Around 2013, Netflix began to see the writing on the wall: The days of licensing a back catalogue of great TV shows for dirt cheap were numbered.
The TV and film industry titans were realising how valuable streaming rights were, which meant that getting them would become increasingly difficult over time for Netflix, especially as more services jumped into the market.
Netflix made the decision that it would have to start making its own shows and movies, starting with “House of Cards.”
The huge investment Netflix has made in “originals” over the last few years — $US6 billion in 2017 alone — has paid off in a string of hits that have not only won fan loyalty, but also gotten the internet buzzing over and over again. Netflix even won a best drama Golden Globe this year for “The Crown,” its costume drama about the life of Queen Elizabeth II.
But since “House of Cards,” the question hasn’t really been whether Netflix is producing some great shows, but whether Netflix originals are worth the gargantuan sums of money the company is plunking down to make them. “The Crown,” for instance, cost a reported $US130 million.
But on Netflix’s earnings call this week, Netflix content boss Ted Sarandos made comments that should, on that front, give investors a boost of confidence. Sarandos said the amount of money Netflix is investing in originals is “pretty consistent” with the amount of hours people spend watching them.
“That’s why we’ve said before that the investment in original programming has been efficient,” Sarandos said. “That’s what we mean: Relative to what else you’d spend the money on, versus the hours of viewing.”
So, broadly speaking, every dollar Netflix spends on original programming gets it the same amount of watching hours that a dollar spent on licensed content would. And that’s why Sarandos later said Netflix isn’t driving toward a specific percentage of original programming.
That is a deceptively important statement from Sarandos. Why? Because it means that Netflix’s forward-looking thesis that a global TV network, without ads, delivered directly over the internet, is efficient — or at least as efficient as Netflix’s previous model of being an online library of other people’s old shows and movies.
And Netflix isn’t the only one to have noticed. Rival Amazon is set to spend an estimated $US4.5 billion on video this year, according to JPMorgan, and has also characterised spending on lavish original shows as “efficient.”
“‘The Grand Tour’ is an expensive show but it’s well worth it,” Amazon Studios chief Roy Price said recently of the new show from the team behind “Top Gear.” Reports pegged the cost at $US250 million for three seasons.
“It’s actually efficient and good economics,” Price contended.
Only time will tell whether Netflix and Amazon execs are simply blowing smoke. But if true, those comments should make investors bullish on the prospects of the streaming giants, as they try and turn themselves into the first truly global TV networks.
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