Netflix's Second Million-Dollar Competition

By: Prince Damin


The final results of the Netflix Prize are in: Netflix (Nasdaq: NFLX) is sending out that $1 million check to Team BellKor's Pragmatic Chaos. And the next million-dollar race is already on.

After three years of hard work and a dramatic race to the finish line, BellKor used movie ratings on a five-star scale to predict the film tastes of Netflix subscribers 10% better than the company could do on its own. It took three years for some of the finest analytical minds in the world to clear that hurdle, so let's leave that method alone.

Now, Netflix is moving on to the next challenge: predicting movie ratings with no ratings history to lean on. Instead, the next $1 million Netflix Prize relies on demographic data and previous rental history. That sounds a lot harder, but also more valuable to the company. Deducing movie tastes without asking for user input should make the ratings system instantly valuable to new subscribers, as well as lazy or shy ones who can't be bothered to rate what they're watching.

This dedication to a high-quality ratings service speaks volumes about the Netflix mindset. Blockbuster (NYSE: BBI) seems to settle for just building a large library of ratings through Facebook widgets and the like. You don't see Blockbuster making news when it comes to making those rating clicks work for the company.

This is Reason #501 why I believe in Netflix for the long haul. CEO Reed Hastings attacks the movie-rental business from an engineering point of view. His company works hard to turn reams of raw data into useful information and then into action plans. If the DVD format drops off a cliff in five years, this commitment to quality data makes Netflix into a contender for leadership in the all-digital era.

And if nothing else, Netflix is sitting on a valuable portfolio of patents, designs, technology, and movie-industry relationships. A big, rich competitor in the digital video space could buy Netflix just to get all of those delicious tools.

I could see Apple (Nasdaq: AAPL) buying Netflix to improve its iTunes movie store and to apply Netflix’s techniques to its own music ratings as well.

Amazon.com (Nasdaq: AMZN) could come knocking and get an instant upgrade to product ratings on everything from books and movies to clothing and flashlights.

Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT) might be less likely to jump into the movie-rental business, but they care about data quality and would find a use for Netflix-style engineering. And Hastings sits on Mr. Softy's board already.

But personally, I hope Netflix stays independent and grows into a large cap on its own.

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