Netflix Stock: Shift To Original Programming A Moat For Netflix Inc. (NFLX) Investors?

• Netflix is cutting its count as well as expenditure on licensed content.
• The shift to original programming is a risky but necessary one.
• The only problem left to solve now is international local programming.

Netflix Inc.’s (NSDQ:NFLX) library is dwindling at a rate that many of us would have never imagined. According to exstreamist, the world’s top video streaming company’s library has halved its total title count since 2012. It might sound a bit paradoxical to see a company that actually started by renting movie DVD’s, then transform itself into a video streaming company with a massive library of movies and shows licensed from third parties constantly keep reducing its overall title count. After all, people join Netflix to get access to more and more content, isn’t it?

Netflix’s Third Party Content on the Decline

But Netflix has other plans in mind. By offloading third-party licensed content from its libraries, the company is making more cash available to create its own original programming.

“While the exact number of titles available on Netflix in 2012 is unknown, sources who used to work for the streaming giant have told us it was close to 11,000 movies and TV shows. Over the years, this gradual decline has come from major content owners pulling the plug on giving Netflix distribution rights, as well as Netflix decreasing their total spend on third party content.” – exstreamist

Also read: Netflix Inc Cash Flows Are Severely Strained By Market Expansion

So Netflix has been carefully pushing itself to become a content creator instead of just being a content distributor. This transition has been going on for quite some time and it has worked really well for the company with hit shows like House of Cards, Orange is the New Black, Narcos, Jessica Jones, DareDevil and many more.

It all started with the overwhelming success of House of Cards, which sort of accelerated the path of original programming over licensed content. The trend has become such a game-changer now that Google has entered the original programming world through YouTube Red, Amazon has stepped up its game with Amazon Prime Video, and even Apple is moving in that direction as well. The industry has gotten to the point where if you don’t have a program that you produced on your own, you just stand as one among the crowd without any unique proposition to sell your streaming service. After all, any company with money can pay for content license and start streaming, but original content is now where it’s at.

The Problem with Original Programming

On the other hand, original programming can be a double-edged sword. A hit series can easily go well over ten seasons, but if you have a look at the list of the longest running prime time television series there are only 38 shows that has crossed the 10-season barrier. Every company would naturally want all of their shows to run forever, but that is just not going to happen. As a result, companies have to keep their focus, keep producing series after series and expect a small portion of them to stay at the top for a while. TV production companies have known this for years, but new entrants in the space like these tech majors are only just learning their lessons.

Though the TV market and video streaming market are a little more forgiving than their movie counterparts – where you end up investing years and millions producing a movie whose fate gets decided in one weekend – it is still a huge task to keep producing at such a high level. One of the big problems that Netflix is going to face is how they’re going to deal with international markets. Their original English-language programming does have an extended reach since they’re already present in 190 countries, many of which are English-speaking or have significant English-speaking populations, but the rate at which the number of licensed content titles are being cut, Netflix has to massively increase its investments in local programming while using their US programming as a short-term buffer.

This will be a huge task to undertake and not at all an easy one to maneuver through, but the company seems unfazed at the daunting task, trying to get Netflix to be an “Original Programs first, everything else next” type of streaming service.

As such, the level of risk is much higher with original programming than licensed content, but you can be sure that Netflix will achieve one thing – a video streaming platform that stands out from the crowd, which is what they wanted to do in the first place. As they push hard into original series, their competitors will have to keep shelling out cash to produce fresh content just to stay relevant. And it will be years before Amazon or Google can match the volume of original content that Netflix currently has.

Also read: Is Netflix Inc (NFLX) Too Big To Acquire For Walt Disney Co (DIS)?

For investors, this is the kind of moat that keeps a company growing stronger with each quarter. Their subscriber growth in the United States may not be high enough for us to see a saturation point any time soon, but it has already started showing signs of slowing down. It is imperative that they keep pushing their original programming agenda if they want to stay ahead of the rest of the market – at home and overseas.