Arrested Development
But let’s remember what folks do with Netflix—mainly watch old movies and reruns of Television shows. Hollywood is Netflix’s greatest supplier of content. If Netflix may be the enemy, then why is Hollywood so delighted to provide Netflix content? Why don’t these studio’s hire developers and BUILD their own Netflix? The same reason the music industry allowed Apple to take music distribution away—laziness. Hollywood will continue to bristle about Netflix, but will ultimately do nothing but continue to provide Netflix content. Some in the entertainment industry see Netflix as a real threat and just aren’t willing to be part of Netflix.
HBO is a prime example. AMC Networks Inc (NASDAQ:AMCX) and a smattering of others know selling valuable original programming on Netflix isn’t worth it—it kills the whole subscription model. Other media companies aren’t worried—but they should be. The cash Netflix pays for reruns is lucrative for traditional media companies and producers, but the profits Netflix makes will be used to further erode traditional media’s already fading viewership. Right now Netflix is playing that old game—start out with reruns while looking to the future. Relying on the content of others has provided Netflix an audience, but Netflix needs to grow the business. Growth for Netflix is in original programming—creating shows people love.
Be Original
Netflix’s foray into original programming is exciting. It’s just like AMC Networks Inc (NASDAQ:AMCX) all over again. The vast majority of thrilling programming is in the 100 hour cable television program. This type of programming is pure gold for Netflix, but original programming is not cheap to produce. Netflix will spend $3.8 to $4 million per episode. This is high, but Netflix will have $0 marketing cost to push their original programming—they’ll will use algorithms and big data to find an audience for their original programs.
The Netflix original program, House of Cards is undoubtedly the first of many original shows that will take Netflix to another level. With Hemlock Grove and Orange is the New Black in the pipeline, Netflix is positioned to become the place for stellar original programming. Netflix will have exclusivity of their original shows for four years. Once that time has elapsed Netflix and show producers can then re-sell the content to linear cable channels.
Must See TV
Not many broadcast or cable systems will make this kind of a commitment—producing original scripted programming. Those that do, such as AMC or Starz (NASDAQ:STRZA), have been rewarded. Breaking Bad, Mad Men and Spartacus have seen excellent returns on investments for AMC and Starz (NASDAQ:STRZA). AMC has hit pay dirt by simply telling a good story. Meth cooks, zombies and Don Draper—no wonder AMC’s price target is $75 a share. Even the History Channel has followed suit with its hit show, Vikings. Netflix wants some of that action, and with their bankroll and customer base Netflix will get that action.
As Netflix continues to take audiences from traditional television to online entertainment, profits are likely to soar. Helping boost Netflix stock are the continuing high cable and dish subscriber fees coupled with the consumers changing taste. Not to mention Netflix has no real competition. No one sans Kim Dotcom seems to want to build a “for pay” online entertainment website these days. As Netflix continues to cut deals for content while producing high-quality, proprietary original programming, the Netflix stock—like its original programming, is certainly worth watching.
The article Netflix Takes a Bow originally appeared on Fool.com.
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