The AI Giant Hiding in Plain Sight
The Strategy Behind Your Next Binge Watch
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Dear Investor,
Artificial Intelligence (AI) has become a cornerstone of technological advancement, transforming the way we interact with the digital world. AI companies are at the forefront of this revolution, developing systems that can learn, adapt, and make decisions, thereby enhancing various industries and everyday life.
At its core, an AI company specializes in creating algorithms and technologies that enable machines to perform tasks that typically require human intelligence. These tasks include learning, reasoning, problem-solving, perception, and language understanding.
AI is not confined to robots or science fiction; it's a broad field encompassing everything from voice recognition software to predictive analytics.
Leading the charge in AI are several public companies. The usual suspects are: Google GOOG 0.00%↑, Apple AAPL 0.00%↑, Microsoft MSFT 0.00%↑, Nvidia NVDA 0.00%↑ and Meta META 0.00%↑.
Yet, there's a remarkable player often overlooked in conversations about Artificial Intelligence, one not typically recognized as a tech company.
This enterprise boasts a staggering 250 million paying subscribers and continues to expand.
Its products consistently achieve viral status, a phenomenon analysts struggle to fully comprehend.
Renowned for creating highly addictive products, this company stands as a giant in the industry.
So, who am I talking about?
Netflix NFLX 0.00%↑
How did a former DVD lender become one of the biggest entertainment companies in the world?
The answer lies in the data.
Here’s my unconventional view on them:
Netflix is NOT a streaming company. They are fundamentally a data analysis enterprise; the streaming content serves primarily as a manifestation of their extensive data insights.
That’s the bigger picture behind their success which many analysts miss when they focus only on subscriber growth from quarter to quarter.
Netflix’s power lies within its proprietary system and application technology that offers its subscribers suggestions and recommendations on what next to watch based on their viewing preferences and history.
This highlights a key advantage Netflix holds over traditional TV production: direct, real-time feedback from viewers. For instance, if you pause a film at a certain point to finish it later, it might just be due to fatigue.
However, if millions of viewers exhibit similar behavior at that exact moment, it could indicate a flaw in the script, signaling the directors to make adjustments in future productions.
In contrast, traditional TV productions lacked access to such immediate and detailed insights, often relying on surveys and less direct methods to measure audience engagement and content effectiveness.
Every day, the influx of new data provides Netflix deeper insights into user behavior and preferences, enabling the creation of increasingly compelling series, scripts, and shows which leads to more data to analyse and so on.
The original “positive feedback loop”.
This collection of data has allowed Netflix to make the right decisions on content licensing, pricing, acquisition, and investment in original content.
“Entertainment is a core human need. It changes how we feel and gives us common ground. The invention of motion pictures 120 years ago, and then of television 70 years ago, were the first two entertainment revolutions. The third revolution is streaming, personalizing any-screen anytime anyplace video, which allows Netflix to provide better entertainment at lower cost and greater scale than the world has ever seen.”
Reed Hastings - CEO of Netflix
What is the secret behind Netflix's consistent production of hit shows and the intense hype around their series on social media, along with a dedicated fanbase for shows like "House of Cards" and "Stranger Things"?
The answer lies in their ability to anticipate and deliver exactly what viewers desire, often before the viewers themselves are aware of their preferences.
Netflix excels in understanding and preempting audience desires, crafting content that resonates with viewers, thereby nurturing a strong, loyal following.
Let’s take a closer look at how their first viral series was created: House of Cards.
Analyzing Viewer Preferences: Netflix has a wealth of data on its subscribers' viewing habits. By analyzing this data, Netflix identified a combination of factors that suggested a high potential for success for a show like "House of Cards." These factors included the popularity of the original British series of the same name, the strong following for the show's lead actor, Kevin Spacey, and the interest in films directed by David Fincher.
Understanding Genre Popularity: Netflix's data analysis showed a significant interest among its users in the political drama genre. This insight further supported the idea that a political drama like "House of Cards" would be well-received.
Evaluating Director and Actor Combination: The data suggested that the combination of Kevin Spacey as an actor and David Fincher as a director was particularly appealing to many of its subscribers. Netflix could gauge this based on how well content involving either Spacey or Fincher performed on their platform.
Risk Mitigation through Data: Typically, TV networks order a pilot before committing to a full series, but Netflix's confidence in its data analysis led it to commit to two seasons of "House of Cards" right away. This decision was based on the strong indicators from their data that the show would be successful among its user base.
Tailored Marketing Strategy: Armed with this data, Netflix also tailored its marketing efforts for "House of Cards" to target viewers who were most likely to enjoy the series, based on their previous viewing habits.
Jonathan Friedland, the company’s chief communications officer, said:
“Because we have a direct relationship with consumers, we know what people like to watch and that helps us understand how big the interest is going to be for a given show. It gave us some confidence that we could find an audience for a show like ‘House of Cards.’ ”
In essence, the creation of "House of Cards" wasn't just a creative decision but a calculated move based on extensive data analysis.
The success of "House of Cards" validated Netflix's data-driven approach, setting a precedent for how the company would approach content creation in the future.
I often find myself amused when I encounter an analyst's opinion that Netflix won't succeed in increasing its prices or that its advertising strategy is doomed to fail. Such opinions reveal a fundamental misunderstanding of the company's business model.
It's a mistake to view Netflix merely as a streaming service, overlooking the depth of its data-driven approach.
Netflix meticulously analyzes every data point before implementing any new strategy. This method involves testing a concept on a small scale to gauge its effectiveness. Only after proving successful in this controlled environment does Netflix consider a broader rollout.
This approach extends beyond content creation and includes strategic decisions like their recent initiative against account sharing across different households, which proved to be successful.
The data-centric approach is a cornerstone of their business strategy, often surprising those who underestimate the company's adaptability and foresight.
That’s why they have the lowest cancellation rate among streaming services:
Final Thoughts
If humans possessed the ability to consume unlimited food, Netflix would be a culinary maestro, continuously serving up an array of new dishes and recipes tailored to our individual taste preferences.
And we would eagerly savor each plate, looking forward to their next culinary creation.
We would not be binge-watching, but binge-eating.
And their core business (data analysis) would still be the same.
I think this analogy underscores Netflix's prowess in understanding and catering to diverse and evolving tastes, much like a chef who expertly satisfies the palate of each guest. 🙂
Until the next issue. 👋
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.
I remember all the complaints on social media when they clamped down on sharing. It was like shoplifters telling you your store will be doomed to failure once you add those alarms at the exits that go off. Arguably they were using those people to grow their popularity and collect data on what works. Once they grew enough the freeloaders stopped adding value.