(NFLX) Netflix’s “Just for Kids” on Xbox

Streaming services provider, Netflix Inc. (NFLX) recently announced the availability of its “Just for Kids” category on Microsoft’s (MSFT) Xbox 360 console entertainment system. “Just for Kids” is now available on all major consoles, including Sony’s (SNE) PlayStation 3 and Nintendo’s Wii.

Netflix’s “Just for Kids”, is targeted at children aged 12 and below. The category, which includes shows such as “Bob The Builder,” “Thomas the Tank Engine,” “Backyardigans,” “Caillou,” “Curious George,” “Power Rangers” and “Arthur”, has become quite popular with subscribers.

This is evident from the fact that since its release in August 2011, “Just for Kids” has accounted for more than 2 billion hours of viewing. The surge in viewership has been primarily driven by Netflix’s engaging content, in our view.

We believe that the addition of Xbox 360 to the list of devices for streaming TV shows and films from the “Just for Kids” category will drive Netflix’s popularity going forward. Xbox 360 continues to lead the domestic console entertainment market, which will help Netflix to reach out to a larger section of its targeted audience.

Beside the popular gaming consoles, “Just for Kids” is also available on personal computers, including Apple’s (AAPL) Macintosh and Apple TV. Netflix expects to add other devices such as tablets to the list of devices for streaming content from the “Just for Kids” category in the near future.

Netflix’s library contains a wide variety of documentaries and movies that target every section of the audience. Through its original television shows, Netflix has been venturing into different genres like comedy, political thriller, autobiography as well as horror. Lately, Netflix has made a name for itself by offering new and exclusive content to its subscribers compared to the traditional content provided by some of its closest peers.

As a result, in the recently concluded second quarter of 2012, total number of subscribers (Domestic and International) jumped 18% year over year to 30.1 million. We believe that the variety in content will help the company to drive customer engagement going forward.

Furthermore, we believe that the improved content makes its streaming services distinguishable from other service providers such as HBO, Amazon.com Inc. (AMZN), Hulu as well as the newly-launched services from cable and media companies such as Comcast Corp. (CMCSA), Dish Network Corp. (DISH) and Verizon Communications (VZ).

Our Take

We believe that Netflix’s improving content portfolio and international expansion are noteworthy. Despite higher license renewal costs, we think Netflix will probably see sales strengthening, as subscribers take note of the improving portfolio. This would ultimately enable the company to strengthen its position over the long term.

However, higher capital expenditure due to international expansion will hurt earnings growth in the near term, in our view. When compared to some of its cable and communications peers that have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers.

We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating over the short term.

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