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Netflix ready to move to TV’s next episode: Ownership

April 21, 2015 11:34 AM
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(Bloomberg)—For most of its rapid ascent of the TV business, Netflix Inc. has rented shows. Now it wants to own them.

Like a major Hollywood studio or competitor HBO, the company will own many of the 20 or more original shows that debut on its streaming service next year, CEO Reed Hastings said in an interview.

“We’ve continued to expand our creative role on the shows,” Hastings said. “Now we’re taking on ownership and production.”

It’s a new step for Netflix, No. 6 in Internet Retailer 2015 Top 500 Guide,  which in the past has licensed programs from studios like Sony Pictures and Weinstein Co. While fans associate “House of Cards” with Netflix, producer Media Rights Capital owns the hit series. As a result, U.S. viewers can buy past seasons on Amazon.com and Germans can see season three on Sky Deutschland.

While Hastings wouldn’t discuss titles, the coming originals that Netflix bought include “Flaked,” a Will Arnett comedy from the makers of “Arrested Development,” according to a person with knowledge of the matter who asked not to be named because terms aren’t public.

Ownership achieves several objectives for the Los Gatos, Calif.-based company, beyond providing shows others don’t have. It eliminates the sometimes territory-by-territory tracking of streaming rights, and lets Netflix unlock revenue from selling DVDs or license rights to other services.

It also ensures a supply of new material, should conventional TV networks cut back on selling streaming rights to their shows to Netflix.

HBO’s playbook

“We already expect U.S. TV networks to increasingly buy out the SVOD [streaming video on demand] window when they acquire a show and it would not be a surprise if one or two studios stopped selling shows to Netflix,” analysts at UBS AG wrote in a report last week.

Netflix is taking a page from the playbook of HBO, Time Warner Inc.’s premium cable network. Though both license movies from studios, HBO owns the global rights to most of it biggest hit series, including “The Sopranos,” “Six Feet Under” and “Game of Thrones.”

The test is whether Netflix, competing with more seasoned producers at HBO, FX, AMC and Showtime, can do it as well, according to Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles.

When it licenses shows, Netflix pays about half of what it would cost to produce them, according to Pachter—giving up some of the upside, such as DVD revenue, when shows are a hit, but also limiting the losses that come with owning programs no one wants to watch. Netflix hasn’t gone through the “painful process” of creating a show from scratch, he said.

 

‘Good decisions’

“The real risk is that they might not make very good decisions,” Pachter said. “It isn’t clear to me that Netflix has an upper hand in negotiating rights so that they position themselves to capture significant economic rent.”

Shares of Netflix soared 26% last week as the company reported signing 4.9 million new subscribers in the first quarter and credited exclusive shows such as “Orange Is the New Black.” That topped the company’s forecasts and lifted the worldwide total to more than 62 million.

Hastings cited the popularity of Netflix originals “House of Cards” and new shows like “Unbreakable Kimmy Schmidt” and “Bloodline.”

The company plans to dramatically increase production of originals over the next few years, making exclusive shows a larger part of its $9.8 billion long-term streaming budget. Its content obligations have grown by 71% over the past two years.

The company could make as many as 40 new shows a year by 2018, double its output this year, according to UBS. Costs, amortized over a period of years, could make it harder for the company to deliver the profit leverage investors expect, UBS said.

“While we acknowledge that Netflix’s subscriber growth is impressive, we remain skeptical that it can deliver the leverage many investors expect,” UBS said.

 

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