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Why Is Netflix Investing in New Technological Initiatives?

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Overhaul of Netflix’s mobile app on iOS

A Mobilesyrup report from February 24, 2016, states that Netflix (NFLX) is going to “overhaul” its mobile app on Apple’s (AAPL) iOS operating system and will introduce an in-app setting that will make it possible for Netflix users “to manage their mobile data usage.” In the previous part of this series, we also looked at Netflix’s 4K and HDR (high dynamic range) video content initiatives. Now let’s explore the reasons behind Netflix’s technological initiatives.

Netflix started offering 4K content from UHD (ultra-high definition) television sets in the second quarter of 2014. Netflix’s UHD plan is priced at $11.99 per month. Netflix stated in its 4Q15 earnings letter to shareholders that it is seeing more Netflix subscribers opt for the UHD plan.

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Other technological initiatives

Netflix is implementing many technological initiatives to provide its viewers with the ability to stream content efficiently. After a four-year development period, Netflix is also in the process of rolling out a new video-encoding technology. This new technology could save bandwidth for Netflix subscribers. The company expects that it could help save subscribers up to 20% on data.

Late last year, the company also introduced do-it-yourself smart socks, which prevent Netflix subscribers from missing entire episodes or seasons of TV shows if they fall asleep while binge-watching.

Why the technological initiatives?

As the chart above indicates, Netflix recorded total domestic streaming memberships of 44.7 million and net additions of 1.6 million members in the United States in 4Q15. Netflix’s total net additions for 4Q15 fell by 0.34 million from 4Q14.

Netflix stated in its 4Q15 earnings letter to shareholders that since the company already has high penetration in the United States, it’s struggling to make further headway in the country. Considering this statement from Netflix, it is possible that Netflix’s technological initiatives are an attempt by the company to attract both domestic and international subscribers to Netflix.

Netflix makes up 0.86% of the PowerShares QQQ Trust Series 1 ETF (QQQ). QQQ has 4.8% exposure to the television and radio sector. QQQ also holds 5.6% of Amazon (AMZN) and 8.7% of Microsoft (MSFT).

In the next part of this series, let’s look at Netflix’s expectations for fiscal 1Q16 for the company’s domestic and international streaming businesses.

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