Netflix’s Focus on Original Content
Many web or mobile apps rely on subscription models and focus on boosting subscription growth, but Netflix’s long-term strategy requires so much subscription growth that it has pursued global expansion (competitors like Hulu, on the other hand, stay domestic and only operate in the US). This is because Netflix has chosen to provide original content.
In this context, Netflix’s business model can be simplified to this:
Obviously, there are complications to both licensing and producing original content that this diagram glosses over, including high upfront costs and multi-year commitments. Currently most of Netflix’s “original content” is actually produced by other major studios, but then licensed “exclusively” to Netflix. The problem with licensing, however, is that Netflix is starting to lose access to “exclusive” content from producers like Lion Gates, who are starting to view Netflix more as a direct competitor than a partner and have signed deals with competitors like Hulu. Technically speaking, these “exclusive” deals do not preclude competitors from licensing the content in the future. Further, as Netflix expands globally, Netflix has to struggle with obtaining international streaming rights for the same original content, which studios balk at because it conflicts with the interest of regional sales teams.
Thus Netflix has shifted its entire business model to not just licensing but producing original content, and plans to spend $5B on content in 2016, which is second only to ESPN in terms of programming expenses. This includes costs for over 200,000 square feet office, stage and production space in a brand new Hollywood office which Netflix will move into in 2017, which shows just how serious Netflix is about bringing production in-house.
This strategy is really one of the only ways that Netflix can truly differentiate itself from other competitors. Hulu and Video Amazon, after all, also have access to popular content, allow streaming from multiple devices and offer similar monthly subscription pricing models. The only thing they can’t copy is original content that consumers can only access on Netflix.
Thus the key thing to realize about this business strategy is this: by focusing on original content, Netflix is creating a network effect that it hopes will propel the company far ahead of competitors. With original content that is actually produced and not just “exclusively” licensed by Netflix, the company will capture new subscribers who will want in on these awesome new shows as well as keep current subscribers happy enough to renew. This in turn will provide Netflix with more revenue to budget to producing original content (currently it spends roughly 10% of its overall content budget on original content).To get an idea on how much original content likely moves the needle on subscribers for Netflix, take a look at some of these statistics, here and here.
This is the part of Netflix’s strategy that has been extensively covered by the press and the one that Netflix touts most often to investors. From a product standpoint, this means designing for all the usual metrics like subscription growth and retainment, as well as highlighting Netflix’s original content.
