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NFLX (Part 2): An Expensive But Stunning Media Powerhouse

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**Part 2 is similarly not fact-checked, and is just based on observation and discussion.

Solid Growth Potential That’s Intricately Tied to Strengthening Its Moat

It’s a mouthful there. But essentially, THIS is the reason why I am excited about Netflix even though it seems like its best days are over…

Stacking On A New Moat: Its Proprietary Technology…

Investors who have looked at Netflix are always shocked by the large amounts of FCF burn that’s been going on for years. If an astute investor were to look at it closer, most of that FCF is going toward Research & Development, and Production Costs (for its Netflix Originals). While many are skeptical about the high spending on production (justifying that the profit-life of a Originals film ends around the 4th year), they understate what Netflix has been doing in terms of R&D.

Recently, Netflix has launched Season 5 of Black Mirror – a CYOA (choose-your-own-adventure) film with a unique interactive element to it. In this Season, titled Bandersnatch, viewers can take part in creating the outcomes for the characters in the film. They can choose whether the character lives or die in a certain scene – and that affects the next scene of the plot. An interactive film like this took many hundreds of hours to produce (what with all the different outcomes), but feedback has been phenomenal.

Viewers have begun sharing optimal outcomes on Reddit and discussions have been long-lasting. We consider this a success for Netflix in reinvigorating the viewer experience and attracting more than just eyeballs in a normal show.

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The most intriguing thing about this new technology for me is that it is proprietary to Netflix. In creating Bandersnatch, Netflix developed “an internal tool” called Branch Manager. This tool allows a near-seamless production experience between Netflix and producer Charlie Brooker, and allows for multiple complex “branches” to form for the viewer without overloading Netflix servers.

The best part about this new tool is that it allows for significantly higher engagement and collection of user data (to provide recommendations and potential future investable films).

The potential for Interactive viewing formats is huge, and Netflix is just barely scratching the surface. It plans to open this feature up to more Originals films in the future – and that is where it gets exciting.

Collecting viewing data in media has only been about “eyeballs” and “advertising”. But now, with Interactivity, Netflix is right at the crux of collecting massive amounts of valuable subscriber data – and using that to make more informed decisions about what to produce. This would lower production costs significantly, reducing a huge portion of Netflix’ current costs. Such data mining would also secure and strengthen Netflix’ moat against other competitors by knowing their customer intimately and customizing the experience to them using their data. An external competitor would find it difficult to poach existing subscribers from Netflix, as they do not have such individualized data and personalizing the experience for them, like they’re used to at Netflix.

Besides increasing subscriber stickiness, advertisers would also stand to benefit greatly from such a trend. Without conventional ads (Netflix doesn’t do ads), product placements would be worth more due to increased engagements. Filmmakers would also be much stickier to Netflix as well, because unlike switching broadcasting of a film from one platform to another (like Channel 4 to Netflix), such Interactive films are created with the platform and format in mind. This means porting over to another platform (such as Hulu) would be technically impossible (for now) – as Netflix owns the rights to their interactive software. This is a big win for Netflix – as it means essentially locking down both the user and the producer on its platform. Genius.

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While I’m singing praises about this new technology… know that this is just icing on the cake. The real “meat” (or moat) is still in its network effect and business model.

Stay tuned to Part 3 for a short piece on valuation.

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