It's a Kind of Magic: What Pandora and Netflix Have in Common

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If you're a Pandora Media investor, you probably know these passages by heart:

Each song in the Music Genome Project is analyzed using up to 450 distinct musical characteristics by a trained music analyst. These attributes capture not only the musical identity of a song, but also the many significant qualities that are relevant to understanding the musical preferences of listeners....

By utilizing the wealth of musicological information stored in the Music Genome Project, Pandora recognizes and responds to each individual's tastes. The result is a much more personalized radio experience -- stations that play music you'll love -- and nothing else.

This approach is at the heart of the Pandora experience. Drop some hints about what you like into Pandora's rich database of song descriptions, and its algorithms will figure out what else you might enjoy. The result is not only a reliable source of stuff you already know you like, but also a way to expand your musical horizons to similar but unfamiliar content. Sometimes you might not even know why you like that new track Pandora puts in front of you, but can't help snapping your fingers anyway. It's a kind of magic.

Now, consider this discussion from Netflix content guru Ted Sarandos in a recent interview with The Hollywood Reporter:

With House of Cards, it was identifying not just somebody who saw The Social Network or liked David Fincher but trying to figure out what everybody who liked Benjamin Button, Seven, Fight Club and Social Network have in common. It's that they love David Fincher's style of storytelling. They may not even be able to identify him by name, but we know from their behavior that that's who they are.

Sound familiar? It should. Netflix is creating exactly the kind of magic that Pandora does, only in a different medium and with a different strategy to exploit it.

Pandora grabs your input (conscious or not), and turns it right back at you, creating personalized radio stations at the drop of a hat. Netflix runs the same kind of analysis, but uses it in two different ways:

  • To figure out which shows and movies to put front and center on your page, as well as the various menu systems on set-top boxes, tablet apps, and smartphone apps.

  • To leverage the information to build a stronger content library, either by buying the rights to existing content that is likely to increase customer engagement, or by making new content with similarly high chances of success.

It's the same idea applied to two different markets. Netflix is banking on this tool to help it grow two or three times as large as HBO in the American subscription video market, while building data-driven services on a global level. Pandora can't run its business without the data analysis tactic, which sets it apart from a rising tide of fresh competitors.

If you like one of these stocks due to its content-finding genius, you should look into the other one, as well. Netflix currently serves my own portfolio with aplomb, and I'm always looking for Pandora's strained margins to turn a corner and make me invest. Neither company would be interesting to me without these homespun crystal balls, built on real user input.

Or so my database of investor preferences tells me, anyhow.

What's inside the red envelope
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The article It's a Kind of Magic: What Pandora and Netflix Have in Common originally appeared on

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix. The Motley Fool has a disclosure policy We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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