Is Netflix's Original Content Strategy Paying Off for Investors?

Jacob Harper |

NetflixThis morning Netflix (NFLX) experienced a pre-market surge of 5 percent on news of a multi-year deal with Dreamworks Animation (DWA) to produce over 300 hours of new content, set to be completed by next year. This won’t be Netflix’s first foray into original content. Beginning with the simultaneous release of eight episodes of original drama Lilyhammer in Feb 2012 and Hemlock Grove soon after, Netflix has continued to aggressively branch out into content production in 2013 first with political drama House of Cards and then a reboot of classic cult comedy series Arrested Development. Facing an increase in fees from distributors wanting a higher licensing fee for content, Netflix has decided to vertically integrate and focus more and more on producing shows and movies themselves and releasing them straight onto their own service. 

And this model appears to be serving them, and their closest competitor, quite well. With its five percent surge, the closer Netflix hems to the model of HBO (TWX) and their streaming service HBO Go (and the runaway success of Game of Thrones) Netflix should prove to be a jump up and up. After all, in just one year we’ve seen Netflix surge from $67 dollars a share in July 2012 to its current price of $223, representing an increase of over 330 percent. And with this new deal with Dreamworks, it would appear that Netflix will continue its meteoric rise.

Netflix’ surge, though, could be taken with a grain of salt. After all, edging onto the turf of established studios is an expensive venture, and most all of Netflix’ revenue comes from subscribers. And original content needs to bring in a higher volume of new subscribers than their existing content licensed from other companies does. As of April 2013 Netflix has 36.3 million unique subscribers, brining in approximately $302 million a month. While the stock has risen more or less steadily since its IPO of 15 dollars a share in March 2002, Netflix experienced spikes similar to today with the announcements of its last two original – though previously established – series: House of Cards (a remake of a BBC series) and Arrested Development (a continuation of a canceled Fox series.)

On the heels of the Arrested Development premier in May, CEO Reed Hastings said he expected over 900,000 new subscribers in May in response to the release of the 12 new episodes (as opposed to the 300k new subscribers a month Netflix would normally expect to pick up in the slow summer months). Whether that 900k number panned out or not is still unclear –Netflix is not subject to the same tracking systems movies or even television (with its Nielsen boxes) — though DSL reports indicate at least 38 percent of subscribers watched one or at least part of an episode of Arrested Development. So, on the surface, it would appear to be a success.

While it’s clear a release of new content (or news of new content) garners an initial bump for Netflix, what isn’t clear is what happens after everyone gets to see the finished product. Everyone –viewers, analysts, critics – go in blind, as nothing is previewed for critics and an entire season’s worth of content is dumped on the public at once. So how to gauge the success for its original programming, after the rush of the release has worn off and the returns aren’t immediately known to the public? The short of it is: look to the critics.

All 13 episodes of Season One of House of Cards was released simultaneously on Feb. 1, 2013. From January 23rd until the release date, Netflix’s stock rose dramatically from $103 to $170 a share. What’s interesting to note is that after this rush and everyone got to see the content the stock held: Netflix closed out March at $190 a share. Critical appraisal of the series was fairly high, especially concerning star Kevin Spacey’s performance as a Machiavellian Congressman. This bode well for future viewings of the series. Conversely, since its release last month Arrested Development has met mixed to negative reviews. Following a slight uptick in stock price on the eve of May 26th release, after Arrested Development’s bad reviews got around Netflix’ stock plunged, dropping over five percent in less than a week.

So how will this Dreamwork’s deal affect Netflix’ stock going forward? That content won’t see the light of day for a year. But Netflix already has plans to roll out new original content in the much nearer future. Ricky Gervais’ new comedy series Derek is set to premier on Sept. 12, 2013. If the pattern holds true, following its release we should see an immediate spike in Netflix’ stock.

And after that? The critics will be the judge.

[Image via Flickr]

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
DWA Dreamworks Animation SKG Inc. n/a n/a n/a 0
NFLX Netflix Inc. 95.94 0.11 0.11 6,179,471
PHH PHH Corp 14.33 -0.16 -1.10 271,902
TWX Time Warner Inc. New 76.73 -0.58 -0.75 2,178,969

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