Despite Netflix’s (NASDAQ:NFLX) improved streaming data in Q1 earnings results, the company’s stock plunged as investors seem to be worrying about the company’s future. Netflix’s ability to continue growing its profits will depend on how it differentiates itself from the competitors which are gaining strength. These include Amazon (NASDAQ:AMZN), Dish Network’s (NASDAQ:DISH) Blockbuster, Comcast’s (NASDAQ:CMCSA) Xfinity Streampix, Hulu and others.
A big part of this differentiation is going to be content, and Netflix shed some light regarding its content strategy during its recent earnings announcement. Below are some points worth noting in our view.
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1) Content costs will climb
There is no doubt that Netflix will continue to spend on content aggressively. There is no room for slack given the increasing competition domestically and short window of opportunity that exists in international markets before local competitors start springing up. Netflix is going to launch in another undisclosed international territory towards the end of 2012.
2) Exclusive content has value
There is a clear move towards exclusivity. This comes from regular contracts as well as from original programming. The company has stated that it will try and get more exclusive content in order to fight off the competition.
Original programming is a part of this strategy and currently forms less than 10% of total content spending.  Exclusivity implies higher price and couple this with the increasing number of bids from deep pocketed competitors, Netflix will inevitably continue to spend high on content acquisition. Although Netflix believes that in terms of cost per hour of viewing, it should be able to produce original programming at similar rates at which it currently acquires content. This perhaps means that the company is expecting higher amount of viewing for its original programming.
3) Tiered pricing
Netflix has no plans for tiered pricing and the same streaming content will be available to all customers for the same price. As the amount of original programming increases, the question that arises is whether or not it will take up a notable portion of subscriber’s share of prime-time TV viewing?
We think this is far off and unlikely in the near future, but if at some point it happens, it will be a cause of concern for advertisers. The issue will ultimately percolate down to how content companies manage their content, and this could drive up the cost of content further.
Our price estimate for Netflix stands at $110, implying a premium of about 25% to the market price.Notes:
- Netflix’s Q1 2012 earnings transcript [↩]