Netflix (NFLX) is testing the waters with new users, and the monthly subscription fee hike from $7.99 to $8.99 on May 9 suggests the company is seeking increased revenue from its primary source of income. As it anticipates increased viewership with the second season of Orange is the New Black, it is time to again examine whether the company’s benefit from original content production outweighs its costs.
Production Price Tale of the Tape
The fantastically popular House of Cards came in at around $100 million to produce, to the tune of about $4 million per episode. Netflix’s strategy has been one focused on production, rather than marketing; while broadcast television networks spend hundreds of millions on advertisements and promotion, Netflix has shared that it prefers to spend the majority of its production budget on hiring, casting and filming.
Production expenditures have been about the same for Orange is the New Black, and at just over $4 million per episode, the series is costing Netflix far more than what television networks average to produce their shows. However, in the grand scheme of yearly earnings, $100 million is little more than a drop in Netflix’s digital bucket. In its fourth quarter 2013 cash flow analysis, Netflix reported that it spent just over $3 billion on additions to its streaming content library, which suggests that each original series is claiming just 3 percent of Netflix’s content budget.
Results on Earnings, Value to Investors
Just prior to the February 1, 2013 premiere of House of Cards, Netflix stock price jumped over 20 percent from January 22-29. The trend continued, increasing again in July 2013 before the first season of Orange is the New Black and later in 2014 in anticipation of the second-season release of House of Cards. Stock has been steadily gaining throughout May 2014, with the approach of the second season of Orange is the New Black driving up stock value.
The reason for this increase can be directly attributed to the main source of Netflix revenue: its subscribers. The company markets its service by offering attractive free trials in the first few weeks of major releases like Orange is the New Black, and while this may encourage viewers to cancel once the trial period ends, Netflix has reported that in the case of the House of Cards promotion, fewer than 8,000 subscribers canceled out of more than one million new members. As a result, analysts have consistently upgraded and positively reiterated their assessment of Netflix stock, with the most recent reiteration coming in on June 4 from Oppenheimer, which raised its price target from $435 to $500 a share.
Original Series Buying Intangible Gains
There are, of course, intangible gains to be had by funneling revenue into original content production. In 2013 Netflix received a total of 14 Emmy nominations for three of its web-television series, and most recently won a 2014 Golden Globe out of four nominations.
Though expensive, Netflix’s dedication to producing quality and popular original series has paid off in the entertainment industry. Recognition from the largest television awards guilds has influenced Netflix’s credibility as a content producer while ending any remaining notion that series awards belong exclusively to television broadcasting. In effect, these ceremonies have done much of Netflix’s marketing for them; Netflix ended 2013 with more than 44 million new subscribers.
Staying Ahead: Netflix Merges onto the European Autobahn
As with all successful business operations, copycats are presenting competition. Netflix faces rivalries with preexisting Hulu content and new ventures into the world of original content from Microsoft and Amazon. Tensions are high between the streaming giant and Verizon as the broadband provider kicks off a partnership it made with Redbox to create Redbox Instant.
With increased competitors come increased costs as Netflix loses its purchasing power in licensing new content. To stay ahead, Netflix is attempting to penetrate the international market, adding Germany, Austria, Switzerland, France, Belgium and Luxembourg to its audience.
This venture is accompanied by an increase in subscription cost for new members; existing members are not subject to the price hike, a detail made explicit following the huge drop-off of subscribers after the company’s last attempt to raise prices. The increase suggests that Netflix anticipates both an international interest in its service as well as a need for increased revenue to acquire and produce attractive content for its new viewership.
With so many imitators entering the webisode market, it is clear that original content production offers companies like Netflix a new range for success. Development costs are high, but with quality series such as Orange is the New Black, Netflix maintains its prominent position in the streaming world. Given the success of domestic original content, the increased revenue Netflix will earn from new subscribers may be geared toward international production down the line.
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