Some highlights from Reed Hastings’ latest letter to Netflix investors

Founder and CEO of Netflix, Reed Hastings, cla...

Founder and CEO of Netflix, Reed Hastings. (Wikipedia)

As Netflix stock climbs on news of its better-than-expected fourth-quarter results and an upbeat forecast, Over Most Of These Stations takes a look at some of the highlights from CEO Reed Hastings‘ latest letter to shareholders.

Looking forward, we expect this year’s Q1 net additions to be slightly higher than last year’s Q1 net additions of 1.7 million. The fact that our growth remains this strong despite intensifying competition, and our already substantial U.S. market penetration, underlines the large opportunity ahead.

A key part of the case against Netflix is that as the online video marketplace gets more crowded, the company’s leadership position will erode.

Here, however, Hastings is saying there are no such indications on the immediate horizon. His researchers took the 100 most popular movies and 100 most popular TV shows in Netflix’s library and matched them against AmazonPrime, Hulu, Hulu Plus and Redbox Instant,  and found that the company’s rivals offer very few of those top 200 titles.

Of course, the difficulty will arrive when Amazon and other companies larger and better-funded than Netflix decide the time has come to spend more heavily on content.

We believe original series developed for Internet TV will be better for creators, better for consumers, and better for Netflix. A large on-demand service has fundamental advantages in producing and launching new series.

Some investors worry that Netflix, already paying large sums of money to obtain streaming rights to programming produced by other hands, will overreach by funding the creation of original series, such as “Lilyhammer,” which debuted last year, and “House of Cards,” starring Kevin Spacey, which will premiere next month.

However, Hastings makes an interesting point:

[Traditional] channels must aggregate a large audience at a given time of day and hope the show programmed will actually attract enough viewers despite this constraint. With Netflix, members can enjoy a show anytime, and over time, we can effectively put the right show in front of members based on their viewing habits. Thus we can spend less on marketing while generating higher viewership.

Traditional outlets are trying to figure out the best way to cope with a developing on-demand media culture, in which people watch shows they’ve recorded days or weeks after airtime, or use an online video application to watch later. Advertising rates are still largely determined by “live” viewing, and while the networks would like to change that, companies that buy commercial time realize their ads are more likely to be skipped in a DVR environment.

Carl Icahn became a 10% investor last quarter at approximately $58 per share. We have no further news about his intentions, but have had constructive conversations with him about building a more valuable company.

We’ll see how this works out. Icahn has been a disruptive force at other companies where he’s kicked in the door, including Blockbuster, Motorola, and many others.

— David B. Wilkerson