April 16, 2018 / 10:12 PM / 10 days ago

Breakingviews - Netflix’s advantage is Facebook’s weakness

By Jennifer Saba

The Netflix logo is shown in this illustration photograph in Encinitas, California October 14, 2014. Netflix Inc shares were down 3.1 percent at $435.28 after the announcement. Picture taken October 14, 2014. REUTERS/Mike Blake

NEW YORK (Reuters Breakingviews) - Netflix’s advantage is Facebook’s weakness. Subscriptions give the video-streaming service an edge – and an incentive for boss Reed Hastings to keep customers’ data close by. Cash burn is always a risk but for now Netflix is handily outperforming its FAANG associate.

Netflix is part of the gang of stocks that includes Facebook, Apple, Amazon and Google parent Alphabet, but lately it stands out from the pack. The stock was up 60 percent this year as of Monday’s close, more than double second-place Amazon’s rise. Zuckerberg’s dorm-room creation has declined nearly 7 percent over the same period.

The shares jumped another 5 percent following the closing bell after the company reported it added more than 8 million paying customers in the first quarter, giving it a total of nearly 119 million worldwide. Crucially, the company is showing it can boost prices without denting customer growth. For example, it hiked the cost of its mid-level tier subscriptions by $1 to $10.99 in the United States last year.

Netflix’s subscription model contrasts sharply with Facebook, which depends on advertising for nearly all of its $40 billion in annual revenue. Facebook argues that the vast amounts of information it collects on its 2 billion members helps Madison Avenue better target companies’ products and services. A recent data leak that exposed the accounts of 87 million Facebook members suggests that the trade-off may not be fair. While Zuckerberg parried calls for regulation at congressional hearings last week, the risk of political interference continues to hang over the business.

Netflix is a data hound too. It mines the viewing habits of subscribers to suggest other TV shows or produce certain types of movies. That gives Hastings a reason to keep data close to the vest. Netflix doesn’t release ratings.

The producer behind “Stranger Things” is not without challenges. Hastings warned that the company is on track to burn up to $4 billion in cash this year and will be cash-flow negative for several more years as it spends heavily on original content. If Netflix fails to attract more people to the service or maintain its ability to raise prices, the model could fray. For now, though, Zuckerberg would love to have Hastings’ problems.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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