) recently announced the launch of its in-house content delivery
network ("CDN"), Open Connect. This CDN will directly connect
Netflix's video library to Internet service providers, ensuring
smooth and fast data transfer that would eventually enrich customer
So far Netflix relied on third-party CDN service providers such
Akamai Technologies Inc.
Level 3 Communications Inc.
). The company confirmed that it would continue its present
relationships with these CDN service providers owing to the
multi-year contracts that remain in force.
But Netflix added that all data transfers in the future would be
done through its in-house CDN, Open Connect. Netflix said that
about 5% of its content is already being delivered through Open
With Netflix's future growth strategy entirely based on the
online streaming business, the company's initiative in building its
own CDN is commendable. First, the company will obtain the service
at cost (since it eliminates CDN service provider profit). Second,
the reliability of its services could increase, thus improving
relationships with Internet service providers. Therefore, margins
will expand over time.
Nonetheless, if the company suffers another subscriber exodus
like last year, the capital expenditure in building Open Connect
would weigh on the results of the company. But on the brighter
side, Netflix witnessed additions to its domestic subscriber base
in the recently concluded quarter.
Netflix has been trying hard to recover from the 2011 fiasco and
has taken positive measures including improving its content and
expanding its streaming business internationally. However, its DVD
business continues to lose subscribers.
Moreover, Netflix faces significant competition from
), HBO and
). Higher capital expenditure arising from international expansion
and building its own CDN will also impact profits.
Thus, we have a Neutral recommendation on Netflix over the long
term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold
rating in the short term.
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