Reportedly, Netflix Inc. (NFLX) is planning to introduce “social features” for its domestic subscribers after the United States Congress passed a recent bill, which will allow it to share customer rental data on social networking platform Facebook (FB).
Although Netflix did not provide any further details (currently nothing is available on the company website), a company spokesperson told news website Talking Points Memo (“TPM”) that they plan to introduce the service in 2013.
The bill removes restrictions under the Video Privacy Protection Act of 1988 that prevented companies from sharing rental histories of customer video. Although many states such as Connecticut, Maryland, California, Delaware, Iowa, Louisiana, New York, Rhode Island and Michigan have enacted separate laws to provide greater protection, Video Privacy Protection Act of 1988 has been the strongest protection for consumer privacy.
The Act protects consumer privacy against a specific form data collection. The Act prevented disclosure of personally identifiable rental records of “pre-recorded video cassette tapes or similar audio visual material”. However, the new Video Privacy Protection Amendments Act of 2012 allows companies such as Netflix to share video preferences of consenting customers through social media. It also protects consumers by not only asking companies to obtain their consent in writing (Internet forms are also allowed) but also allowing them to withdraw their consent any time.
Netflix has been lobbying against the restriction for a long time. The law prevented it from offering the social sharing service in the US, which it was already offering in Canada and Latin America. The amended Act removes this major obstacle for Netflix as its US subscribers (approximately 30 million) will now be able to link their Netflix accounts with their Facebook accounts. They will also be able to share their favorite movies with friends over the Internet through the Netflix Facebook app. We believe that this service will boost Netflix’s domestic subscriber base going forward.
However, we believe that Netflix will not be the sole gainer from the newly amended Act. Netflix competitors such as Hulu will also benefit from the new rules as it already began offering Facebook integration to its subscriber’s way back in 2011. Hulu is currently facing a case under the old law in California, which we believe it will settle as the new Act comes into force.
In such a scenario, we believe that Netflix’s superior content will be the ultimate deciding factor in the ongoing battle for online supremacy. Netflix’s new and exclusive content offerings to its subscribers are the company’s biggest USP compared to its closest peers, Hulu,HBO and Amazon (AMZN).
However, the company continues to see cost escalation due to higher license and renewal fees. Netflix needs to pay $5.0 billion for streaming content obligations, out of which $2.1 billion is to be paid within the next 12 months. We believe that these huge payment obligations would weigh on the stock going forward.
Thus, we have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank (Hold).
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