How Netflix Uses Data to Beat Disney

Jon Markman

The top show on Netflix ((NFLX) -Get Report) during August was The Umbrella Academy, and it’s a perfect reason why the streaming media company continues to be an attractive investment.

According to a Variety story late last week, the quirky superhero action series even beat out Hamilton and Frozen 2, streaming on Disney Plus. The secret sauce is predictive analytics and target marketing.

Netflix is simply operating by a different set of rules than other media companies.

Despite its success, most investors still don’t understand Netflix. They assume popular box office titles translate into more successful streaming media properties. That is not even close to being true. Netflix, in 1997, turned everything upside down. The big idea was to use data to change the way average people consumed media.

Founders Reed Hastings and Marc Randolph started with a humble DVD rent-by-mail website. It took off. However, growth caused a dilemma: It didn’t have enough inventory of new releases. So Netflix developed algorithms based on members’ interests that de-emphasized popular titles.

All these years later, the Los Gatos, Calif-based streaming giant is still pressing this advantage.

When you’re curled up on the sofa in your PJs scanning your Netflix cue, data analytics and algorithms are probably the furthest thing from your mind. But Netflix data scientists know what summaries you’re reading, how long you spend surfing titles, what you end up watching, and for how long. Its algorithms are using all of that network data to keep you engaged.

Netflix product managers are also using this data to develop, license and market new content. This flies in the face of the normal studio process where creatives pitch ideas and execs decide to greenlight shows and films.

The success of Umbrella Academy, an adaptation of the Dark Horse Comics series, illustrates the power of turning the traditional process upside down.

The idea, written by Gerard Way, and illustrated by Gabriel Ba, is a story that would have been hard to tell in the conventional media world. The plot lacked formulaic lynchpins like central focus, or lead characters for that matter. Despite these mainstream failings, the comic series won critical acclaim and developed a cult following among graphic novel devotees.

The story involves 43 superpowered children born to unconnected women who didn’t even know they were pregnant. Sir Reginald Hargreaves, a paternal figure known as Monacle, adopts seven of these children, each selected for their unique powers. He then begins training them to one day save the world from undisclosed forces. The siblings are reunited years later when Monacle dies and one of the original 43 has become a supervillain.

The Umbrella Academy works on Netflix because of “narrow-casting,” a business model built around the personalized experiences for each of its subscribers. The Los Gatos company doesn’t need blockbusters to lure viewers, its algorithms know where they are on the network.

The Umbrella Academy targets Netflix subscribers interested in adoption, coming of age dramas, superheroes, graphic novels, fans of actress Ellen Page, the only big name star, and Gerald Way and Gabriel Ba.

The results have been stunning. According to 7Park Data, the firm cited in the Variety report, The Umbrella Academy had more than twice the number of viewers for the Disney Plus programs, Hamilton and Frozen2. It was 3x more popular than The Office, streaming on Netflix, World’s Toughest Race: Eco Challenge Fiji, the only top 10 program from Amazon Prime Video, and The Incredibles 2, also on Disney Plus.

Variety notes that 7Park Data samples 15,000-25,000 households in the United States using Roku ((ROKU) -Get Report) devices or other connected TV platforms.

The comprehensive data also reveal The Umbrella Academy viewers were more engaged.

Viewers of the Dark Horse Comics action adventure watched more minutes than any other streaming show during August. The numbers padded Netflix’s considerable lead over second place Amazon Prime Video ((AMZN) -Get Report) and Disney ((DIS) -Get Report).

I have been bullish on Netflix for years because most investors are still missing the larger point of what the company is doing. Managers have built a predictive analytics business with a media application. This business, now 182 paying members strong, gets better with more data.

Growth investors should consider buying Netflix shares into any significant weakness such as the past three weeks.

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