Netflix, Inc. (NASDAQ:NFLX) is not releasing ratings data for its first original series House of Cards, but based on the evidence at hand it looks like a remarkable success. The company says it’s the most watched title in its library ever, the critiques have been mostly positive and the series has been widely acclaimed by viewers: House of Cards has a score of 9 in both Metacritic and IMBD. More importantly, this has huge implications regarding Netflix as an investment.
Big data, big success
Creating a successful movie or TV series is a notoriously difficult venture; even the most renowned actors and directors have experienced their fair share of failures. Since fixed costs are unusually high, content creation is a business in which there is a lot of money to be made or lost depending on viewership. The way Netflix, Inc. (NASDAQ:NFLX) has created House of Cards is nothing short of amazing, and it has some very important implications for the future of the business.
Netflix has access to enormous amounts of information regarding the viewing habits and tastes of its more than 33 million members, and House of Cards proves that the company knows how to utilize that information in order to create successful content.
Using its enormous database, the company discovered that the same subscribers who liked the original BBC House of Cards production were also inclined to watching movies starring Kevin Spacey or directed by David Fincher. A remake of the series including Kevin Spacey and directed by Fincher should then be a big hit. There is obviously much more to a successful series than matching big data and reaching conclusions, but knowing what viewers want is an invaluable advantage.
The company analyzes every detail it can possibly track: not only ratings and recommendations but also geo-location, device information, social media interaction and other data sources. This is critical when it comes to creating new content or buying it from other sources, and it puts Netflix, Inc. (NASDAQ:NFLX) in a position of strength versus other industry players.
That´s why the company´s recent integration with Facebook Inc (NASDAQ:FB) is much more than a simple adaptation to social networks or some free advertising for Netflix. The new social integration will allow users to show their viewing history on Facebook Inc (NASDAQ:FB), and also what their friends are watching and recommending. Netflix is most certainly planning to capitalize all that information as much as possible from multiple angles.
Competitive strength in a crowded space
When it comes to Netflix as an investment, the biggest long term risk is the competitive landscape. There is little doubt on the fact that online streaming is a promising business, and Netflix, Inc. (NASDAQ:NFLX) has the first mover advantage, but other players like the voraciously competitive Amazon.com, Inc. (NASDAQ:AMZN) have entered the scene lately, and this poses a major risk for the company and its investors.
Amazon has disrupted different business areas over the last years, and the company is famous for putting sales growth over profitability and aggressively expanding its market share even if that means having razor thin, or perhaps negative, profit margins. Since it generates big operating cash flows in online retail, Amazon has deeper pockets than Netflix, Inc. (NASDAQ:NFLX), and that´s a serious problem when it comes to competing for content over the next years.
Even Apple Inc. (NASDAQ:AAPL) could be considered a competitor in some sense. The Cupertino giant has a different a la carte model for video, which is more suitable for premium content. There is enough room for both companies to do well as long as their offerings don´t necessarily clash, but it´s still not clear to what degree Apple and Netflix can be considered partners or competitors. Apple has ambitious plans when it comes to TV, and it’s certainly stronger than Netflix from a financial point of view.
And this considers only two big and powerful giants, it’s worth noting that smaller players like HULU and Coinstar, Inc. (NASDAQ:CSTR) are trying to make inroads into the business and steal a piece of the pie away from Netflix too. The main point is that the streaming business is getting crowded, and that´s why it´s so important for Netflix to differentiate itself from the competition if the company is going to maintain its leadership position in the industry.
Bottom line
Streaming is an area with enormous long term potential on a global scale. the big question for Netflix investors is whether the company can sustain its leadership in the face of increasing competitive pressure.
House of Cards is not only another successful product that the company is adding to its library; much more than that, it’s about the company proving to the public and to investors that it has the ability to capitalize on big data and create high quality exclusive content that differentiates itself from other payers in the business, and that´s why it’s a game changer for the company.
The article Netflix: House of Cards Changes Everything originally appeared on Fool.com and is written by Andrés Cardenal.
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