Netflix (NASDAQ:NFLX) has released an interesting fact that about 75% of what its subscribers watch are from recommendations.  Netflix’s recommendation engine tries to optimize the viewer experience by making it more personalized. This helps the company differentiate itself from its competitors such as Amazon (NASDAQ:AMZN) and Dish Network’s (NASDAQ:DISH) Blockbuster. Moreover, we think that a recommendation feature is not just about personalization, but also an important tool to derive maximum utility out of the older content that Netflix provides.
Netflix continues to rely primarily on old content for streaming. While viewers may actively find out about the new releases or on-going hits, they may not know much about the old content available on Netflix. Recommendations help market this content and thus extract maximum utility out of it. Netflix’s dependence on older content implies that the company will continue to work hard to maintain the appeal of its old content. If this appeal ceases, it will be difficult to stop subscribers from migrating to other platforms.
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Recommendations and personalization are the future of video. Pandora (NYSE:P) has done a good job in this aspect for music, and this has helped fuel its growth. A big portion of Netflix’s value is hinged on U.S. streaming subscriber growth.
With the emergence of significant competition lately, the market is going to get crowded and it will be hard for players to differentiate themselves. To cope up with this, Netflix will need to further improve its recommendation and personalization engine and a possible integration with Facebook can help.
Our price estimate for Netflix stands at $131, implying a premium of about 20% to the market price.Notes:
- Netflix Recommendations: Beyond the 5 stars (Part 1), Netflix Blog, Apr 6 2011 [↩]