Recently, a U.S. District Judge in Massachusetts ruled that Netflix (NFLX) must provide a closed captioning option to movies and other content featured on its "Watch Instantly" on-demand service. In a lawsuit filed by the National Association for the Deaf in 2011, the association claimed that under the Americans with Disabilities Act (ADA), retailers and others must accommodate those with disabilities to ensure these customers can readily use goods and services sold.
Netflix argued that the ADA does not cover online retail, so the company is not under any obligation to ensure all streaming movies have closed captioning options. The judge who ruled against Netflix reasoned that the ADA was written with room to grow (and include new forms of retail).
In accordance with a Federal law passed in 1996, all television programming must include closed captioning options for the deaf or hard of hearing. Until now this law only addressed television and does not specify online viewing.
However, the FCC has put new regulations in place that include closed captioning for online videos and other content -- these new regulations will go into effect in 2014. This means that regardless of whether Netflix needs to adhere to the ADA, the FCC will enforce the new regulations, which gives the company little choice but to comply.
What's So Terrible About Closed Captioning?
In most cases, closed captioning already exists for movies and television shows made from 1996 on. This means all Netflix has to do is include additional "closed captioning" files on its website to be used by most televisions and other devices made for the hearing impaired. This ruling will not affect Netflix profits, and the company has already taken steps to add closed captioning to some of its online content.
The main issue here may be time -- even though 2014 sounds like a long time from now, in reality, to go through an entire database of online content to ensure each file containing closed captioning could prove quite an undertaking, and a costly one at that. Other companies that provide online content including YouTube, owned by Google (GOOG), features closed captioning and subtitles options that content creators can add to content prior to uploading. The company does not force creators to add closed captioning or subtitles, however. Hulu, controlled by a partnership with NBC Universal, which is owned by Comcast (CMCSA) and NBC, Fox Entertainment Group, Disney-ABC Television Group, and Providence Equity Partners provides some closed captioning features for its online streaming service.
Not all companies involved in online streaming of movies and other content provide these services. Amazon (AMZN), which is set to become a main competitor of Netflix in online media streaming, does not currently provide closed captioning with its media streaming service, Amazon Prime. Blockbuster on Demand, owned by Dish Network (DISH), does not offer these services either.
If Netflix is forced to start providing closed captioning, then it makes sense that other companies will have to follow -- especially when new regulations go into effect. What's interesting to note here is that Netflix has been trying to add closed captions to its database and now has a jump on the competition.
Increased Customer Base
Why should investors care about this development? Closed captioning could give Netflix stock a boost. While it is unknown how many hearing impaired people there are in the world, it has been estimated that by 2015 approximately 750 million people worldwide will be hearing impaired to some degree. And while many can watch television without the need for closed captioning, others cannot or would prefer to have the option whenever they want to use it. This means Netflix could potentially increase its customer base greatly by providing closed captioning services.
Another advantage is that by catering to those with disabilities, the company appears friendlier and socially conscious. This is very appealing to potential investors and those who already invest as investors choose companies not only based on latest stock numbers, but also in how companies conduct business and treat customers.
Netflix Stock Up 14%, No Need to Worry (Well, Mostly)
Investors shouldn't worry about this latest ruling though, as Netflix stock has steadily increased since last week and continues to rise. Inflated investor confidence due to an increase in viewership of streaming movies and other content is one reason for this recent jump in stock price. It is estimated that subscribers streamed 1 billion hours of online content in the month of June. On average, Netflix subscribers spend 38 hours per month streaming video, and this should continue to increase.
Even though investors should feel really good about this news, the truth is that the company still needs to recover from last year's decision to offer two separate plans -- one for online viewing and one for DVDs by mail. According to quarterly income statements, the company hit one of its lowest points in Q1 2012 as compared to all four quarters in 2011. In Q4 2011, the company earned $35.22 million in net income, but in Q1 2012 net income was down $4.58 million. Increased SG&A expenses ($229.55 million in Q4 2011 vs. $247.79 million in Q1 2012) pretax income growth (-39.29% in Q4 2011 vs. -112.36% in Q1 2012) may have contributed to a less-than-stellar first quarter for 2012.
But with this latest increase in stock price, investors seem pleased with how the company has managed to bounce back from last year's change in pricing options. Netflix still has work to do, however. For now, I recommend investors stick with Netflix; with more and more people streaming movies and soon with the option of closed captioning, the company should make a full rebound by the end of the year and into next year.
It will be interesting to see how the rest of the years financials pan out. Investors should play close attention to this new development. I think these figures will play a role in Netflix maintaining its stock price rise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.