Why Netflix spends an incredible amount on Content
There’s been a lot of talk and even more speculation over the last year about how much money content streaming service Netflix is spending creating and acquiring shows for it’s Netflix Originals banner. The following is a quote from a Variety article published March 10th (found here)
Tony Wible, an analyst with Janney Montgomery Scott, estimates that Netflix will spend $5 billion in programming next year, more than anyone save ESPN. It also eclipses the $4.5 billion that rivals Amazon, HBO, Starz and Showtime are estimated to have shelled out in combined spending in 2014.
Netflix is going both deep and long on original content. Unlike traditional content creation companies (Studios) and content distribution companies (Cable and Free to Air Networks) Netflix doesn’t have the baggage that comes with operating a traditional Free to Air or Cable TV network and this has given them some big advantages.
Netflix are incredibly smart and they know the markets in which they operate. Netflix is willing to pay a premium for their original content titles because they’re cutting deals that allow them to use that content worldwide. As the launch of Netflix Australia showed this week, not all content deals around the world are equal. While Netflix Australia isn’t the poor little brother by any stretch of the imagination, it is missing some glaring content when compared to its US parent.
What isn’t missing however are the highly anticipated titles from the growing catalog of its original content productions. Much of this content was originally licensed to the cable giant Foxtel – co-owned by Newscorp and Telstra. Foxtel now operates the Netflix competitor Presto! in partnership with Seven West Media.
The current rumour (mostly unsubstantiated but likely true) is that Netflix not only bought back the rights to their own content from Foxtel, but paid a premium to do it. It begs the question – why on earth would Netflix buy back their own content at a premium in preparation for their launch in Australia? The answer is simple.
Know your enemies like you know your friends
Netflix knows their consumer. Netflix knows they have an instant audience because they’ve been keeping tabs on something interesting. Over the last few years they’ve seen an uptick in the number of their American subscribers paying with Australian credit cards.
It’s been estimated that around 200,000 Australians have been bypassing geo-fencing and subscribing to their US service. If this number is accurate it means a number of subscribers that will instantly switch over once the service launches in their local area expecting access to the same Netflix Originals available from the US service.
They also understand competition. Netflix have been operating in the North American market for years – a cutthroat market dominated by hostile and (lately increasingly desperate) Cable giants. It’s through this competition that Netflix have tested and proven the worth of their investments in original content – investments that have translated into a large (and growing) audience of cable cutters.
These “cable cutters” are typically 18-35 year old consumers that desire premium content and the ability to consume it in an entirely different way to anything offered by cable. They’ve also proven that they are willing to pay for that privilege.
Artificial Scarcity No Longer Makes Sense
Much like Free To Air television networks, cable networks have always relied on rigidly enforced artificial scarcity to inflate the value of their content. Their tactics resulted in them stringing out content week after week, with seasons for some shows taking up 6 months to unfold. They bet that your favourite shows would keep you watching and subscribed. It wasn’t a stretch though, because there was no other way to gain access to the content. It wasn’t much of a choice.
Networks also used the same tactics to limit access to their content worldwide. Even recently it wasn’t unusual for international broadcasters to be asked to pay a premium for the rights to a Networks “flagship” shows – even when it was several years it had first aired in the US. This worldwide syndication tactic guaranteed easy profits, especially once the global reach of the US entertainment industry peaked in the 80’s and 90’s.
The problem with this artificial scarcity is that it has proven over the last 10 years to be a serious mistake by the Networks. Consumers aren’t stupid – they know when they’re being bent over the barrel and taken for a ride. These days it’s simple, and in some cases far more convenient, for domestic and international consumers to bypass restrictions designed to cause artificial scarcity.
Netflix has eschewed this antiquated model in favour of releasing its Netflix Originals the way that the majority of its consumers want to access it – all at once, regardless of where they live. This bulk release of content simplifies matters for Netflix, but it’s the worldwide release that makes the most difference.
With the instantaneous release of episodic content like House of Cards and Marco Polo, Netflix has proven that instant access to content worldwide actually works to not only bump subscriber numbers, but also reduce piracy.
It’s not a perfect system though. There will always be those who seek to get something for nothing. Piracy has existed for decades and there will always be some for whom legal options that cost money will not satisfy. That isn’t the case with all consumers though. There are places where the only reason Piracy exists in high volumes is because consumers feel they have no other reasonable choice.
When consumers feels your content inaccessible at a reasonable cost or too difficult to gain access to by conventional means, they’ve proven willing to bypass the artificial scarcity restrictions being enforced on them and acquire that content by other means.
Playing the long game
I mentioned early in this piece that Netflix has been playing the long game and that’s absolutely true. They’ve stated on a number of occasions that their current goal is for 100 million subscribers worldwide. This would make them the largest subscription content service in the world bar none and give them unprecedented buying power.
The mathematics of 100 million subscribers are staggering. Assuming that the average subscriber spend is US$10, the monthly income for Netflix at that point reaches US$1 billion dollars.
$1billion in revenue per month from their subscription streaming service alone changes everything. It would open up a lead between Netflix and their competitors that would be extremely difficult to bridge. No other streaming service comes even remotely close to that number. No other streaming service has doubled down and spent as much on original content on a regular basis as Netflix has either.
100 million worldwide subscribers would also give Netflix unprecedented leverage when negotiating with content owners too. After all wouldn’t you prefer that your [Episodic Content / Documentary / Movie / Insert new content type here] be available on the service with a global reach of 100 million subscribers?
Netflix has charted a course for themselves and they are charging ahead. While nothing is ever certain, it certainly looks right now like they’re moving in the right direction. After all, no other streaming service is pushing the broadcast and cable industries to transform the way they make their content available like Netflix is.
The used to say content is King. If that remains true today then Netflix is clearly positioning themselves to be the power behind the throne for years to come.