How is Netflix making money on their original content series?
Their latest release, Marco Polo, is reported to have cost $90 million for 10 episodes. At $7.99 a subscriber you can do the math for payback and ROI. But wait. This isn’t the first show Netflix has made costing tens of millions. The popular of House of Cards and Orange is the New Black head-up a rapidly expanding list of Netflix original content. At face value the strategy appears to be a money pit of immense proportions. I’ll admit that the business case was not immediately clear to me.
Matthew Ball provides an excellent economic review of Netflix original content for the Ivey Business Review. Reading Ball’s analysis you can start to feel Netflix’s business drivers of customer retention, third party licensing costs, and the ability to price subscriptions based on value received. Competition in streaming video services is increasing as more media outlets provide options for content. Netflix struggled with a price increase in the past. Even with the advancement of technology, availability of exclusive content, and increased hours of viewing it will be tough to have significant price increases in the future because competition is growing. Netflix appears to be positioning itself with premium content, but probably can’t afford to have premium prices.
Long term thinking.
Making business decisions for the long term is a good concept to debate. If you’re in a business school, chances are you’ll go long. If you’re in a strategic business meeting, chances are you’ll go short. I’ve experienced both settings. When you talk theory in business school everyone takes the side of keeping the company relevant for years to come. But in a real business, the conversation tends to gravitate towards the next quarterly earnings release, the stock price, the owners tax return, or how to not get sued tomorrow.
Yet, I see the massive cash investment from Netflix as a great example of long term thinking. The payback of the subscription based viewer model comes from attracting and retaining subscribers. Unlike cable TV which had the ability to essentially hold subscribers hostage for years based on the availability of content options, Netflix subscribers are free to go at any time. (Not to mention they don’t use term commitments!) But think about this. The number of traditional pay-for-tv subscribers has started to decline. There’s an oncoming avalanche of “cord cutters” and Netflix is positioning themselves to catch a large percentage of the money shift. They offer services for a fraction of the cost of cable TV and provide an increasing amount of content. All of it commercial-free.
The cost to borrow money is cheap right now. Ryan Bushey, of the Business Insider, points out that Netflix can borrow in the short term to make more on the investment for the long term. Controlling the price in the future is a smart bet. When is the last time the price of content from Hollywood studios went down?
My experience with Netflix original content.
I’m a Netflix subscriber. My first viewing of an original content series prompted this post because it made me think about the business economics as part of my experience. Plus the entire model of watching shows is different on Netflix.
The traditional TV series season lasts for months. Viewers wait a week between episodes. They watch commercials throughout the viewing. So in a 60 minute episode, a viewer may get 45 minutes of entertainment. Netflix releases the entire series of the original content at the same time. It’s Commercial free and available for binge-watching. It’s a different model and fits our instant gratification culture. Oh by the way, if you think about it, this all started with VCR and DVRs. We started recording shows to watch them when we wanted. We could skip commercials. We could watch episodes back-to-back.
My experience? In a word, satisfying. I like to watch content on-demand on my schedule. I don’t typically watch content during the work-week. But I may use content watching on the weekend as a time to “wind down” and relax. I like uninterrupted episodes that allow me to watch past an arbitrary stopping point that keeps me hooked for another week of waiting. The quality has to be there as well. I was satisfied with the plot develop development and level of acting in the series I chose to view.
So in a make-believe setting, would Netflix original content make it through the Shark Tank assuming it was a startup-up looking for seed money? Interesting question. Netflix original content is competing to take away viewers from Shark Tank. But the Sharks tend to like the risks that will pay them royalties month-over-month and that have a realistic chance of succeeding. So imagine you’re a shark. The question is for you. Netflix is asking $7.99 a month with no monetary return. The return is in the form of exclusive original content. Are you in or out?
Disclosure: I am a paying Netflix subscriber.
This is my 400th blog post on Merchantstand.com