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.
