Can Original Programming Be Netflix’s Key Competitive Edge In 2017?

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Competition in the streaming media industry is intensifying with Amazon’s global expansion in the space. Netflix (NASDAQ:NFLX) remains a dominant player with more than 40% of broadband households in the U.S.  being Netflix subscribers. However, as competition intensifies, it faces a challenging environment for growth. With several players in this industry, content is likely to be the key differentiator. Netflix is focusing on original programming to develop a competitive edge and has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. This may reduce the number of licensed popular shows on its platform, but can attract users to its high-quality original shows. The company is spending a significant portion of its content budget on original shows. This will ensure that content on Netflix is exclusive and unique and should enable the company to retain its loyal subscribers. However, viewers preferring popular shows from cable networks might be disappointed with this strategy, should it involve licensing fewer shows. A survey conducted by RBC Capital Markets in November 2015 revealed that original content did not influence the decision of nearly 51% respondents to subscribe to Netflix. We believe the right mix of original programming and popular licensed content will be critical for Netflix’s growth in the long term.

See our complete analysis for Netflix

Popular Shows, High Quality Original Content Key For Growth

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As competition in the streaming media space intensifies, companies are counting on content to be a key differentiating factor to drive subscriptions.  Netflix will spend nearly $6 billion on content in 2017, second only to ESPN which spent $ 7.6 billion on content in 2016. Amazon’s streaming service, which is likely to be Netflix’s closest competitor next year, spent an estimated $ 3.2 billion on content in 2016. Amazon stated that it is likely to double its spending on video content and triple its spending on originals in the second half of 2017. High spending on content is likely to impact the margins of these players if they are unable to grow subscribers at a steady pace. However, this is not of immediate concern to Netflix. The company is steadily adding subscribers, as it added 3.1 million in the first nine months of 2016. We expect its domestic subscriber growth to slow down over our forecast period, but the company is likely to add nearly 10 million domestic subscribers over the next six years.

We expect Netflix’s domestic contribution margin to increase steadily from around 37% in 2016 to nearly 43% by the end of our forecast period.

Netflix has shown strong subscriber growth in 2016 and its original shows have been successful. This strategy has changed the company’s perception from a content aggregator to a producer of high-quality original shows. However, with competition now intensifying, Netflix has to remain focused on content – providing the right mix of original shows and popular licensed shows to retain the grow subscribers. While some subscribers might opt for both Netflix and Amazon’s video services to gain access to a variety of content, 2017 is likely to see a churn in subscriptions. Amazon has the pricing and local content advantage in international markets, but Netflix’s strong content strategy should ensure that it withstands the competitive pressure from Amazon.

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