Netflix sheds light on content strategy

Original programming is important, as it will help the company stave off competition and increase viewership.

By Trefis Apr 27, 2012 6:13PM
Image: Watching television (© Maria Teijeiro/Getty Images/Getty Images)Despite improved streaming data in its first-quarter earnings results, Netflix's (NFLX) stock plunged as investors fretted about the company's future.

Netflix's ability to continue growing profits will depend on how it differentiates itself from the competitors gaining strength. These competitors include Amazon (AMZN), Dish Network's (DISH) Blockbuster, Comcast's (CMCSA) Xfinity Streampix, Hulu and others.


A big part of this differentiation is going to be content, and Netflix shed some light on its content strategy during its recent earnings announcement. Below are some points worth noting:


Netflix Content Acquisition Cost as percent of Revenues

Content costs will climb


There is no doubt that Netflix will continue to spend on content aggressively. There is no room for slack, given the increasing competition domestically and short window of opportunity that exists in international markets before local competitors start springing up. Netflix is going to launch in another undisclosed international territory toward the end of 2012.


Exclusive content has value


There is a clear move toward exclusivity. This comes from regular contracts as well as from original programming. The company has stated that it will try and get more exclusive content to fight off competition.


Original programming is part of this strategy and currently forms less than 10% of total content spending. Exclusivity implies higher price, and couple this with the increasing number of bids from deep pocketed competitors, Netflix will inevitably continue to spend high on content acquisition.


Netflix, however, believes that in terms of cost per hour of viewing, it should be able to produce original programming at similar rates at which it currently acquires content. This perhaps means that the company is expecting higher amount of viewing for its original programming.


Tiered pricing


Netflix has no plans for tiered pricing and the same streaming content will be available to all customers for the same price. As the amount of original programming increases, the question that arises is whether or not it will take up a notable portion of subscriber's share of prime-time TV viewing?


We think this is far off and unlikely in the near future, but if at some point it happens, it will be a cause for concern for advertisers. The issue will ultimately percolate down to how content companies manage their content, and this could drive up the cost of content further.


Our price estimate for Netflix stands at $110, implying a premium of about 25% to the market price.

1Comment
May 1, 2012 9:44AM
avatar

blockbuster theft- the first blockbuster opened in greenburgh ny-

the original filing- the business- not one store is legal- all blockbuster-

even changed the stock fairview has another -problem in hyde park- using all the schools money

 and residuals for black folk on manhattan ave- now plans to tear down- what

 WHITE MAN WILL SURFACE AS OWNER in poughkeepsie- ulster or albany county-west bubba**** ny--

fayetteville ny-

all property stolen and new counties to open netflix -the state closed its eyes-

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