Netflix’s Simplicity Is Its Secret Weapon

(Bloomberg Opinion) -- I’m cautious about Netflix Inc.’s financial health and the wisdom of its investors as the company finances its growth by spending on investors’ dimes. Netflix, though, has underappreciated advantages over the growing number of Netflix wannabes. 

That’s not to say Netflix will “win” against the coming competition from Walt Disney Co., Apple Inc., AT&T Inc.’s Time Warner and others. As people spend more of their time watching internet video, there will be many winners. But there won’t be an infinite number of beneficiaries, either. 

Netflix has a good shot at being among the ones left standing if — and this is no certainty — it can remain financially irrational, and if competitors stay unwise enough to make Netflix’s simple technology and no-frills product even more appealing.

Netflix’s Simplicity Is Its Secret Weapon

It sounds odd, but Netflix’s biggest Achilles’ heel — its strategy to grow now and pay for it later — is also its best armor. 

The company has permission from investors who lend Netflix money and buy its stock to binge on TV series and movies and on a rapid international expansion. That permission from people holding Netflix’s purse strings is why the company is able to spend billions of dollars more cash than it brings in. That’s why Netflix can owe 116 times its peak annual cash flow  for movies and TV series it agreed to buy or make, plus debt repayments and other contractual obligations. Netflix exists in its current form because investors are willing to let it exist.

That doesn’t mean Netflix is ignoring their expectations for revenue entirely. On Tuesday, it announced that it was raising its prices in the U.S. by 13 percent to 18 percent. The cost of its most popular plan will rise to $13 a month from $11. The price of the cheapest plan will go to $9 a month from $8. Look for executives to explain how this increase plays into their open-pocketbook strategy when Netflix announces its fourth-quarter results after the market closes on Thursday.

Disney and AT&T don’t have the latitude to spend lavishly and worry about the bill later. As my colleague Tara Lachapelle has written, Netflix has spoiled viewers and movie-and-TV creators. It can splurge on programming and set prices low for customers, which sets an unsustainable bar for rivals.

That’s a point in Netflix’s favor. But it also has product advantages that may not be appreciated.

I can’t emphasize this enough: More than a decade after Netflix started its streaming-video service, media and entertainment companies still don’t seem to understand why Netflix is popular. It’s not only because Netflix has a buffet of TV series and movies that are at least good enough for a lazy Saturday afternoon.

The programming is only part of the appeal. Netflix also has technology that just works and a simple product proposition. 

The Netflix competition swims in complexity: AT&T may soon have eight flavors of streaming video packages with different types of programs and prices — and none of them are likely to be as comprehensive as Netflix. Variety reported on Monday that Comcast Corp.’s NBCUniversal unit plans a streaming-video service that it will provide free for people who pay for cable TV, charge extra to exclude commercials and offer as a subscription to people without cable. Soon, just about every entertainment company will have its own online video service, or multiple ones.

Choice can be great or paralyzing. If it requires a spreadsheet and a PowerPoint presentation to explain your streaming video services, you’re doing something wrong. 

Netflix’s Simplicity Is Its Secret Weapon

By contrast, Netflix is so simple people can buy it without thinking. There is basically one version of Netflix. There are no options for live television, with or without commercials, or add-ons for people who love old Hollywood movies. 

Netflix knows what it is and understands its appeal. Entertainment companies, and even YouTube and Amazon, seem to want to be different things to different people to see what catches on. As entertainment increasingly fragments in response to Netflix, the simplicity is a strength.

It’s also easy to underestimate how hard it is to make technology that just works for the average person. Netflix has mastered the complexity of moving streaming video pixels from one place to another. It’s also easy to flop on the sofa and start watching something that Netflix suggests in seconds. As Rich Greenfield, an analyst at BTIG Research, wrote in a recent blog post, the media companies developing Netflix-like services have been focused on the quality of the programming — as they should. But technology is just as important to get right, and it’s not clear the entertainment companies have the resources or ability to match Netflix. 

Media, entertainment and tech companies wading into Netflix’s waters are still a threat. Entertainment powers like Disney and Time Warner will pull some of their programs from Netflix and put them in their own video services. That pullback, plus the emergence of more companies paying top-dollar for TV shows and movies, will drive up Netflix’s costs. The company’s biggest risk is if conditions change, Netflix can’t be financially irrational anymore. 

Netflix’s rivals can’t change their need to be financially prudent while Netflix is profligate. But the wannabes are hurting themselves by missing the other ingredients of Netflix’s success.

Netflix's peak annual free cash flow was $279 million in 2009. It now owes $32 billion in coming years for streaming content, debt repayments and other commitments. To be fair, Netflix in 2009 was a fraction of its current size.

I will say that Apple, Google and the other tech giants can also be financially irrational about their internet video products, if they want to. It's not clear they want to.

A significant chunk of those series and movies were licensed from those major media and entertainment companies.

There is HBO Go for people who pay for the cable TV network on TV and want to watch it online, too; HBO Now is for people who don't already pay for HBO and want it online only. DirecTV Now is a cable-like collection of live TV network delivered online. AT&T executives recently suggested they might offer a version of DirecTV Now without sports-related networks to make the package less expensive. AT&T offers Watch TV, a streaming video service for AT&T mobile phone customers or $15 without it. And there will be three versions of a streaming video service coming later this year with movies and TV shows from AT&T's newly acquired Time Warner and from other companies.

Yes, there are different tiers of Netflix streaming service depending on how many screens households want to watch at once. The programming is the same.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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