From the Ivey Business Review: “Arrested Economics — Assessing Netflix’s Original Content Business”


Story-makers, the shift in the independent film industry includes new opportunities in what is commonly called “television.” The new creative opportunities are exciting. Here’s the second of two discussions about these new opportunities.

Arrested Development and House of Cards aren’t designed to deliver the metrics Wall Street expects, and this means a lot about how Netflix views its future.

Reposted by permission from Ivey Business Review

(Originally posted June 9, 2013)

A Netflix New Season: ARRESTED DEVELOPMENT

May 26th was a uniquely exciting (and perhaps exhausting) day for TV lovers. At midnight, Netflix released a brand new season of Arrested Development – more than seven years after the show was cancelled by Fox. The show’s return represents a key component of Netflix’s emerging original content strategy and is the fourth show released by the over-the-top streaming service this year (at a total cost of more than $150M). As such, I thought it would be a good opportunity to pause and evaluate the economics of this strategy and hypothesize what success might look like. In doing so, we can also better understand the role of original content (is it intended to drive net adds, reduce churn, stabilize content costs etc.) and the impact of their controversial decision to release entire seasons at once. This will also tell us about Netflix’s future and management’s POV on this future.

The Value of Netflix to the Consumer

Though inexpensive on the whole, Netflix’s service does not offer materially cheaper entertainment than that of traditional cable TV, costing approximately $0.0024/minute versus cable’s $0.0035/minute. alt="NFLX3"

This is interesting for two reasons

1. Despite being commercial-free and infinitely more flexible than live linear TV (in terms of time, content and screen), Netflix is unable to command a price premium for its entertainment service

2. Average time spent watching Netflix per user is up more than 10% year-over-year. However, with prices still $7.99 a month, Netflix has not benefited from this increase in customer value (directly, at least, as it would improve word-of-mouth and perceived value). Increases in both the quality and size of its content library content quality is no doubt a major driver for increased usage, but this has contributed to a 16% increase in quarterly licensing costs ($1.355B in Q1 2013).

This matters because it means Netflix may have limited means to raise prices – and when it does, they will still lag customer value growth. As the instant decapitation of Qwickster demonstrated (among many other lessons), Netflix’s customers really do control the relationship.

MORE … click here to continue reading.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s