Netflix Inc's "Stranger Things" Raises the Stakes Against "Game of Thrones"

By Markets Fool.com

Image Source: Netflix

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Netflix (NASDAQ: NFLX) just took a big step toward its goal of building a service to rival Time Warner's (NYSE: TWX) HBO.

The streaming video giant's new thriller, Stranger Things, has raced to the top of IMDB's list of most popular TV shows. CEO Reed Hastings celebrated the news in a Facebook post where he couldn't help but point out that it pushed HBO's Game of Thronesblockbuster out of the No. 1 position.

Netflix doesn't release audience numbers, so it's always a guessing game to figure whether any particular series is resonating with streamers. Still, Netflix appears to have a major hit on its hands.

Stranger Things was the most streamed original series in the week after its launch, according to Parrot Analytics. Its viewing demand was over three times that of the second place show, the popular Orange is the New Black.

Game of Thrones still held the top spot in overall TV demand, but Stranger Things notched a solid second place showing with demand putting it well ahead of established hits like Mr. Robot and The Walking Dead. The show has also garnered a 97% audience score on Rotten Tomatoes (where it's also listed as the site's most popular series).

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Netflix was already feeling flush from its banner haul of Emmy nominations. It received 54 nods, up from 34 last year, to make it the third most-nominated network behind just HBO and FX. HBO continued to set the standard with 94 primetime nominations, 23 of which went to Game of Thrones.

The gap is narrowing, though. Last year there were 92 nominations that separated Netflix from HBO. This time around, it was just 40.

Image Source: Netflix

Buzz from original series can have a positive impact on Netflix's growth. In fact, when the company has significantly outperformed management's subscriber projections, it's usually due to the popularity of just a few exclusive shows.

In last year's second quarter, for example, membership gains were 33% higher than Hastings and his team had forecast. Executives credited "the growing strength of our original programming slate," which at the time included the additions of Sense8 and season 3 of Orange is the New Black, for the surprising growth. Netflix is currently forecasting very minor subscriber gains in the U.S. this quarter. A breakout hit could easily lift actual results higher, though, especially in the seasonally weak summer quarter.

The long-term benefit is all about branding. Netflix has beenspending billions to raise the bar on quality. Better content, in addition to attracting new members, tends to keep existing subscribers highly engaged with the service and thus less likely to cancel.

Improved content should also help raise the perceived value of the service, which is something that Netflix is struggling with right now. Cancellation rates jumped last quarter as the company rolled out price increases to its massive user base. It didn't matter to many longtime members that the fee boost was actually a delayed hike from two years ago -- they saw it as a new charge that they weren't willing to pay.

Hastings and his team believe the elevated cancellation rates will persist into the third quarter this year before things return to normal as the pricing change rollout ends in the fourth quarter. "People don't like price increases, we know that," he recently told investors. "It's a necessary phase for us to get through," he said, because it helps fund investments in better content.

A hit show like Stranger Thingsshould help convince wavering subscribers to stick around and pay the extra $1 or $2 per month, lifting Netflix's growth prospects for the current quarter, before its Disneypartnership likely accomplishes the same feat beginning in September.

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Demitrios Kalogeropoulos owns shares of Facebook, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Facebook, Netflix, Time Warner, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.