Widened consumer electronics space, exclusive content driving Netflix

A holiday season filled with consumers "buying new electronic devices, including tablets and smart TVs" is being cited as a primary reason why Netflix (Nasdaq: NFLX) handily beat market expectations and delivered an $8 million profit and a 2.05 million domestic subscriber increase in its fourth quarter.

While the results and the ensuing reaction of the market were positive--Netflix stock climbed 22 percent to $125.75 in extended Wednesday trading--the company still has a way to go to recover from a serious pothole into which it fell several years ago, Co-Founder-CEO Reed Hastings said during a generally upbeat Q&A with analysts.

"We're extremely thoughtful and careful about what we're trying to do because it wouldn't take much to have the issues layer up again or for us to lose track. So I'd say we're on probation at this point," Hastings said.

Still, he added, "this feels good."

The good feeling, he noted, was created by "three big factors" affecting current and future company prospects: "the content growth as we grow, the general trend towards Internet TV and the consumer electronics ecosystem."

Of the three, Hastings highlighted the consumer electronics piece.

"Both the rise of tablet phones and the rise of smart TVs are very helpful to us, and they are really the beginning of a trend along Internet-connected ecosystem devices," he said.

The devices are not restricted to the traditional, either, Hastings added, as they include "Google (Nasdaq: GOOG) Glasses, Internet watches, all kinds of scenarios over the next five years as well as multi-screen scenarios where you use your tablet or phone to choose content on the TV."

During the Q&A, Hastings emphasized that Netflix's fortunes will be tied to those of advancing consumer electronics: "If you think about Netflix eight years from now… we will be at the iPhone 10 and how incredible will that be for not only viewing video, but maybe controlling video around all of your house."  

Netflix, he said, rode the trend of more content on more devices in the fourth quarter. It also contributed its own content in the form of some exclusive agreements, such as the one the company struck with Walt Disney Co. (NYSE: DIS), and new original content in the form of shows like "House of Cards" and the upcoming "Arrested Development."

"The Disney deal is particularly significant because it is our first Pay 1 deal with a major studio in the U.S. and because of the strength of the Disney, Pixar, Marvel and Lucasfilm titles," Hastings wrote in a letter to shareholders.

The exclusivity portion of the Disney deal doesn't kick in until 2016, so "in the meantime, we are adding lots of other great films and TV shows," he added. Still, he said in the Q&A, exclusivity has its place.

"We're excited about the Disney content and what could eventually flow in," he said in the call. "We're more and more interested in exclusive content" because "exclusivity allows us to have a differentiation in the long term."

Original content is another area of differentiation, and Netflix has an advantage over traditional broadcasters in the way it markets that content to consumers.

"We don't have to advertise 8 p.m. on Thursday night. We get to let people know about the show and they can watch it anytime at their leisure," Hastings said.

"We're pioneering this new service, Internet TV, as are other firms, and from a macro level there's a lot of great growth factors," he added.

That, it would seem, would put Netflix in conflict with multichannel video programming distributors (MVPDs) who in many cases generate their own content and in many other cases--short of VOD--have time-slotted programming.

While Netflix might compete, it also helps drive customers to the higher-end broadband packages, Hastings said.

"They've got an incredibly profitable great business doing data and that's great for them. It doesn't conflict with us," he said, adding Netflix can "help them drive more adoption of the higher end packages and now we worked really well with them."

For more:
- Netflix issued this letter to shareholders
- Seeking Alpha produced this transcript (sub. req.)
- Bloomberg had this initial take

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