Sunday 21 July 2019

Netflix shows that content is king

Streaming video company Netflix announced substantial subscriber growth in its most recent earnings report last week.
Streaming video company Netflix announced substantial subscriber growth in its most recent earnings report last week.
Steve Dempsey

Steve Dempsey

Streaming video company Netflix announced substantial subscriber growth in its most recent earnings report last week. It now boasts 109 million subscribers, up from 86 million in the third quarter of last year. That means it's adding around 12,000 subscribers in the US each day and over 56,000 subscribers per day in the rest of the world.

And investors love subscribers. So despite the fact that profit margins in the US aren't great, confidence in Netflix remains high. The stock topped $200 for the first time last week, and was up 2pc in after-hours trading following Monday's third-quarter earnings report.

Netflix is engaging in a costly method of winning and keeping subscribers: creating original programming like House of Cards, Orange is the New Black and Stranger Things. "Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes," said Netflix's letter to shareholders.

"Our investment in Netflix originals is over a quarter of our total P&L content budget in 2017 and will continue to grow."

So Netflix intends to spend between $7bn and $8bn on original content in 2018. To put that in a little bit of domestic context - although it's hardly a like-for-like comparison - RTE's entire budget for indigenous and acquired programming for RTE1 and RTE2 was €185m last year.

Some years ago, Netflix's strategy was to "become HBO faster than HBO can become us". But now the prize is bigger than HBO. Many linear TV networks in the US are cutting back on expensive, scripted TV shows. Netflix is predicting a global shift from linear TV to online entertainment, and owning and controlling access to unique content is the key to winning subscribers at scale.

But Netflix isn't the only one that's joined the dots and realised it's all about the content. Streaming competitor Hulu is investing heavily too. Having created The Handmaid's Tale, it will launch seven original series in the next six to nine months, and is spending $2.5bn on original content this year, said ceo Mike Hopkins.

With shows like Transparent and The Man in the High Castle in its stable, Amazon Prime's budget for programming is estimated to be around $4.5bn. Apple reportedly has $1bn to spend on its own programming next year. This would see around 10 new shows added to shows like Carpool Karaoke and Planet of the Apps. Facebook also has a $1bn war-chest for making and commissioning video. The social network has launched its watch tab for original videos, and has inked deals with a host of partners from National Geographic to Nasa. And Disney isn't just setting up its own platform, it's also pulling all its content from Netflix. And then there's YouTube. Google's video platform has built a highly successful business on the back of its 1.5 billion monthly users. But YouTube is also eager to create more professional offerings. It has a host of original programming created for YouTube Red, its subscription offering. It is spending up to $1m per episode on content from Ellen DeGeneres, Rhett & Link and is soon to release Step Up: High Water, a drama based on the dance movie franchise.

So where does this leave the consumer? Spoilt for choice, by the sounds of things. But maybe also beholden to a number of digital subscription services to see their favourite programmes - or waiting on terrestrial channels to pick up those programmes.

The commercial lesson is clear; for big online subscription plays, content is the differentiator. Not only is it the end product that users want to consume, it's the best form of marketing. Don't believe me? Go online and gauge the breathless expectation for Stranger Things season 2; the '80s horror homage returns on October 27.

Lest we can be accused of going all doe-eyed over some showbiz razzmatazz, it's important to note that Netflix is also putting considerable focus on the less sexy side of the business; distribution. It's working with internet service providers and multichannel video programming distributors to make it as easy as possible for new users to sign up. Netflix is being sold in a bundle of high speed internet and TV services with partners like SFR/Altice in France, Proximus in Belgium and T-Mobile's ONE family plan, which offers US subscribers with two or more voice lines a standard Netflix subscription at no extra cost. But why are these tech partners interested? Because they know Netflix has a suite of programmes people want to watch. Yet again, the content's the kingmaker.

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