HOW NETFLIX INCREASED ITS REVENUE USING DATA ANALYSIS

For the past decade, DVD revenue has been shrinking rather immediately, due to piracy and changing consumer viewing habits. The industry is hoping that the new player on the block, Video on Demand (VOD), can fill this loss. In the year 2013, VOD provided 7.9% of all profit generated by films in the UK, up from just 2.7% in 2008.

The biggest player in the VOD market is Netflix. It started in 1997 by Reed Hastings as a mail-based DVD rental service, adding internet streaming (VOD) services in 2007 and by the start of 2014 they were providing over 1 billion hours of films and TV programs every month. In 2002 the company has move to public, which means that legally it is required to publish a whole host of data.  I have given some time going through 10 years’ worth of annual reports in order to pick out useful data points on Netflix.

In summary.

•           In the year 2000, Blockbuster rejected to buy Netflix for $50m.

•           In 2013, Netflix generated $4.4 billion in credit.

•           In just 3 months (July to Sept 2014) Netflix spent $1.2 billion acquiring new content for its streaming service and a further $16 million on new DVDs.

•           The average Netflix subscriber streams 45 GB of films and TV shows per month.

Netflix has a rough start to 2014 as the stock has fallen 9.4% since the start of the year, but the company continues to roll out internationally, and shares could have almost 60% upside to them.

As Netflix continues to gain scale the company could raise prices, given the value customers are getting. "The estimate is the average U.S. Netflix subscriber is paying $0.16 per hour viewed, v/s approximately $0.50 for the average pay TV subscriber, which suggests significant latent pricing power,"

Given how strong Netflix is with U.S. consumers and the value it provides, Analyst Wilson estimates that there's the potential for Netflix to boost prices significantly over the next few years, bringing it into parity with how much conventional pay TV costs. Wilson said if Netflix came into parity with pay TV, Netflix would cost $25 a month, way more than the usual $8 a month subscription most people have.

Though much has been made about Netflix's content costs, the company has a structural advantage in how it buys content. The company has precise data on what each user watches, an on-demand schedule that caters to users, not Netflix itself, and it has the compliance to buy separated content. Wilson said that "We believe this combination, along with the scale of Netflix, allows the company to purchase content more efficiently than its traditional linear competitors and its smaller Internet competitors".

Aside from being the dominant OTT(Over-The-Top) player, Netflix's cost of content(coc) per hour viewed is substantially less than Comcast's, which is the largest cable operator in the U.S. Wilson estimates that Netflix pays only 10 cents an hour viewed to get its streaming content, v/s 23 cents an hour viewed for Comcast, and this gap is spreading. This may be part of the reason why Comcast essentially bound Netflix to pay for direct access to Comcast's broadband network.

So, Netflix has a massive opportunity to expand internationally, as developed countries in Europe present the next big area of growth for the company, in a meaningful way and it help to increase its revenue.