The Birth of the New Media Studio System

Jacob Harper |

Netflix, Inc. (NFLX) Chief Content Officer Ted Sarandos famously quipped in an interview with GQ in 2013 that "The goal (of Netflix) is to become HBO faster than HBO can become us."  As HBO is already revolutionizing content creation with their mega-popular series Game of Thrones, that’s quite a bold statement. But with the absolute explosion of original content being produced by streaming websites, it's not an an entirely innacurate one.

Part of what separates them Neflix and other streaming sites from HBO though, is they're not revolutionizing television with high quality (though their shows seem to do pretty well with the ciritcs. It's that the shows are produced, and distributed, in a manner unique to entertainment. 

Shows on Netflix – and other streaming platforms like Amazon.com; Inc. (AMZN) and Hulu – are “dropped” as complete seasons, all at once. Gone are weekly installments of an hour apiece, or single movie of two hours. Think of content produced specifically for streaming platforms like a thirteen hour movie, with carefully constructed breaks.

Star of Netflix original series House of Cards Kevin Spacey singled this unique format out as being the biggest development in the entire platform. What a company like Netflix is doing, according to Spacey, “is the ultimate expression of individual control,.”

With streaming, people get to watch what they want, when they want it. And with streaming companies producing their own content, they can craft it to exactly meet audience expectations for not what content is, but what it can be.

Doubling Down on Original Content

The streaming companies are betting on this new style of original content, and betting big. Netflix CEO Reed Hastings gave House of Cards director David Fincher $100 million to produce two "seasons." And according to Netflix' own metrics, the show has been a hit.

Which is another aspect of online content to take into consideration. Unlike television and its Nielsen boxes, or box office receipts from movie ticket sales, there’s no great way to actually see how the numbers from online streaming monetize. Whether a show is watched by all or no current customers isn’t what will put money in streaming company’s coffers. What will is attracting new subscribers.

By that metric, analysts are split. Netflix has 29 million domestic subscribers, though that money comes in whether people watch the original series or not. Netlfix declines to release the exact numbers of views on their original series. Whether they net enough new subscribers to warrant the costs of the original content is probably unlikely, at this juncture. So what makes Netlfix/Amazon/Hulu/Apple TV the “new HBO,” which was at one point the “new studio system?” That is, why produce these series if they can’t prove the money is there?

Buzz.

How Online Studios Tailor Their Hype

Netflix drops entire series at once, and generates talk. Regardless of how many people sign up, their brand name is inextricably linked with the content. It’s not just a show, it’s a Netflix Original. And Netflix has an almost preternatural ability to predict te success of their shows. After all, they know what theire subscribers are watching. This is how they were able to accurately predict Hosue fo Cards would be a smash hit. It's why they renewed Orange is the New Black before it even premiered. Netflix is spending big money, but they are sure their shows will create hype, and will be unmitigated successes.

Amazon is going about it ina  decidedly different manner. They are producing original content via their Amazon Studios in a lower-rent fashion by soliciting open script submissions for shows. And in so directly involving viewers in the process, and then using viewer feedback to pick the winners, they've created a little mini-buzz of its own.

After receiving over 2,700 television pilots they picked 12 to produce, awarding 10,000 apiece to the winners. And from those twelve they chose six to take to series.

Amazon picked their original series in an interesting manner. They don’t have the stores of content data to use to tailor their material like Netflix does, so Amazon appealed straight to the viewers. They premiered the pilots on the site, and used direct user feedback to pick which shows were picked for a full season of production.

Hulu and the Old Model

Of the online studios, Hulu is perhaps the most arcane in their content development. Their original series have not generated near the publicity of a House of Cards or even Amazon’s content outreach campaign.

Unsurprisingly, Hulu is also the online studio with the most intimate connection to old media – in this case, owners 21st Century Fox (FOX) , Walt Disney Co. (DIS) and NBC, which is controlled by General Electric Company (GE) . Hulu is still a private company, and has had interest expressed in it from a long list of players looking to go toe-to-toe with Amazon and Netflix. But it appears more likely that nobody is going to take the gamble.

Hulu’s original content hasn’t garnered quite the buzz of Amazon or Netflix. Hulu’s owners recently sunk $750 million more to “propel future growth.”

The subscription section of Hulu, Hulu Plus, has 4 million subscribers. Netlfix has over seven times that. But if if they can follow in the footsteps of Netflix' potential paradigm shift, they could really change the content game. And Sarandos predicts the entire new media studio system - Netflic, Hulu, Amazon, and others - could even (with their unique structure and distribution) eventually eliminate the disctinction between television and movies. Utterly change how we define them.

That is, make television and movies, and the studios that produce them, obsolete.

A Short List of the Original Series Produced by Online Studios

Amazon

Alpha House, Betas, Annebots, Creative Galaxy, and Tumbleaf

Netflix

Hemlock Grove, Lilyhammer, Arrested Development, Orange is the New Black, House of Cards

Hulu

The Awesomes, The Wrong Mans, Behind the Mask, East Los High

Streaming Website Stock News

Netflix stock is up .97 percent to $260.48 a share. The stock has been on an incredible ride over the last year, rising up to over $300 and dropping as low as $77. Analysts, likewise, are incredibly split on their potential.

Amazon is up .10 percent t 306.87. Their stock has been more or less steadily climbing since 2008.

 

(July 18 Update: Netflix' original content division was critically validated when the nominations for the 65th Primetime Emmy Awards were revealed this morning. Netflix scored 14 nominations, including a best drama nom for House of Cards.)

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
AMFL American Films Inc 0.01 0.00 0.00 0
AMZN Amazon.com Inc. 816.11 16.95 2.12 3,827,406
NFLX Netflix Inc. 97.07 2.51 2.65 9,681,306

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