The Future of Netflix
Netflix bounced back as the "world's leading Internet TV network," but the company's future lies in its ability to successfully produce original programming.
The Los Gatos, Calif.-based streaming and DVD rental company added almost 3 million subscribers to its streaming service, for a total of 26 million users worldwide. Despite the boost in subscribers, it lost about 1 million DVD mail rental customers, for a total revenue of $870 million for the first quarter of 2012, falling short of expectations.
A Company in Trouble or Just Growing Pains?
Analysts and the company itself differed on the interpretation and meaning of Netflix's figures, with many hoping for a larger bounce from earlier quarters.
Netflix CEO Reed Hastings says his company will return to "global profitability" by next year as its international expansion gains momentum, and highlights Netflix's transition into a cable-like network, with a mix of nonexclusive broad content and original programming.
Analysts and investors, however, worry Netflix is facing long-term obstacles that will hinder its future growth. Content acquisitions are becoming more expensive, with Hollywood TV studios, networks and other content providers determined to make Netflix pay dearly for the rights to stream their shows and movies.
The cable industry is also ramping up its streaming efforts to compete against services like Netflix and Hulu. HBO, for example, has beefed up its HBO Go service and is courting new subscribers by streaming episodes of new shows such as "Girls."
The result is a radically different picture from years past, when Netflix enjoyed tremendous growth, built a massive subscriber base, and announced skyrocketing revenues for quarters on end as the company took advantage of a historical sweet spot: it attracted enthusiastic subscribers by the masses while being consistently underestimated by its competitors. But that moment has passed, and now Netflix is reconfiguring its strategy to move to its next -- and much riskier -- stage of growth.
Betting Big on Original Content
Netflix has never hidden its ambitions to phase out its DVD rental business, but it has been more circumspect about its desire to become a HBO-like powerhouse of streaming services. But announcing itself as the "world's leading Internet TV network" leaves little doubt about where Netflix heads next as it doubles down on an original programming push that will likely make or break the company.
The streamer recently released its first original content offering, "Lilyhammer," to warm praise and wide press coverage. Its experimental foray into original shows has now become a concerted push, and the site will release the David Fincher-helmed "House of Cards" later this year. Other shows are in the pipeline, like the Eli Roth horror series "Hemlock Grove," a new series by "Weeds" creator Jenji Kohan "Orange is the New Black," and the new season of "Arrested Development," which will likely be the Internet-TV network's first real hit.
But will it manage to draw in ever-important subscribers? So far, results have been inconclusive, but the company says it is pleased with the overall response to "Lilyhammer," especially in relation to the amount of money it invested in bankrolling the show.
The company itself is emphasizing that original content is a long-term investment, calling it a "strategic expansion" of the brand, but exactly how long it will be remains unclear.
"We are now treating it as a capability we should build, like international, to achieve our long-term ambitions," said Hastings. "What is still uncertain is when or whether we will take it beyond five percent of our large content spend."
My Enemy, Myself
Netflix is emulating the strategy of one of its biggest foes in Hollywood: HBO. The cable network, like Netflix, initially began with older "library" content and beefed up on second-run exclusives and broadcast premieres of big Hollywood films. The pay-TV channel didn't become a true player, however, until it began a serious, years-long push to develop original programming.
Their investment paid off, and shows like "Sex and the City" and "The Sopranos" became vital parts of pop culture. HBO's reputation for great programming continues today with shows like "Game of Thrones" and "Boardwalk Empire," and subscribers flock to the channel because of its reputation for gutsy original programming, able to take risks far beyond the safe confines of network television.
However, HBO took years to develop miniseries and shows that were critical successes, drawing in consumers attracted to a strong content brand. "That took HBO nearly a decade to accomplish, so we don't expect overnight results," said Hastings.
Netflix is banking on the same strategy in the long run. But reputations are a long-term game, and the rules are changing rapidly in the entertainment industry. It takes years to develop content and build an audience, making Netflix's original programming push a real risk. The content it develops must simply be good enough to keep subscribers coming, able to convert viewers from the merely interested into the rabidly loyal.
In a sense, the company has no choice but to develop its own offerings, especially as cable channels are increasingly reserving their TV shows for their own streaming services. HBO will only stream its shows on its HBO Go service, and other networks could follow suit, potentially drying up a formerly deep well for Netflix.
Standing in the Way
However, Netflix lacks one major advantage that HBO had during its transition from second-run cable channel to content powerhouse -- advertising, i.e., the lifeblood of cable industry revenues. Netflix does have its DVD rental business to diversify its revenue streams, but with mailing and inventory costs rising and subscriber growth stalling, that stream will likely dry up as DVDs lose favor among most consumers.
Netflix conspicuously lacks ads on its service, and the company seems committed to its subscriber model, but that could change in the future as DVD mail rentals inevitably become obsolete. The company could also experiment with different pricing models, such as tiered pricing plans.
However, subscribers will likely balk against any changes, much like they did when the company re-engineered its subscription plans. Netflix will have to navigate any alterations to its model delicately, especially since subscribers remain the main source of revenue for the company.
The ultimate fortunes of Netflix will likely mirror the overall struggle of the video streaming industry's attempt to find a viable, profitable place alongside -- or in place of -- the more established TV and movie industries. Will streaming services entirely replace cable one day? Or will they remain ancillary services in the eyes of content providers, the place where obscure C-list movies go to die? Netflix is one of the most well-equipped streaming companies to determine an answer, and many will watch to see if and how it can carve its own path in uncharted waters.
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