Netflix’s prediction algorithms are driving its success
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Netflix’s prediction algorithms are driving its success

There are lots of areas in which streaming video on demand (SVOD) market leader Netflix has the edge on its competitors. Whether it’s content creation, subscription pricing, or ease of use, the company knocks almost everybody else out of the water, hands down. But there’s one area which gets less attention, and may prove to be even more powerful, than all of these things: the technology behind its predictive powers.

Netflix’s share price has appreciated by an incredible 106% year to date

graph 2606 netflix

SOURCE: Yahoo Finance

Netflix is an expert at suggesting shows that we might like to watch. It’s what lies behind the binge-watching behavior of many of its users, and what helps us encounter shows we love, but may never have watched without a nudge. This is not a simple matter of chance – Netflix has invested heavily into developing tools that will push its content out to viewers in sensible ways. That’s a necessity given the scope of Netflix’s content library, and it’s also the key ingredient in creating a service that users love.

In the company’s own words: “We want to estimate the conditional probability that a subscriber will like a film, given his or her particular viewing history, in light of the ratings data from all other subscribers. This will allow us to personalise film recommendations for each viewer.”

Netflix has this down to a fine art: 80% of all the hours streamed on its platform are funneled through this recommendation system. The actual maths behind the process is too complex to detail here – and, in any case, unnecessary – but it all centers around probability theory and the use of a statistical “offset”. The company worked incredibly hard to discover the best way to recommend movies and TV shows to people, offering a $1 million challenge in 2009, where the prize was claimable by a suggestion able to increase the system’s accuracy by 10% or more.

Given the company’s recommendation system’s success in driving viewers to compulsively watch more, it was money and time very well spent.

Disclosure

Dominion holds Netflix in its Global Trends Ecommerce Fund.


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