Netflix’s House of Cards Is More Than a Cash Cow — It’s a Cash Herd

Source: Netflix

Source: Netflix

Between an aggressive content acquisition strategy and the development of original content like House of Cards and Orange is the New Black, Netflix (NASDAQ:NFLX) has become a critical part of the entertainment economy. The digital video streaming company ended 2013 with more than 44 million subscribers from around the world, adding 2.3 million U.S. subscribers and 1.7 million international subscribers in the fourth quarter alone. With those kinds of numbers, Netflix is home to one of the largest TV audiences in the market.

It helps that the service is available online and on pretty much any device with a screen and a connection to the Internet, giving the audience flexibility and control over its media consumption. Netflix has capitalized on this, a value add over traditional television for most consumers, by releasing each season of its original content all at once. As Kevin Spacey, an executive director of and actor on House of Cards, put it in an interview with CBS News earlier in January, Netflix is allowing consumers to treat their entertainment “like it’s a novel. You pick it up when you want to pick it up. You put it back on the bedside shelf when you want to put it down.”

This feature has become a huge selling point for Netflix. Given the opportunity, many subscribers will binge, suggesting that the capacity to binge-watch is a feature worth subscribing for. Broadband technology firm Procera estimates that 16 percent of Netflix subscribers using a particular but unnamed Internet provider tuned in for at least one episode of season two of House of Cards, which was released on Friday. If the data can be extrapolated, that’s roughly 7 million viewers, and Procera reports that its data show “clear signs of binge watching.”

It’s hard to tell exactly what Netflix’s secret sauce is, but it’s clear it’s working. The ability to binge-watch is clearly part of the recipe, but it’s less clear how important this feature is for acquired content versus original content. Original content itself is a huge plus, but a $6.2 billion spending plan to acquire new content over the next three years is evidence that subscribers want access to an incredibly wide variety of shows. The company recognized as much in its Long Term View report, saying, “People’s tastes are very broad, even in a single market.”

The more content Netflix offers, the more consumers the company can wrangle into a subscription, but there is value to this strategy beyond just subscription numbers. “The Internet allows us to offer a wide selection, and to have our user-interface quickly learn and make recommendations based upon each individual’s tastes,” the company wrote. “Those members who love action blockbusters, Korean soaps, anime, sci-fi, Sundance films, zombie shows, or kids’ cartoons will find that Netflix fills their homepage with relevant and interesting titles.”

Perhaps more importantly, Netflix can analyze this data in order to guide its decision making on what new content to produce, as it did with House of Cards. The entire television entertainment industry is getting smarter, and as with most businesses data is at the heart of the evolution. House of Cards season two viewership and fourth-quarter subscription growth demonstrate that Netflix’s business engine is working — that Netflix knows how to use data to procure the content viewers want and how to use its platform to deliver the content in an appealing way. The better it does this, the more people subscribe and the more data it collects, feeding a virtuous cycle.

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