In an attempt to drive subscriber growth and build on the success of its previous hits such as House of Cards and Orange Is the New Black, Netflix will be producing 600 hours of original content for its OTT service in 2016. And this will sharply increase in coming years, according to an analysis by UBS reported by Business Insider UK.
Netflix Inc. (Nasdaq: NFLX) has clearly identified original productions as the key to driving subscriber growth and cutting churn. The company had a disappointing second quarter, adding 1.7 million subscribers, which was below its forecast of 2.5 million and down from 3.3 million in the same quarter last year. In an attempt to turn that around, the company is investing billions in original programming. This will not just increase its annual slate of content but also provide valuable second-run programming to help its library grow.
According to UBS AG , the company began creating content in 2012 and has steadily been accumulating a sizable store of video content that will comfortably exceed 2,000 hours by the end of 2017. But by 2018, Netflix's accelerating investment in original content will almost double that volume, to reach 4,000 hours. By 2020, UBS estimates Netflix will have well over 8,000 hours of original content available to subscribers, and it will take 2.9 years of uninterrupted viewing to get through the entire catalog of original content. That compares with six months of viewing required to get through the current crop of titles, and neither figure includes licensed content.
To look at it another way, and underscore the pace at which Netflix will be ramping up its programming, UBS estimates that Netflix will create 2,000 hours of original programming in 2019 alone, which would far exceed the entire catalog of original programming produced until today. And Netflix's production plans ramp up still further in 2020.
In a previous post, we had discussed how Netflix would be shifting its investment mix from licensed to original content. UBS confirms this trend, anticipating Netflix's investment in licensed content will flatten a little below $4 billion (where it's at for 2016) and remain there for the foreseeable future. (See Amazon Strategy Highlights Arms Race for Original Content.)
Netflix Investment in Licensed & Original Content
(Source: Company Reports, UBS 2016)
Image is for representation only. Actual data may differ.
Original content spending, however, is due to ramp up from comparatively small investments in previous years to about $1 billion in 2016, and then more sharply up to approximately $5.5 billion in 2020.
However, this ramp-up in investment will require corresponding increases in revenue and subscriber growth. And Netflix's last quarter showed its subscribers have a low tolerance for price increases, so the company does not have a lot of room to maneuver with its pricing strategy. (See Does Netflix Need a New Business Model?)
Netflix is taking a multi-billion dollar gamble on its original programming being sufficiently powerful to draw enough subscribers to keep funding its ever-increasing production cycle. While that's a risky strategy, it has worked so far. And the alternative approach -- relying on licensing content -- is not really an option. That would leave Netflix dependent on the major media companies, and tied to the complexities of regional licensing and pricing.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation