After releasing it’s first original series in February, NetFlix is planning to release at least five new original (and proprietary) programs in 2013. This shouldn’t be surprising for many reasons – namely NetFlix is simply following the path of it’s predecessors in the video distribution business. In this we also see that producing and distributing original content is higher up the value chain.

One of Clay Christensen’s great contributions to business analysis was showing that companies across diverse industries will naturally push to move up the value stream.  From steel mills to automobile manufacturers to consumer electronics OEMs, we’ve seen low-cost start-ups slowly (but inevitably) move-up the value chain. With all of these moves, we then see new low-cost start-ups enter the market and begin to make the same trek forward (and upward).

HBO, Showtime, and Starz all began life as distribution platforms for others’ content before eventually moving into original content production. If anything, I’m somewhat surprised that we haven’t seen more cable companies and telcos – also large content and entertainment distributors – push into original content production and distribution. Arguably, their push up the value chain has remained within the confines of services. Cable companies have entered into Internet and phone services while the telcos have pushed into home Internet and paid TV services. Even Dish wants to push into offering cellular service. Coming in 2013, Verizon is launching Redbox Instant which enables both companies to move further up their respective value chains.

Just as HBO, Showtime, or Starz have done, Netflix has grabbed hold of a sizable market. Today Netflix has roughly 25M subscribers – compared to HBO (29M), Showtime (21M), Starz (19M). As the WSJ points out, Netflix believes that can achieve 60-90 million U.S. streaming subscribers. Those figures would suggest adoption of between roughly 50% and 75% of all U.S. households. Those types of figures are possibly achieved because a greater share of households move away from traditional paid TV services and join the ranks of Netflix customers. More likely, these types of subscriber levels will require significant overlap across other paid TV services which I believe suggests we’ll see the share Netflix spends on original content increase steadily in the years to come. For 2013, Netflix expects to spend less than 5% of its $2B annual content budget on original and exclusive programming and moving forward expects to spend between 5%-15% on original content.




 Earlier this month NetFlix increased the price of their subscription offerings (read more here and here).

And then earlier this week, NetFlix reported Q2 earnings.  You can read the Letter to Shareholders here.  NetFlix closed the quarter with nearly 24.69 million subscribers – a 65 percent jump from the year-ago period.  Netflix expects to finish the third quarter with 25 million subscribers – 12 million taking the hybrid service, 10 million choosing streaming only and 3 million subscribing to the DVD-by-mail service.

The future of the company is clearly streaming.  In the letter to shareholders Netflix reported 75 percent of its recent subscriber gains were to the streaming only service. They also wrote, “With the rapid adoption of streaming, DVD shipments for Netflix have likely peaked. Also, in Q2 the total number of subscribers who were on hybrid plans (and, therefore eligible to receive DVDs) declined slightly from Q1 (emphasis added).”

I don’t view the price increases as grab at revenue growth explicitly.  Rather I see it as a push to keep the streaming service relevant. In order for the streaming service to remain relevent (and ultimately prosper) NetFlix needs a rich, deep, and current catalog. This is clearly a focus.  Again quoting from the letter to shareholders:

We’ve spoken frequently of how we are directing savings generated from declining DVD demand into additional streaming content and marketing. During the quarter, we substantially increased sequential spending on streaming content as titles from our new content deals (discussed below) became available for streaming.