What’s The Significance Of Netflix’s Technology & Development Expenses?

Netflix (NASDAQ:NFLX) has an online ordering model and hence it devotes a significant amount of resources to develop the best suggestion and referral algorithms. This ensures that customers can find their favorite movies without much effort. Further, it also invests heavily in streamlining its delivery process and has successfully managed to automate a significant part of its postage and packaging process. These costs are included in technology and development expense heading and these investments ensure high levels customer satisfaction. Contributing here are not only compelling viewing experiences, but convenient payment and delivery processes as well. Since resources poured into technology and development (in addition to content) somewhat govern the user churn rate, it seems worthwhile to look at Netflix’s contribution profits from the perspective of technology and development expenses.

The table below measures Netflix’s contribution profit dollars for every dollar invested in technology and development process. During the initial period under consideration, the metric is visibly declining, which is due to the high investment in online video streaming optimization. The significant jump in the content being streamed online has pushed the company to devote more resources to develop better and more efficient streaming and data handling algorithms. However, we estimate the aforementioned metric will improve in the near term as the company benefits from: 1) increased operating leverage; 2) its expansion in geographies that consume the same content and use similar algorithms; and, 3) increases in contribution margins in regions abroad with lower marketing expenses.

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