DIRECTV (DTV), Comcast Corporation (CMCSA): Netflix, Inc. (NFLX)–Great Story Marginal Business

What will binge viewing do to future margins?

There was a short disclosure in Q2 commenting on viewing patterns for new content and possible future changes in costs. If the original programming is viewed primarily in the first few weeks or months with a rapid tailing off, amortization will have to be front-loaded increasing the expense per period immediately tapering off with viewing over the period of the license. House of Cards would cost more in the first few quarters after its release and then decrease over the remainder of the license. The more original content they release, the greater the impact on margins.

In the end

Costs, earnings and cash flow are unimportant at this stage.  These aren’t the numbers that matter to investors –subscriber adds and exclusive content coups are paramount. With evidence that traditional pay TV subscribers and DVD sales are in decline, the market looks ready for a first mover and technically superior streaming service like Netflix to put itself in every household that has Internet access. With enough subscribers, they should see better margins and higher earnings. As of October 2012, 88 million US households had high speed Internet (72% penetration) suggesting that the current 27 million domestic streaming subscribers has room for enormous growth and international growth may be even higher. Netflix will need to translate the high growth into high profits.

The article Netflix–Great Story Marginal Business originally appeared on Fool.com and is written by jean graham.

jean graham has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Netflix. The Motley Fool owns shares of Netflix.

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