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Netflix: More Value in Original Content Spending

16 Apr, 2015 By: Erik Gruenwedel

Netflix original series "Bloodline"

Netflix upped content spending by $300 million in the first quarter — the majority on original fare. It’s a fiscal trend the subscription streaming pioneer plans to double down on over the next three years as it targets a portfolio brimming with 50% original content.

In the April 15 earnings webcast, chief content officer Ted Sarandos said money spent on original fare such as “House of Cards,” “Orange Is the New Black,” and recent launches “Unbreakable Kimmy Schmidt,” “Marvel’s Daredevil” and “Bloodline,” help broaden the brand by locking up exclusive streaming rights across multiple territories.

Indeed, AMC Network’s “Breaking Bad” prequel, “Better Call Saul,” which wrapped its first season April 6 as the No. 1 new series on cable, streamed concurrently as a Netflix Original series outside the United States.

“The dollars invested in our original programming are more efficient, in that for every dollar spent, we get more bang for the buck in terms of hours viewed,” Sarandos said, adding that hours viewed leads to higher retention, more word-of-mouth and more brand halo with consumers.

Indeed, as CEO Reed Hastings tweeted earlier, Netflix subscribers streamed about 10 billion hours of content in the quarter — up 150% from 4 billion hours streamed during the same period two years ago.

“So that’s why we say [original content spend] turned out to be not just an important strategic investment but also an efficient one,” Sarandos said.

CFO David Wells said he is comfortable with plans to spend upwards of an additional $5 billion on content through 2018, since it’s “working” with subscribers. From a fiscal angle, Wells said upticks in content and marketing spend have been matched with equal increases in streaming revenue.

“We’re getting smarter and more efficient how we put those dollars to use. So that makes me a little bit more comfortable,” he said.

Finally, Sarandos said that with the focus on original scripted series and TV content, 33% of Netflix streaming is primarily movies. The OTT appeal for feature films prompted Netflix to secure exclusive streaming rights to Sony Pictures’ The Interview just 30 days after its theatrical bow.

“We had a phenomenal reaction in the U.S. and Canada for that movie,” he said, adding that Netflix plans (with a populist approach) to keep narrowing the theatrical release window.

Sarandos said the controversial comedy, which sparked an IT attack on Sony by cyber terrorists working for North Korea, turned into a “beautiful one-off” validation of sorts for curtailed release windows. When Sony bypassed a nationwide theatrical launch of The Interview due to alleged threats against moviegoers, it managed to generate $45 million in revenue primarily from digital VOD and license fees paid by Netflix.

“What could have been a financial disaster turned it into a financial win for the studio. So if anything you want to look at that and say, well, it's a beautiful possibility for future disruption in [theatrical] release patterns,” Sarandos said.

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