Netflix’s quarterly shareholder letter, released overnight, contained lots of new information. But one section in particular stood out:
Looking at our original content performance over the last few years, there have been so many impressive aspects…
But there is one real shocker; last year our original content overall was some of our most efficient content. Our originals cost us less money, relative to our viewing metrics, than most of our licensed content, much of which is well known and created by the top studios.
(The emphasis is Netflix’s).
Here’s why that statement matters: That it is cheaper to produce content than license it substantiates the company’s decision to shift into original content, which was considered very risky at the time.
Netflix released a string of original dramatic series last year. At least two of them, House of Cards and Orange is the New Black, can be considered bona fide cultural hits. How they and other shows actually performed, only Netflix knows. The company does not release any ratings data or viewing metrics —after all, it’s a subscription business and sells no advertising. (Programming boss Ted Sarandos has, justifiably, criticized the focus on ratings in much of the industry, which he says has diminished the quality of TV.)
But based on the comments in the shareholder letter, we can assume that the economics behind the shows is sound.
It’s important to remember that Netflix is not searching for smash hits with all of the shows it orders. Basically, the company is trying to build a portfolio of content that appeals to the most people at the lowest cost (per hour) of said content.
When it comes to ordering original content, the company analyzes troves of proprietary data on actors, directors, genres and so forth, to identify the potential audience size for a show, and then sizes its financial commitment to a show appropriately .
Some of its shows (like Norwegian series Lilyhammer), will quite deliberately be designed to really appeal to certain niche audiences. Others, like its newest and most expensive show Marco Polo, will be designed to have more mainstream appeal. While the big expensive shows capture all the headlines, its smaller, more targeted shows also have a key role. The company is tripling its original content output this year, so don’t be surprised if a sizable proportion of them take this form.
Even when it comes to big, risky high profile bets like Marco Polo (which reportedly cost $90 million to make and has been panned by critics) Netflix has a key business advantage over its rivals. Unlike its competitors for content, which are for the most part domestic TV stations, Netflix can spread out the costs of its content bets over a global, rather than national or regional, customer base.
Moving from a DVD rental service to a content creator is a risky proposition. So far, the leap of faith seems to be working out.