How Netflix Is Using Data To Regain Its Leadership Position

| About: Netflix, Inc. (NFLX)

Perhaps more than any other company, Netflix (NASDAQ:NFLX) is leveraging its vast storehouses of data to stage its comeback as an industry leader in on-demand entertainment. It hasn't always been very good at letting the consumer drive its strategy, but it appears to be finally learning that lesson once and for all. Netflix made its name by offering the most convenient and inexpensive access to movies and TV shows, originally through mail subscription, but now through Internet streaming, eliminating all those pesky commercials that consumers hate. If it plays its cards just right, it could become a true juggernaut that will roll right over competitors like Comcast (NASDAQ:CMCSA), Amazon's (NASDAQ:AMZN) Prime Instant Video and Hulu.

Big Data, Big Plans

Not all companies knows what to do with the big data generated by consumers in today's increasingly digital and online society, much to their chagrin. Netflix was recently one of those companies, but that is changing. By tracking what people view and when, Netflix has accumulated more data on consumers' watching habits than any other company in the world. And now it is learning how to use that data to its advantage. The critical step the company is making is taking all that viewer data and starting to figure out the "why" part of the equation, meaning what it is that people want to watch. Netflix CEO Reed Hastings understands the critical role that data can play in the industry, especially given that people streamed more online movies than were watched on DVD last year. The big data stream flowing through Netflix is gargantuan - 30 million plays each day that generate four million reviews and three million title searches, not to mention what time of day each item was watched, as well as on what type of device. That data has driven a key innovation with Netflix, the release of an entire season at a time so that people can watch as much of it in one sitting as they want rather than waiting a week for another episode to air.

Content Is King

When content is king, Netflix has the corner on what content to produce or acquire, and the muscle to make it happen where other companies might falter. Netflix has exclusive rights to a number of key series from Time Warner (NYSE:TWX), as well as Disney (NYSE:DIS) movies for paid-TV watching beginning in 2016.

Netflix is now beginning to use its big data to carefully craft original shows that could single-handedly transform the television industry. The first of what will probably be a long list of well-planned original series, House of Cards, was made available in February. Its latest efforts will also include a partnership with Dreamworks (NASDAQ:DWA) to bring all-new original shows for children to Netflix. It's a great move, given the recent TV ambitions of Dreamworks. And where Netflix is concerned, you can bet it's all based on data-driven research. The company devotes $2 billion of its annual budget to content, and 10% of that is devoted to the creation of original programming. In addition to House of Cards, another original series from Netflix is Sense8, a sci-fi series brought to life by the makers of The Matrix, slated for release in early 2014.

Going Global

Some analysts have expressed concern that Netflix hasn't added paid users as rapidly as it should in the domestic market, but that will be more than made up for in its moves to become the industry leader across the entire planet. Canada and Europe have been the engines driving its initial global expansion, which has increased revenues. With its foothold firmly secured in these places, however, Netflix will capitalize on the new markets to fulfill estimated revenue growth of 20% this year and 17% next year. It will all hinge on the company's continuing ability to mine its data in order to determine and develop the content that people want to see.

The Bottom Line

Netflix stock hit an all-time high of $305 in the summer of 2011. Its share price has been something of a roller coaster since then, dipping as low as $54 in September 2012. Since then, however, things have been moving in a much better direction. Currently trading in the $220s, that represents a 220% increase during the course of one year, and a 172% increase in the last six months. Given that people's appetite for TV and movies isn't going anywhere any time soon, Netflix is poised to keep things moving in the right direction.

Disclosure: I am long NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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