Netflix Should Read Amazon's Script

It turns out 2013 has been lucky for Netflix. The stock has surged 178% so far, the best performance in the Standard & Poor's 500-stock index. But to keep the odds in its favor, the video-streaming and DVD-rental company will need to be more like an Amazon than an HBO.

Netflix's paid domestic streaming subscriber base has increased to nearly 28 million from 25.5 million at the start of 2013 and 22 million a year before. This puts it just below Time Warner's HBO. Meanwhile, Netflix's domestic streaming margin on the basis of contribution profit, revenue less cost of sales and marketing, was 20.6% in the first quarter, up strongly from 14.3% a year earlier. But expanding margins may represent a risk for Netflix. That sounds counterintuitive. But when Netflix reports second-quarter earnings on July 22, investors will be more focused on how many subscribers it added, something that may require extra spending. For Netflix, building a formidable subscriber base should be a more immediate concern than raising margins. Having more users enables Netflix to spread the costs of buying and creating new content. And rising market share should help it raise subscriber fees.