Netflix, The Hollywood Studio

Netflix recently announced it would not be renewing the non-exclusive licensing agreement with Epix, meaning that thousands of movies will soon be leaving the company's catalog, including blockbusters like Hunger Games and Transformers. Instead, Netflix will focus its efforts even more on original and exclusive content. The market reacted with a share price drop of 2%. However, this initiative makes sense and is, most likely, a calculated gamble.

Netflix is one of the top companies when it comes to understanding what its customers are looking for. It has a huge data, analytics and algorithms team and keeps recruiting for more.

The recent news indicate that Netflix is aware that by increasing original AND exclusive programming efforts instead of licensing overpriced non-exclusive older content, it will improve results and increase subscriber numbers. Most people I talk with who have recently joined Netflix, did so because they heard of House of Cards or Orange Is The New Black. This will only improve due to other extremely well done original shows like Bloodline or the Wachowskis’ Sense8 (with many more to come, including original movies).

From left to right: House Of Cards, Orange Is The New Black, Bloodline, Sense8

The push for exclusive content is also going full steam, which is why Netflix is reportedly paying top dollar for Pay-TV rights for all of Disney's output, including Pixar, Marvel and LucasFilm (starting in 2016). Last year, a Pay-TVdeal was also signed with Sony Pictures Television for the studio's animated films.

The quest for original content is a huge trend now and most companies in the business, both new and traditional media, have realized how important this is for their competitiveness. Think of Amazon’s Transparent, AMC’s Mad Men and Breaking Bad, FX’s The Strain and Fargo, USA’s Mr Robot and, of course, Showtime and HBO with a huge list of phenomenal original programming. 

While it is important for subscription services to offer a healthy catalog of popular movies and TV series (another reason why Apple’s rumored move to original content won’t do much for them if Tim Cook & Co don’t secure SVOD rights from studios as well), it is original content that is giving them the competitive edge and ability to attract new subscribers. Without original content, the ability to differentiate from the competition comes mostly from lowering the subscription price (and consequent margin decline).

Also, Hollywood studios are famous for exploring and forcing incredibly harsh terms on its TV licensing deals. Ironically, this is even more predominant when dealing with services with a small scale and/or presence in a particular market. When the power balance tends towards the studios (which happens most of the times), they will reduce their risks to almost zero and ask for higher fees in the shape of a “greater of” between minimum guarantees and revenue share. Under these situations, it is extremely hard for those services to make a profit. I would assume this is the case for Netflix’s international operations, as shown by their still negative margins. However, Netflix original content can be distributed internationally without the hassle of arduous licensing negotiations with studios for each single market.

Netflix as a global company is now in a position where they don’t really need to pay an insane $1Bn for old (library) movies, which are in fact available on other services, to attract more US subscribers. They can take that money and follow a much more competitive strategy focused on giving their customers what they want: good quality, exclusive and original content. It’s about quality, not quantity.

This article first appeared on LinkedIn Pulse and Medium