Netflix's New Cloud System Will Catapult Stock Higher

Apr.20.12 | About: Netflix, Inc. (NFLX)

What a ride it's been for Netflix (NFLX) investors over the last 15 months. 2011 saw Netflix hit its highest price and tumble down a long way following the company's Qwikster mistake. Netflix has made some leaps back, now trading over the $100 mark consistently, and there's plenty of evidence to suggest it's poised for more growth if it sets its visions right.

But I will get to Netflix's financial upsides soon. For now, I want to focus on the technological innovation side of the California-based company. This week, for instance, Netflix made major headlines across tech blogs, magazines and publications alike. The news is that Netflix has pledged to open-source its "Simian Army," a collection of programmed, cloud-based applications that keep the streaming giant's system running. The company is calling the software applications "monkeys."

Open-sourcing is essentially giving out your secrets for free. By the end of the year, Netflix will share with the world how it runs its system using these "monkeys." The company has a "monkey" for duties like protecting the server from cracks in vulnerable areas and one for cleaning up unused items that it calls its "janitor monkey."

The "monkey" system is part of cloud-computing, the next big phase in corporate computing and, eventually, one of the next big things in private and individual computer use. Netflix uses a cloud sponsored by (AMZN) and has been extremely successful at keeping its operations running smoothly. Consider, for a moment, that Netflix servers have to handle extreme amounts of traffic at specialized times. For instance, Sunday evenings are the busiest time for the company as many of its 23 million users decide on ending their weekend with a movie. Those same viewers are not watching movies at 4 a.m. on a Wednesday morning. Netflix servers have to be specialized and well-equipped, which makes the outsourcing move all the more exciting.

But who is it exciting to? The obvious answer would be Netflix's competitors. It's natural to wonder why a tech company -- or any company for that matter -- would want to release its successful secrets. Netflix insists that the move is right. The company claims that the outsourcing will keep it in touch with new cloud techniques as they develop. Essentially, Netflix letting its secrets out can ensure that new ones come in from people outside the company.

This is not the first time Netflix has opensourced some of its tech secrets. And it won't be the last either. The company preaches the message that an opensourcing policy is only right for a technology company.

Personally, I don't mind the opensourcing. Netflix is first and foremost a technology company. Movies come second. Without the technology, its ability to stream and deliver movies to its millions of subscribers would be impossible. So, Netflix can continue its torch-bearing ways with a release of its "monkey" system. Certainly, no company has ever made money simply by opensourcing its code. System opensourcing works in precisely the opposite manner: It's a free gift.

But I think the move proves that Netflix is still on the rise. It shows that the company's keen eye for development and innovation has not gone south. Qwikster was a fiasco, to be sure, but it at least proved the company is willing to take a gamble. The new cloud system shows investors and onlookers that Netflix is ready for the next era of computing, an important reminder for a company that relies so much on its ability to innovate and evolve.

The move toward a new generation of computing is important because it can further set Netflix apart from its competition. Especially as Coinstar (CSTR) has announced new record earnings, Netflix wants to move ahead of its kiosk-based counterpart. Coinstar has teamed up with large names like Starbucks (SBUX), CVS Caremark (CVS) and others to put its Redbox movie distribution kiosks in popular places, but it still can't offer the immediacy of Netflix. The question then, moving forward, will be whether Netflix can keep this competitive advantage, which will require consistent operations from its technological systems.

Comcast (CMCSA), another Netflix competitor, has made some moves in the movie streaming area as well. It has begun to offer a testing period (for San Francisco users) on its XFinity streaming through TiVo devices. The move is an attempt to further popularize the On Demand services it and other cable companies provide, as a means to combat the rise of Netflix. The move, in my opinion, will have little to no effect. I don't see consumers buying TiVo for new streaming capabilities it makes more sense to go through a cable provider. Moreover, the XFinity On Demand still does not have the selection that Netflix offers, and that's what really sets Netflix apart.

Netflix CEO Reed Hastings recently posted online about a tiff he was having with Comcast, leading an Internet discussion about the latter company's pledge for net neutrality. Comcast, in 2008, put a cap on streaming capabilities for its subscribers. The cap was set at 250GB, which still allowed for hundreds of movies to be watched each month. Hastings noticed, however, that movies watched through the Xfinity App did not count toward this limit, while movies viewed through the Netflix app did count against it. He argued that this was in no way neutral, and has looked to start a conversation concerning fairness.

The point that Hastings has made is valued. If anything, it highlights some of the more covert methods that cable companies have instituted to deal with the rise of Netflix. Still a great thorn in some sides, Netflix will continue to grow and be present in every conversation concerning movie streaming. It has gone far to establish that reputation and name association. For that reason, along with its continued commitment to technological innovation and ingenuity, I see Netflix as a force to be reckoned with for years to come. I see only growth on the horizon concerning its price and its subscriber base.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.