Does Netflix Need Innovative Tools To Increase Viewership?

Netflix (NASDAQ:NFLX) has had a spectacular Q4 2016 with its international subscriber base increasing rapidly and margins from this segment showing strong signs of improvement. In the domestic segment, despite competition from several existing and new players, Netflix was able to add 1.93 million members in Q4 2016, exceeding its forecast of 1.45 million. While this growth is likely to slow down in the future as the market matures, we expect Netflix to continue to add subscribers in the domestic market over our forecast period.

Netflix’s focus on original programming is likely to be the key driving factor for domestic subscriber retention and growth. Also contributing is its strong content library, which increases binge watching. The company is investing heavily in original programming  In fact, it has a $6 billion content budget for 2017, which makes it one of the biggest media spenders on content.  It is also looking at innovative ways to make binge watching easier. At one of its recent “hack day” events, Netflix engineers devised a way by which viewers can scroll and play videos through a headband. Using a modified Muse device — a headband that is intended to help with meditation — users can nod to select shows or movies and think “play” in order to get the title to start. The device, called MindFlix, works by reading brain activity and using the readings to perform predetermined functions. While this device is not currently available for consumers and the company has not confirmed any launch date, it indicates that Netflix is looking at innovative tools which will make binge watching easier. Last year the company came up with innovative socks which switch off Netflix if the viewer falls asleep during a binge watching session.  While these tools can intrigue viewers, high quality original content will be the key for Netflix’s subscriber growth. The company is investing in technology initiatives to identify areas which can make the customer experience better. Still, the two key areas of focus for Netflix should be content creation and the optimization of bandwidth usage. Conveniences such as scrolling and playing videos without using any device or auto switch off are not likely to drive significant subscriber growth.

Netflix is investing heavily on original programming and this is showing results in terms of subscriber growth. While its international expansion continues at a rapid pace the company is likely to face challenges as it expands into various geographies, such as low internet speeds and consumers’ preference for local content. In the U.S., as the threat of limiting data usage by broadband players looms, Netflix can be impacted if consumers need to pay more to view its content with better streaming quality. We believe innovation to provide high quality streaming at lower bandwidth consumption will be critical for Netflix’s growth in the long term. While its “hack days” might come up with interesting innovative tools to promote binge watching, we believe focus on content and optimization of bandwidth usage are the two key areas for Netflix’s long term growth.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research