Netflix (NASDAQ:NFLX) CEO Reed Hastings announced last Thursday that users streamed 4 billion hours in the past three months, prompting a (temporary) jump in the stock the next day.
That “4 billion hours” stat is impressive, and shows a per-month improvement over Reed’s July update that users had watched 1 billion hours in June — but does it really matter?
Yes … just not as much as it might seem.
The issue is that NFLX gets its revenues from subscriptions, not advertising, so an increase in hours viewed doesn’t necessarily translate to more money. If the same number of subscribers spend more time watching programs, Netflix doesn’t get more money from it — the new hours would have to come from new viewers.
Based on the company’s Q4 guidance, subscriptions are growing at a much slower rate than viewing hours — worldwide subscribership was only projected to increase about 4% in Q1. Maybe those 4 billion hours will end up translating into higher-than-expected subscription numbers, but we won’t see the actual results until April 22.
Besides, numbers are only a part of the picture.
Netflix wouldn’t have improved either metric — viewers or streaming hours — if it only offered the same stagnant rotation of shows and movies. People are joining and are streaming more content, which means that despite some complaint on this front, Netflix is doing a good job of bringing in the right shows and the right movies for its audience. Not to mention, it also has deals in place to bolster that content, such as an agreement with Disney (NYSE:DIS) that will include both old and new movies from Disney and its subsidiaries.
And as it stands right now, content selection is a big competitive advantage over rival services like Hulu and Amazon (NASDAQ:AMZN).
Netflix has stepped up its game by offering original programming to its subscribers, beginning with the Kevin Spacey series House of Cards. Netflix won’t release numbers on viewership, but Spacey’s a big enough name to draw eyes. On April 19, the company will debut Hemlock Grove, a horror-drama series. (While that might seem like a pretty niche genre, remember that The Walking Dead has been the most-watched show this season.)
The company probably also can count on more viewers joining the service for the new season of Arrested Development, which originally aired on News Corp’s (NASDAQ:NWSA) Fox a whole decade ago. The show struggled with viewership at the time, but developed a cult following that has grown over the years — thanks in part to rerun availability on Netflix.
Of course, neither original programming nor a large library of content guarantees success. Netflix has a few obstacles to overcome in the long-term — namely the small matter of turning a profit.
That library of content and those new programs have to be paid for somehow. In January, the company announced plans to raise $400 million through a debt sale so they could continue funding original programs and paying licensing fees. That’s not exactly a long-term growth strategy.
Those licensing fees, by the way, aren’t going down. Even back in 2011, Netflix knew that licensing costs would skyrocket — they have — and they’re only going to get worse as Hulu, Amazon and other streamers are willing to throw more money to catch up to NFLX in content. This means a lot is hanging on the success of original programming — Netflix can’t afford to keep throwing more cash to get the same or less in the way of licensed properties.
So, sure, 4 billion hours of streaming content is a good thing for Netflix and an unsettling thing for network TV. But investors really shouldn’t get excited until Netflix gets some traction in its original content, and those improving hours reflect a more robust growth in subscribers.
Adam Benjamin is Assistant Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities, but he will be tuning in to the new season of Arrested Development.
