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Netflix, Inc. (NFLX) Is Poised to Outperform

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Netflix, Inc. (NASDAQ:NFLX) has brought a number of game-changing innovations. The company’s ability to innovate and build entirely new categories rapidly is unquestionable. Gone are the days of Netflix being a DVD-by-mail provider only, and the company is increasingly being more selective in choosing which TV shows it adds. The company’s recent big bets on original content are paving the way for the creation of an Internet TV Network.

Netflix, Inc. (NASDAQ:NFLX)

Netflix is the first Internet TV Network

Netflix has now started branding itself as the world’s leading Internet TV network, and very justifiably. The company has recently taken a number of steps that completely justify that claim. The company’s decision to take away a chunk of the production from Dreamworks Animation Skg Inc (NASDAQ:DWA) and also get into deals to create original shows based on the very popular franchise figures confirms that claim.

Netflix is building up an audience for its shows by using its internal viewing data and consumer ratings to develop and build-out shows which will become popular among niche customers. The company’s algorithms are at work and the data is being used to renew original shows and even negotiate licensed content from content producers like The Walt Disney Company (NYSE:DIS), AMC Networks Inc (NASDAQ:AMCX), and Time Warner Inc (NYSE:TWX), and the company is not hesitant to walk away from deals which don’t make financial sense from a viewership perspective.

Franchise building is in session

Franchise building by Netflix, Inc. (NASDAQ:NFLX) is laying the foundation for possible pricing power down the road, as Pay TV prices are expected to rise even more in the future. If Netflix manages to build a handful of successful franchises from its original shows, the company’s fortunes will improve substantially. Netflix’s management has always stated their admiration for Time Warner’s HBO, and their desire to evolve into HBO rapidly. While, the likelihood of increasing prices in the next two years is almost non-existent, a price increase might come into effect in 2015, after Netflix has a strong slate of original shows in their second/third seasons.

The company is projecting that its original content expense will represent a small portion of its total content spend and viewing hours this year. Increased amount of original content will enhance member retention and driver user acquisition globally. Higher brand equity and value perception driven by Netflix-only shows can create a halo effect for Netflix and enable incremental word-of-mouth marketing among viewers.

In 1Q13, Netflix saw its marketing expenditure trickle down by more than 200bps on a year-over-year basis, which was largely driven by the free press surrounding the company’s original shows and an enhanced reputation. And also, Netflix is increasingly focused on marketing its brand across the globe for reaching out to newer customers in International segments. The savings from marketing can be used for adding more original content as well, which in turn, creates more media buzz.

Different strokes for different folks

Owing to the success of the original shows, the company is pondering a ramp in the number of shows to upwards of 20 annually, contingent upon viewership and performance of the original shows throughout the rest of the year. Netflix is tactfully adding more seasons of its current original franchises to build-up a solid fan base for its shows. The company decided to renew Orange is Black for Season 2 before it even debuted on the platform.

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