Netflix in 2014: Streamlining the Streaming Business

Jacob Harper |

On Jan. 2, Netflix Inc. (NFLX) announced that they would be cracking down on password-sharing, wherein one account is used by several parties. The day before, the company silently removed 85 very popular titles from their roster in a cost-cutting measure. Both moves give a peek into how Netflix will operate in 2014: focusing less on explosive user growth, and more on increasing revenue by eliminating inefficiencies. In short, they’re going to act less like an upstart and more like the establishment.

Cutting Off the Freeloaders

It’s no secret that vast swaths of Netflix users share their accounts. Hastings even acknowledged as much, saying he expects subscribers to share their password with immediate family. But as the company faces the simultaneous pressures of slowing growth and stockholder pressure to repeat their banner 2013, Netflix can no longer afford to be so lax.

Netflix’s response is something of a compromise. Rather than cut off accounts switched on too many screens, they’re offering an upgrade option that costs $11.99 instead of the standard $7.99 a month. Hastings explained it by saying, “We usually like to think that a husband and wife can share an account and that that’s perfectly appropriate and acceptable,” he said then. “If you mean, ‘Hey, I got my password from my boyfriend’s uncle,’ then that’s not what we would consider appropriate.”

Appropriate or not, Netflix had tolerated it for some time. But in past quarters user growth hasn’t been what analysts hoped for. To spur growth, Netflix has been forced to quit playing nice with their users. While Hastings hasn’t gone as far as to make implicit threats against subscription-sharers, the offering of an updated plan indicates they are well aware of the problem. And if people don’t sign up for the more expensive package voluntarily, Netflix will no doubt be forced to take action.

Don't Announce Changes, Just Make Them

Perhaps the single thing that has made Netflix so successful is the pinpoint accuracy of their user data. Netflix knows to a person how many times a certain title has been viewed, what kind of titles attract and retain users, and so on. Unlike television, there is no guesswork. Netflix produces titles and retains content because it is profitable to do so.

On Jan. 1, Netflix discontinued 85 well-known titles, and for one simple reason: it was not profitable to keep them on. As distributors demand more money from Netflix in return for licensing their content out, Netflix dropped popular titles like Eternal Sunshine of the Spotless Mind, Platoon, and mega-blockbuster Titanic.

While we’re not privy to their algorithms, the drops are surely a result of those titles not fitting the formula. That is, it was more expensive to retain them than it was worth. And the drops were done with zero fanfare. In 2012, Netflix would make clear when a title was about to disappear off their roster. Now, they don’t. Because doing as much is a courtesy, albeit not one that makes much business sense. Why tell customers a service will disappear?

Netflix in 2014: Growth via Original Content

While expensive to license Hollywood blockbusters like Titanic disappear, Netflix will look to repeat their Q3 2013 performance, where they added 1.3 million subscribers. And they will do this via a heavy reliance on in-house content. Once again using their terabytes of user data, the company can predict not just what type of shows will be popular, but what shows will bring in new users.

In this year, look for Netflix to rely less and less on Hollywood and user’s goodwill, and more on vertical integration via original content and crackdowns on over-shared accounts.  

Which puts Netflix pretty in-line with how cable television providers acted in the '90s. Cheap, made-for-TV movies blossomed alongside the birth of pay cable. But so did cable theft. In 1992, Comcast (CMCSA) made a giant push to eliminate cable theft with an eye towards regaining the some $10 million-a-year lost to cable “borrowers.” After the novelty of a service subsides, the provider has to get tough. And while Netflix might be a superior service than cable, they’re facing the same problems, and are responding in much the same way.    

Netflix might be the new boss of content, but as a business, in 2014 they’re going to be same as the old boss.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
NFLX Netflix Inc. 125.39 0.82 0.66 8,205,078
CMCSA Comcast Corporation Class A Common Stock 69.33 0.63 0.92 10,549,399
NRWEF Norwegian Energy Co As n/a n/a n/a 0

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