Here’s How Netflix Can Benefit From A Consumer Products Business

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Netflix (NASDAQ:NFLX) appears to be increasing its focus on consumer products. A Bloomberg report suggests that the company is looking to hire an executive to oversee the licensing of shows for books, toys and comics and forge partnerships with retailers. As the company increases the amount of original content on its platform and its popularity surges, merchandise relating to this content could generate a new revenue stream for it. Consumer products can be a lucrative business for media companies; for example, Disney generates nearly 10% of its revenues from the segment. While Netflix continues to grow its user base rapidly, and does not appear to be significantly impacted by competition from Amazon Prime Video and others, a consumer products business could work as an effective marketing tool and a new steady source of revenues for the company.

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Monetizing Original Shows

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Netflix has been investing heavily in content to produce original shows. This strategy has been paying off, and the popularity of its shows is ensuring high subscriber retention and growth. However, this strategy also puts pressure on the company’s margins since the cost of producing a high-quality original show is much higher compared to licensing a show. Merchandise based on these shows can be an attractive way to monetize this intellectual property and generate publicity. As mentioned above, consumer products can be a lucrative business as Disney has proven. We expect Disney to generate more than $5 billion in revenue from its consumer products segment in 2017, which is nearly 70% of our estimate for Netflix’s total revenue this year. While Netflix, being a much smaller company, does not have the same infrastructure (such as theme parks) to market merchandise, a merchandising segment could still be potentially very lucrative for the company.

We believe merchandise could also help Netflix to market its shows and reduce advertising costs, at least to an extent. We expect Netflix’s domestic contribution margin to increase gradually from around 40% in 2017 to nearly 42.5% by the end of our forecast period as the company gains operating leverage and reduces its marketing expenses as a percentage of revenue.

However, high content costs can put pressure on these margins. A consumer products segment could enable Netflix to offset this pressure with a potentially high-margin revenue stream. Since these products would be based on the company’s original shows, its high content costs can be potentially offset by the merchandise revenue. If Netflix is successful in building a merchandise segment that helps expand its margins, there could be an upside to our $137 price estimate for Netflix.

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