Netflix's (NASDAQ:NFLX) much-hyped original series House of Cards was released earlier this month. The $100 million production is part of Netflix's strategic move to produce more original content that will attract and retain subscribers, "to become HBO (NYSE:TWX) faster than HBO can become us," as Netflix's Chief Content Officer Ted Sarandos put it.
More original series have been lined up, including the eagerly-awaited resurrection of the cult favorite comedy Arrested Development, which will be released in April. The pivot toward more original programming, made in the face of rising content acquisition, seems to have pleased Wall Street -- Netflix shares have jumped an eye-popping 100% since the start of 2013.
Given the positive reception to its original series, at least so far, one obvious question to ask concerning Netflix's content development strategy is: Are original movies next? This path would not be an unexpected one to take, especially given the company's stated intent to head down the HBO route. Besides hit series like The Sopranos and Game of Thrones, HBO has also produced many original movies, such as the Emmy Award-winning Game Change and Hemingway & Gelhorn.
Netflix's biggest direct competitor, Amazon (NASDAQ:AMZN), is also developing original movies via its Amazon Studios division. The online shopping giant even has a deal with Warner Bros Pictures: The latter will distribute films produced by Amazon Studios theatrically, though so far, no movie has yet to emerge from this pipeline.
Would it be a good idea for Netflix to produce original movies? Daedalus Howell, a media blogger and independent producer, is skeptical, pointing out that Netflix's subscription-based revenue model inherently values TV series more than movies because of the former's greater "stickiness."
"Part of what's unique about the Netflix viewing experience is the notion of 'binge viewing,' which serves content like House of Cards quite well as it converts viewers into 'experts' of a particular story world. This has tremendous social utility for the fan and often leads to evangelizing of the series in question. This behavior doesn't necessarily carry over into feature films, which are usually one-off productions," said Howell in an email interview with Minyanville.
Howell's opinion is supported by data provided by Sarandos. Last December, Sarandos said that "70% of viewing [on Netflix's streaming service] is TV shows. About one-third is movies," although he was referring to theatrical films the company licenses from movie studios, not original products.
While it's still anyone's guess how much more appealing (or not) an original movie would be compared to a House of Cards or an Arrested Development, Howell said because "Netflix has the gravitas to attract A-list talent," whether or not original movies will succeed "ultimately comes down to the particular project" and whether it will "find fans [or] serve Netflix's business needs."
In fact, Netflix once ran a small film unit, Red Envelope Entertainment, for about two years. The unit was tasked mainly with the acquisition, financing, and distribution of independent movies. For theatrical releases, the unit usually partnered with a bigger company to lower its risk profile. Red Envelope was shuttered in 2008 in part because Netflix did not want to compete with movie studios, many of whom, such as Disney (NYSE:DIS) and DreamWorks Animation (NASDAQ:DWA), it has DVD and streaming partnerships with.
Given that Netflix has since made its move toward original content, it's reasonable to assume that we'll once again get to watch Netflix original movies, although Howell doubts that they will be released theatrically.
"I'm not convinced Netflix would be comfortable ceding some control [by releasing original movies theatrically]. If it were going to amortize the expense of development, production, distribution, and marketing of a film as an exercise in 'branded entertainment,' perhaps it could be justified. Producing films for theatrical release could be an interesting brand extension but a very risky and expensive one," he said.
For now, Netflix appears to be happy with its current slate of original series. "[We] may make decisions about...[whether] we want to increase the investment on proprietary original content [or] keep it about the same [in July]...after we've launched House of Cards and after we've launched Arrested Development. So we'll take our time and for the next six months, just focus on the current originals," said Netflix CEO Reed Hastings in an earnings call in January, according to transcript provided by Seeking Alpha.
"We're staying flexible, learning, and we'll grow into original programming step-by-step."
This article by Sterling Wong published on Minyanville.
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Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.