What Netflix Does -- And Doesn't -- Do With Your Data

There's no doubt Netflix (NASDAQ:NFLX) has a lot of viewer data. With 150 million global subscribers streaming video a couple hours every day, how could it not? But contrary to what many believe, Netflix isn't harvesting data to make content green-light decisions.

"The data doesn't help you on anything in that process," Chief Content Officer Ted Sarandos said at Series Fest. "Picking content and working with the creative community is a very human function."

That said, Netflix's data is still extremely valuable to the company. It once published a research paper indicating its data and AI algorithms save it $1 billion per year. Here's how Netflix uses your data.

Not interested in demographics

Netflix, unlike some of its competitors, is completely ad free. Sarandos doesn't have any plans for that to change. That means demographic data like age, gender, race, and income have very little value to Netflix. Sarandos said:

I don't know how old you are when you join Netflix. I don't know if you're black or white. We know your credit card, but that's just for payment and all that stuff is anonymized.

Netflix isn't collecting that data.

The data Netflix is interested in include what its subscribers are watching, where they're watching it, what device they're watching it on, how long they watch it for, and whether they liked what they watched. As mentioned, that data isn't very useful for making decisions on bringing new content to the platform. It might help Netflix decide when it's worthwhile to keep certain content, though.

Viewer data is most useful for content recommendations. Data makes Netflix's search a lot better by filtering results. Netflix uses viewer data to decide which thumbnail to present to each subscriber to maximize their chances of clicking and finding a new movie or series to watch. Netflix might be able to optimize those functions by collecting all of its viewer data, putting it at a slight advantage compared to forthcoming competitors in the space.

Using its budget wisely

The value of viewer data when it comes to buying new content isn't that it tells Netflix which content to buy but how much it should be willing to spend on it. The data isn't always perfect at predicting the value of content, though. Sometimes it spends too much on content, and sometimes it gets a big hit despite a small price tag.

Having the level of data it has about its audience puts Netflix at a huge advantage when it comes to the negotiating table. It also means it can confidently produce 700 series and 80 films per year knowing the money it's spending is, on average, good value.

Those factors give Netflix a huge competitive advantage over competitors that are just getting started. Even those coming from the media industry won't have the breadth or depth of viewer data that Netflix has to inform its spending decisions. And those competing services coming from technology companies are bound to be much less efficient with their original content spending and likely more cautious as a result. That puts more pressure on each original series or film to succeed compared to Netflix's broad approach.

Increasing the value of the service

Overall, Netflix user data helps the company increase the value of its service. It doesn't need to rely on ads and mining more extensive user data if consumers value the service enough to pay 60% more today for the service compared to just a few years ago.

Netflix has taken the extra subscriber revenue and reinvested in content to keep adding more value to the service. It's able to invest that revenue efficiently thanks to its user data, which allows it to pay a fair price for new content and maximize the reach of each piece of content it buys through its recommendation algorithm.

As long as viewership trends continue to move in the right direction, investors should see improved efficiency and value for subscribers, enabling smaller content budget increases and more subscriber price increases.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

This article originally appeared in The Motley Fool.