Netflix holds winning hand as web pioneers try to transform television; The firm that began as a DVD rental service is now producing dramas, and is poised to exploit the online media revolution

Netflix holds winning hand as web pioneers try to transform television

The firm that began as a DVD rental service is now producing dramas, and is poised to exploit the online media revolution

Dominic Rushe in New York

The Observer, Sunday 16 February 2014

Netflix is in with a chance of breaking the internet this weekend. The hugely popular movie streaming company released the second season of the award-winning drama House of Cards on Friday, just as winter storms turned large swaths of America into a nation of stay-at-homes – a combination bound to test the US’s creaky broadband infrastructure to its limits.

Even Tom Wheeler, chairman of the Federal Communications Commission, worries about the strain on the system. Last month he told an interviewer his wife berates him over the sometimes choppy connection to Netflix. “I don’t think this is TMI [too much information], but my wife and I like to lie in bed and watch Netflix,” he said. When their internet connection slows down, Wheeler’s wife is incredulous: “You’re chairman of the FCC,” she says to him. “Why is this happening?”

In part Netflix is a victim of its own success. Its video-streaming service makes up about a third of the US’s web traffic on any given evening. Started as an online DVD rental business in 1997, it has pulled off the shift to digital in spectacular fashion. A business that started as a library of old movies has been transformed into a major media player.

The first season of its House of Cards remake won the first Emmy for a web-only TV show and four Golden Globes. Relaunched comedyArrested Development went on to scoop up more awards. This year Netflix received its first Oscar nomination for The Square, a documentary about the Egyptian revolution. Netflix is planning to spend $3bn (£1.8bn) on new programmes in 2014, 60% of the revenue Morgan Stanley analysts have projected it will rake in this year.

It’s a pricey gamble, but so far it has paid off. The combination of new programmes and old movies has won Netflix 44 million subscribers in 41 countries, who watch more than 1bn hours of TV shows and movies every month. Three quarters of them are in the US but Netflix is an increasingly international business. It now has an estimated 2 million subscribers in the UK and has been growing rapidly in the Nordic countries. “The strategy of providing something new is a good one: it makes the service more about today rather than being an archive,” says Toby Syfret of Enders Analysis. Even in the UK, where Netflix faces stiff competition from Sky and LoveFilm, shows like House of Cards and the prison black comedy Orange Is The New Black are attracting subscribers.

But behind the new shows lies Netflix’s real innovation – its recommendation technology. Using a customer’s history, Netflix tailors its library into an estimated 79,000 “microgenres” – Oscar-winning Romantic Movies about Marriage, Gritty Suspenseful Revenge Westerns, Evil Kid Horror Movies – you watch it, they categorise it. “The whole service acts as a filter,” says Syfret. In a world where there are too many choices, Netflix offers a solution.

Netflix is a tech company first and a media company second. Founder Reed Hastings studied maths and later artificial intelligence at Bowdoin College in Maine. The company employs people to tag movies with metadata.

Before they can start, they have to absorb a 36-page training document that sets out how to rate movies on categories from gore and sexual content to romance and even narrative elements like plot conclusiveness and the moral status of characters. Combine that with the data viewers provide and Netflix is certainly creating the most powerful movies database the world has ever seen.

Hastings recently told the New Yorker he believes Netflix’s potential American market is “60-90 million subscribers,” double or triple the current count in the US. He also thinks half of all TV will be delivered over the internet by 2016. And therein lies Netflix’s biggest challenge.

Last week Comcast, the US’s largest cable company and owner of NBC Universal, made a play to take over Time Warner Cable, the US’s second-largest cable firm. Consumer groups are up in arms about a deal. Most high speed internet is delivered by cable TV companies in the US and the merger would give one company control of roughly 38% of the high-speed internet market, according to figures compiled by the Leichtman Research Group.

The merger is in part being driven by “cable cutters” – people dropping their cable service and relying on the internet for their media. Comcast clearly has an interest this fight and has already clashed with Netflix.

In a Facebook posting in 2012 Hastings accused the firm of favouring Xfinity, its own TV-based video-on-demand service, over Netflix and rivals Hulu and HBO Go. When Comcast took over NBC in 2011 it was barred from favouring its own services by giving them more bandwidth. Regulators feared it might throttle competition, so imposed a “net neutrality” clause. That deal expires after 2017 – unless regulators add a new one to the Time Warner merger.

Traditional broadcasters – Comcast’s NBC among them – have been rattled by Netflix and its peers. The shift away from scheduled programmes to binge-watching and the move from TVs to laptops and tablets are only likely to escalate in the coming months – especially if, and probably when, Apple finally enters the TV market. The fight between Big Cable and Netflix is likely to be one for the ages: and one that Netflix’s 44 million subscribers – including Mrs Wheeler – will be watching almost as avidly as House of Cards.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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