Netflix has been really busy. While the constant adding of new movies to their catalog is built into their business model, no one expected or forced them to expand into original content. The decision to do just that is looking like it’s paying dividends. Literally. The recent announcement of a new deal with Arrested Development writer and producer, Mitch Hurwitz, to produce original content through his own company and other creators, is another move showing that Netflix is not suffering from a case of arrested development itself.
In the last year, the price of Netflix stock has increased 100%. Investment bank RBC Capital Markets in particular thinks there is good reason to believe that Netflix will pay dividends into the foreseeable future. The bank did a recent study on the rapidly growing content provider. The study showed that for the first time in 10 of these such studies, Netflix surpassed Youtube as the most popular place for people to watch a movie or television show. What RBC Capital studied more in-depth were the habits of current Netflix customers. The numbers are very favorable for Netflix. 66 percent of subscribers would describe themselves as very satisfied or better with their product. This number is up four percent. 69 percent of Netflix subscribers would not entertain the thought of leaving the service. About half of Netflix subscribers are subscribers because of the original content on the site. It is reasonable to believe Netflix know this. Making the decision to partner with Hurwitz seems like a very good idea in light of those numbers.
Next week they are scheduled to announce their earnings for the first quarter of 2014. Ahead of that announcement, Netflix sent a letter to shareholders notifying them of a planned increase in the monthly price for new subscribers. Current customers would get a grace period, but the length was not put into the letter. Netflix experienced a bump in the road as a company in 2011 when they increased prices and suffered an exodus of subscribers. Wall Street is not afraid of the same thing happening. After the price increase became public , the stock price for Netflix rose six percent in after-hours trading, which is a good sign for Netflix.
The deal with Hurwitz gives him a lot of room to spread his comedic wings. The relationship between Hurwitz and Netflix has been a good one because of the success of the broadcast of the fourth season of Arrested Development on the site. The show was nominated for three Emmy nominations for the season that was shown on Netflix. Hurwitz called the collaboration the best experience he has ever had working. It is obvious that Netflix is just as bullish on Hurwitz.
Netflix is not putting all their eggs in one basket with Arrested Development, hoping to avoid the fate suffered by a lot of flash-in-the-pan websites. Netflix is also getting support from the state of Maryland where their popular show House of Cards is filmed. Chief content officer for Netflix, Ted Sarandos, told a group of Wall Street analysts that Maryland officials are working hard to negotiate a deal with the production company of the show to keep it in Maryland. Media Rights Capital was denied the tax breaks they wanted to film in the state. In order to keep the credit at an amount similar to what the show received last year, which was $15 million dollars, the state would have to raise the tax credits for all shows $18.5 million dollars, which is a move that did not get enough votes. Sarandos was on the phone trying to calm the nerves of investors, thinking that the incredibly successful show’s production would be interrupted in any way, which is a nod to the power of the sites original content.
Netflix is proving to be a nimble company. A constantly growing catalog of content from multiple sources helps them to justify a raise in the subscription fee, which in turn is forcing Netflix to prove that they are not going to suffer from being self-satisfied, but will continue with their entertaining development.
Commentary by Daryl McElveen