Netflix’s Plans to Beef up Original Content is an Expensive Bet
Netflix’s (NASDAQ:NFLX) stock jumped as the company’s Q4 2011 results showed net subscriber losses reverting back to net growth. During the result announcement, management shed some light on its broader strategy including plans to as a pure-play subscription and not offering à la cart services, spending less on DVD marketing and continuing to invest more in original programming for its streaming services. The latter part of its strategy is somewhat influenced by Time Warner’s (NYSE:TWX) premium movie channel HBO, which spends about 40% of its budget on original programming. [1] While this will give Netflix a further edge over competitors such as Blockbuster, Hulu and Amazon (NASDAQ:DISH), it may also imply some hardship ahead.
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The first and foremost impact will be on content costs as original programming is going to cost more. Netflix’s content costs are already shooting up. Investment in original programming will depend on incremental benefit, which may be hard to measure in the short term. Netflix will need to monitor the viewing statistics of its original TV shows carefully.
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The second issue is that as Netflix is fighting competitors for original programming, the video market will become more fragmented and confusing for consumers. Original content is distributed across channels in pay-TV industry but the pay-TV packages ably combine these channels to offer convenience to viewers.
How will the online-streaming industry tackle this situation? Netflix’s best bet is to rapidly build up lead in terms of original programming, just like it did with content quantity, and in this way it can continue to be the preferred choice.
Thirdly, as Netflix tries to push for original programming it may face resistance from pay-TV service providers who have good spending power and might see Netflix as a threat rather than a complement. Hence we think the push toward original programming could be a double-edged sword.
Our price estimate for Netflix stands at $133, implying a premium of about 15% to the market price.
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Notes:- Netflix’s Q4 2011 Earnings Transcript [↩]