-Netflix Long Term View, page 3
On who Netflix’s biggest competitor is: “The network that we think likely to be our biggest long-term competitor-for-content is HBO. They recently won, for example, long-term exclusive domestic movie output deals with Universal and Fox. They bid against us on many Original projects. They are not currently a bidder against us for prior-season television from other networks. They have global reach and strengthening technology capacity.”
-Netflix Long Term View, page 8
On how it can be better than HBO over the long-term: ” We have more content, more viewing, a broader brand proposition, are on-demand, on all devices, and are less expensive, so we estimate that we can be 2 to 3 times larger than current linear-HBO, or 60-90 million domestic members.”
-Netflix Long Term View, page 10
On the rest of its competition: “Behind HBO would come Amazon/Lovefilm/Prime, Hulu, Now TV, and many cable and broadcast networks in various territories. Amazon in particular is spending heavily and commissioning its own original programming, presumably because they see the same exciting big picture for Internet TV that we do. Many consumers will subscribe to multiple services if they each have unique compelling content.”
-Netflix Long Term View, page 8
On its marketing: “We spend over $450M per year on global marketing to attract people to try Netflix, and to reinforce with our members why Netflix is worthy. Our extensive content is key, as is the ability for members to have control over their viewing experience.”
-Netflix Long Term View, page 4
On its commitment to high-quality content: “We’re now investing over $2b per year in content licensing and the creation of original shows.”
-Netflix Long Term View, page 5
On how it’s retooling its library: “As we’ve gained experience, we’ve realized that the 20th documentary about the financial crisis will mostly just take away viewing from the other 19 such docs, and instead of trying to have everything, we should strive to have the best in each category. As such, we are actively curating our service rather than carrying as many titles as we can.”
-Netflix Long Term View, page 5
On how it analyzes content: “Over the years, we’ve successfully developed the art of estimating how much our members will watch a given show or movie based upon how it has performed to date in other, earlier channels (theatrical for movie; broadcast and cable first-run for TV) and on how comparable titles have performed on Netflix. This generally enables us to avoid overpaying for content, relative to member enjoyment.”
-Netflix Long Term View, page 6
On how it uses big data to deliver original programming: “With Originals, we are now extending that concept to estimate the attractiveness of projects that are brought to us by professional producers. There is more judgment required in this process, and more variability due to the art in the production process, but because of the data we have on our members’ viewing habits and our experience in licensing a broad range of content, we think we can do as good or better job than our linear TV peers in choosing projects and setting budgets.”
-Netflix Long Term View, page 6
On one of the key advantages of this data: “We believe we have a strong advantage over our linear competitors when it comes to launching a show. They have to attract an audience for Sunday at 8pm, say. We can be much more flexible. Because we are not allocating scarce prime-time slots like linear TV does, a show that is taking a long time to find its audience is one we can keep nurturing. This allows us to prudently commit to a whole season, rather than just a pilot episode. ”
-Netflix Long Term View, page 6
Discussing a little-known advantage of Netflix’s no-commercial, block-released original content: “We are able to provide a platform for more creative storytelling (varying run times per episode based on storyline, no need for week to week recaps, no fixed notion of what constitutes a “season”). We believe this makes it easier to attract talent.”
-Netflix Long Term View, page 6
On how much Netflix expects to spend on original content going forward: “For 2013 and the next few years, we expect it to be less than 10% of our content spending.”
-Netflix Long Term View, page 7
On advantages and disadvantages of expanding Netflix internationally: “Our advantage internationally is our global tech spending for an improving app and service, our process knowledge, our data from related markets, and our globally-known brand. Our disadvantages are not knowing each specific culture as well as a local competitor.”
-Netflix Long Term View, page 7
On factors (positive and negative) that it expects to affect its growth moving forward: “The primary forces propelling our growth are our own service, content and marketing improvements, and the improvement of Internet networks and devices. The primary forces impeding our growth are saturation and the broad set of competitors-for-time all improving their offerings.”
-Netflix Long Term View, page 9
On improving its service: “One area is our core services: our streaming delivery, sign-up, billing and customer service, across more than 1000 devices being used in more than 40 countries. Here we strive for operational excellence to avoid any problems. Members want Netflix to just work — flawlessly. On this front, we’re well ahead, but we have plenty of room to improve. We continue to invest heavily to ensure that our service is always available, our streaming has a minimum of buffering, and has great audio-video quality.”
-Netflix Long Term View, page 4
On its view of the future of this space: “If we could look decades into the future at the ways that people access entertainment, we would no doubt see a very different image than we see today – mind-blowing video quality, a proliferation of screens, yet-unimagined natural user interface, and an unbelievable range of choice.”
-Netflix Long Term View, page 10
We encourage you to read the full document here.
Disclosure: none
