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Netflix's CDN Offers Super HD and 3D

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Netflix Inc.’s (NFLX - Analyst Report) Open Connect partners are offering Super HD and 3D quality video formats. The movies and documentaries that are currently available for the domestic customers in 3D format are “Immortals”,” The Art of Flight”, "African Wild,"  "Scary Tales," and "Live Fire".

Moreover, 13 episodes of Netflix original series “Hemlock Grove”, a television series from executive producer Eli Roth, will be available for streaming from April 19, 2013.

With the expanding portfolio of streaming content, Netflix’s Open Connect (Netflix’s in-house content delivery network) has gained popularity among Internet service providers across domestic and international markets. Internet service providers such as Cablevision, Virgin Media and British Telecom have opted for Open Connect as their preferred CDN.

This is due to fact that Open Connect is a single purpose video CDN, which directly connects Netflix’s video library to the Internet service providers, thereby ensuring smooth and fast data transfer and eventually enriching customer experience. We believe that this will drive subscriber growth going forward.

Netflix’s future growth strategy is entirely dependent on the online streaming business. Hence, the company’s initiative in building its own CDN is commendable as it will lower its reliance on third party CDN service providers. Moreover, this will save substantial cost as the company will no longer need to pay service fees to the third party CDN providers over the long term.

However, we believe that the Netflix’s capital expenditure will increase due to higher investment on CDN development and overseas expansions, which will hurt its liquidity in the near term.

Moreover, when compared to some of its cable and communications peers who have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers. In such a scenario, higher license and renewal fees will hurt profitability going forward.

We believe that the streaming market is becoming overcrowded. However, Netflix’s superior content offering is expected to attract new subscribers going forward.

In the recently concluded third quarter of 2012, the total unique subscribers (Domestic and International) jumped 25.7% year over year to 31.8 million. Moreover, we believe that Netflix s effective management of costs will dictate the company’s future prospects.

Currently Netflix has a Zacks Rank #3 (Hold).

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