Tags: Netflix Inc. (NYSE: NFLX)

Hot Stocks: Netflix Inc. (Nasdaq: NFLX) Is More Than Just Special Effects

By , Managing Editor, Money Morning •

Netflix Inc. (Nasdaq: NFLX) shares have surged 764% in just two-and-a-half years.

And yet there are still investors, analysts and businessmen who continue to doubt the company - choosing instead to believe that its meteoric rise is more flash than bang.

If you're part of that mix, you may want to reconsider your stance: Not only has Netflix revolutionized the way people rent movies - driving Blockbuster Inc. (PINK: BLOAQ) into bankruptcy in the process - it's now even revolutionizing the way people watch TV.

Having added 3.3 million subscribers in this year's first quarter, Netflix has some 23.6 million subscribers in North America alone. That's more than Comcast Corp. (Nasdaq: CMCSA, CMCSK), whose cable-subscriber ranks shrank by 39,000 to 22.76 million during the same three-month stretch.

Netflix's traditional DVD-through-the-mail system is not what's driving this transition - it's the company's streaming service, which delivers video through a variety of devices, including the Apple Inc. (Nasdaq: AAPL) iPad and the three top video-gaming systems.

The Netflix service offers customers more than 20,000 television shows and movies to choose from - both on-demand and commercial free.

This new business model that Netflix first created and now dominates was originally the bane of cable companies and television networks alike. Indeed, the old guard worried that Netflix would encourage people to ditch their cable subscriptions, slashing fee income for providers and advertising revenue for the networks.

Over the past year, however, a strange thing occurred: An increasing number of Netflix's former critics have become converts - and even disciples. Now, having realized that Netflix's ascension is unstoppable, the television networks that once scorned the company as an enemy now welcome it as a friend.

For instance, Jeffrey Bewkes, the Time Warner Inc. (NYSE: TWX) chief executive who in December likened Netflix to an ill-equipped Albanian army attempting to take over the world, can be heard singing the company's praises.

"I do have a fondness for subscription television, and Netflix is subscription television," he told moderator Charlie Rose earlier this month at the Tribeca Film Festival in New York. "So, welcome, brother!"

Indeed, Bewkes seems to have realized that Netflix can complement his network's business by streaming - and therefore monetizing - old content that wouldn't otherwise be broadcast. In a sense, Netflix can act as a retirement home for television shows that have been played out on television.

"I've tried at times to be humorous about it, sometimes to make a point, so let me be clear: We think there's definitely a role for subscription [video-on-demand] services, library services, and Netflix in the ecosystem," Bewkes said on Time Warner's first-quarter-earnings call. "What is that role? Clearly it's a way to give consumers access to a deep library of content that they couldn't easily get before, particularly older shows."

Consumers aren't the only ones who stand to benefit. Time Warner's Warner Bros. division last year sold Netflix the streaming rights for all 100 episodes of "Nip/Tuck" for roughly $200,000 an episode.

Time Warner isn't the only network that's come around on Netflix. CBS Corp. (NYSE: CBS) has cut a two-year deal that will allow Netflix to stream such CBS shows as "Medium."

CBS Chief Executive Officer Les Moonves said the deal would bring in "hundreds of millions of new dollars."

Indeed, the same Les Moonves who in September - just four months prior to the deal - said that his company was still "trying to see what Netflix is," gushed over Netflix during CBS' first-quarter earnings call.

"Gee it's great to be in business with them and they are terrific," he said.

Moonves also expressed a willingness to partner with Netflix on overseas ventures.

"We are in serious discussions with Netflix about doing a deal in Latin America, doing a deal in Canada and those deals might happen fairly quickly," he said.

Netflix already has 800,000 subscribers in Canada and is close to announcing deals with three of Latin America's biggest broadcasters, according to The Financial Times.

The company is negotiating to acquire "telenovelas" and other content from Brazil's Globo and Mexico's Grupo Televisa SA (NYSE ADR: TV) and TV Azteca SA de CV, several people briefed on the plans told The FT.

Netflix did not comment on the prospective deals - but acknowledged its international aspirations.

"Our long-term goal is to have a worldwide service at some point," the company said.

A New Direction

Of course, Netflix isn't solely interested in recycling content that network providers no longer have a use for. The company also has an eye towards licensing original programming.

Netflix is reportedly spending more than $100 million to license an original series by David Fincher and Kevin Spacey called "House of Cards." It had to outbid Time Warner's HBO to land the deal.

Netflix CEO Reed Hastings says his company is looking into licensing two or three similar projects in the future, although for less money than the "House of Cards" deal.

"If we're successful, then we'd expand our circle of competency a little bit more, so we'll take it step by step," he said on the company's earnings call.

Hastings also said Netflix would consider rescuing a network show that is otherwise doomed to cancellation. In that regard, it would be following in the footsteps of satellite provider DirecTV (Nasdaq: DTV). DirecTV recently made deals with NBC to air new episodes of "Friday Night Lights" and "Damages," which the network declined to renew.

"For example, ‘Friday Night Lights' wasn't going to get continued two seasons ago on NBC, and DirecTV did a deal to extend that show," Hastings said in an interview with All Things Digital. "So we can see ourselves doing something like that - extending a season of something that was doing well on Netflix."

Having original content of its own could help Netflix lure and retain subscribers, a strategy that HBO and several other premium cable channels have employed quite successfully.

The bottom line is that Netflix has grown its business in a way that is forcing traditional content providers - cable companies and television networks - to adapt. It's on the cutting edge of a new and continuously evolving trend - and making the most of its lead.

Even DISH Network Corp. (Nasdaq: DISH), which bought Blockbuster out of bankruptcy, says it won't challenge Netflix on streaming because of the latter company's "insurmountable lead."

Investors have taken note - hence the torrid run-up that has Netflix shares trading just a few percentage points below their all-time high of $254.98.

Competitors, too, can no longer ignore Netflix, or even realistically hope that the company will fade away. Nor can these rivals waste anymore time analyzing the company's effect on traditional pay-TV subscriptions and advertising revenue.

"You can sit and take a strategic view of whether it's good or bad, and meanwhile all of your competitors are going to be taking big checks," one network executive told The Wall Street Journal. "The model isn't going to go away. So, if you can't beat 'em, join 'em."

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