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On Tuesday, the annual Television Critics Association Summer Press Tour began not with one of the broadcast networks, or even HBO or Showtime, but Netflix. Although the opening slot at TCA is not an official acknowledgement of success, Netflix’s presence there is fitting given that the company released more original programming than ever in the first half of the year. What was a small group of cult revivals (Arrested Development) and premium cable facsimiles (House of Cards) just two years ago is now a hulking stable of over 15 programs from a variety of genres, formats, and countries. As Vulture’s Joe Adalian reported this week, Netflix’s investment in original programming is set to grow immensely in the near future, dwarfing the outputs of HBO, FX, and Showtime in the process.
Driven by the Silicon Valley ethos of “get big fast,” Netflix’s rapid shift from content library to original programming isn’t a surprise. Chief Content Officer Ted Sarandos famously told GQ in 2013 that his company’s goal was “to become HBO faster than HBO can become us.” Yet as prophetic as Sarandos’ mission statement now appears—HBO has indeed stepped toward Netflix’s corner with the standalone streaming service HBO Now—and as cool as it is that Netflix has become a home for singular programs like BoJack Horseman and Sense8 that might not have existed otherwise, this original programming boom is not without consequences on the company’s existing content library and customers.
The simple truth is that programming is expensive. Netflix reportedly spent around $3 billion on programming in 2014 to prime for this year’s coming out party, and is slated to spend close to $5 billion in 2016—more than HBO, Amazon, Showtime, and Starz combined. While the company touted a new record of 65 million worldwide subscribers and $1.64 billion in revenues in its quarterly report earlier this month, it also delivered significantly lower quarterly profits versus the same period last year ($26.3 million versus $71 million), primarily due to increased investment in content.
Pre-2013, Netflix’s investment in content was focused on its library of shows airing elsewhere. The on-demand access to full seasons of shows like Breaking Bad popularized streaming video, revived Netflix’s business after the Qwikster debacle and revolutionized distribution in the process. However, Netflix’s legitimization of streaming video created a new industry gold rush. Amazon, Hulu, and more have jumped into the market in earnest, allowing studios to license their programming for billions of dollars and, increasingly, exclusive deals that turn even the lamest of shows into pure profit.
Netflix saw this wild west of streaming rights coming. With more competition to handle and more expensive licensing bills to pay, the company views original programming as the bridge to a world where it can compete with the HBOs and the Showtimes of the world. But as Netflix expands production to nearly 30 shows in the next year or so, its multi-billion dollar costs are only going to get higher. If subscriptions don’t increase at the proper rate—which seems unlikely only because Netflix is spending so much money—the company is going to have two options: give up more library content or raise the subscription price.
We’ve already started to see the impact of the first option. The inflated value of content means that Netflix now spends over $1 billion a quarter to keep its library replenished (including spending $2 million per episode for the exclusive rights to The Blacklist), while Amazon and Hulu have begun to scoop up the exclusive rights to great shows like Justified, Hannibal, Manhattan, and The Mindy Project. Netflix is still the first place we go to search for a show or movie, but it is increasingly common to discover that content has disappeared from its library, or never made it there in the first place.
Apart from a tweak here or there, Netflix has resisted subscription rate hikes for quite a while. However, in Sarandos’ latest conference call, he said, “We want to take it very slow. Over the next decade, I think we’ll be able to add more content and have more value and then price that appropriately.” The price hike might not be coming soon, but it’s easy to translate the second part of that statement: the valuable content Sarandos refers to is original, exclusive programming. Eventually, you will pay for Netflix not for access of all your favorite shows, but for all your favorite Netflix Originals.
From an industry perspective, this makes sense. Vast content libraries of other companies’ content doesn’t score Netflix industry cache, win it awards, or illicit a weekly wave of thinkpieces. Netflix might have helped raise Breaking Bad’s profile over the years, but the Academy didn’t CC Ted Sarandos on all of Vince Gilligan’s Emmys. Without revving up original series production, Netflix would be viewed as a depository, not a company with dozens of awards nominations and countless actors tripping over themselves to praise it as a respective, creative production partner (Hi, Chelsea Handler).
This is also nowhere near a new strategy. Sarandos’ famous reference to HBO is obviously instructive, as Netflix desperately wants its brand to be ‘premium programming provider’ for worldwide audiences, a ‘Not TV’ for the Internet age. But the company’s move from content library to producer of original programming also has historical precedent in basic cable. Most of your favorite cable channels started out by airing old reruns of broadcast programming, and whatever other weird stuff it purchased on the cheap, until it became financially workable enough to produce their own original shows that built brand recognition. Netflix is doing the same thing, only at an exponential rate, and with more cashflow.
Amazon and Hulu will follow. Hell, they already are. Sure, they’re gobbling up exclusive rights to shows when they can, but they’re ramping up spending on originals at an impressive clip as well. Though the business models are slightly different, with Amazon’s association with Prime and Hulu’s split ownership, both companies will, in the near future, prefer to be known as the exclusive homes of Transparent and The Way (Jason Katims’ new show with Aaron Paul) rather than the home for old episodes of somebody else’s show.
Ultimately then, the glory days of Netflix serving as an on-demand access point to anything you could ever want to stream are already over, if they ever existed in the first place. As these streaming giants expand original series production and start to look more and more like premium cable channels, you’re going to get a lot of great new TV—but you’re going to pay a lot more for it.