A Closer Look At The Importance Of Netflix’s Original Content

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Netflix‘s (NASDAQ:NFLX) results in the first three quarters of 2017 have been encouraging. The company continued its strong run in the streaming business with significant growth in international subscribers, while domestic subscriber growth has been solid despite the intense competition in the domestic streaming business. For the first three quarters, the company was able to add around 15 million subscribers for its streaming business. Going forward, competition in the streaming market will likely be on the basis of original content, as players in the over-the-top space try to attract users to their platforms. In the past few quarters, players such as Hulu, Amazon, Facebook, and Apple are investing heavily in quality content. While Amazon is reportedly looking to acquire live sports broadcasting rights, Apple and Facebook are planning to spend $1 billion on developing original content. We believe that for Netflix to maintain its leadership position in the streaming business, it is important that the company continue to focus on developing quality movies and TV shows, rather than branching out into live events. In this note, we explore the importance of Netflix’s content relative to its future growth.

Original Content Can Drive Growth In Subscribers, Justify Fee Hikes

With several players in the streaming industry, content is likely to be the key differentiator. Netflix has aggregated a diverse library of content that ranges from the third-party licensed movies and TV shows to its growing stable of popular original content. However, as more content producers look to launch their own streaming services, Netflix could have difficulty retaining its library of third-party content – as evidenced by Disney’s plan to move its content to its own streaming platform once its deal with Netflix expires.

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As part of its strategy to reduce its reliance on licensed video content, Netflix has increased its budget for original content to stay ahead of competitors such as Amazon and Hulu. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. As a result, the company is spending a significant portion of its content budget on original shows. The company plans to spend as much as $8 billion on shows and movies in 2018, up from $6 billion earmarked for content this year. Netflix, in its letter to its shareholders, stated that it will work on a wide variety of content to satisfy the diverse tastes of its global audience.

While producing original content could reduce the number of popular licensed shows on its platform over the long run, Netflix should be able to offset this by attracting subscribers to its high-quality original shows, which will be exclusive and unique to its platform. This should enable the company to keep churn fairly low. Furthermore, Netflix is aiming to build a portfolio of original movies, which should also attract and retain viewers. We also believe that this will help the company to optimize the cost of licensing movies relative to the number of subscribers who watch them. Given the secular trends within the pay-TV industry, as consumers increasingly cut the cord in favor of streaming platforms, we expect Netflix’s user base to grow to over 205 million by 2024.

Furthermore, over the past few years, Netflix has been able to increase the average fees paid by subscribers without any material impact on subscriber numbers, which is likely largely due to the popularity of its original content such as Stranger Things, House Of Cards, and Orange Is The New Black. We expect that the company will be able to increase its monthly streaming subscription fees in the U.S. and international markets in the coming years, as its original content continues to grow in popularity.

 

At present, we have a price estimate of $181 per share for Netflix, which is slightly below its current market price.

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