Netflix, Inc. (NFLX): It’s Too Bad It Does Not Charge by the Hour

Netflix may already be seeing this occur. On the company’s recent earnings call, management noted that Amazon.com, Inc. (NASDAQ:AMZN) and Hulu have been more active in bidding for content in the past year, and this competition has driven up prices. One result is that Netflix is allowing a broad licensing deal with Viacom, Inc. (NASDAQ:VIAB) to expire in May. Netflix hopes to license a few shows separately, but the rest will be removed. While Netflix can try to manage costs in this manner for a little while, it risks turning the virtuous cycle — more content draws more users, driving higher revenue, which pays for more content — into a vicious cycle.

Foolish conclusion
Unlike some companies that are very tight-lipped, Netflix, Inc. (NASDAQ:NFLX) provides investors a vast amount of information in its quarterly investor letters, blog posts, and other announcements. Investors need to sift through this information and figure out what is actually relevant. “Hours watched” does not seem like a particularly good metric for investors to follow. In the long run, higher usage probably increases both revenue and costs, but there is simply not enough data yet to know which factor will outweigh the other.

Netflix’s long-term value will ultimately be driven by its ability to generate pricing power, so that it can pass through price increases from content owners like Viacom, rather than losing content or sacrificing margins. If investors chase “canards” like usage statistics in evaluating Netflix, Inc. (NASDAQ:NFLX)’s business model, they may end up overlooking the most important information about the company’s health.

The article Too Bad Netflix Doesn’t Charge by the Hour originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Adam Levine-Weinberg is short shares of Netflix and Amazon.com. The Motley Fool recommends and owns shares of Amazon.com, Facebook, and Netflix.

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