Amazon, Netflix series development process still old school, analyst says

Over-the-top video may have disrupted broadcaster and pay-TV operators' business models, but when it comes to original content, SVOD providers Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN) are traveling a well-worn path.

So says Tom Dotan at The Information in an article that looks at the way both services are funding and developing their new series. Even though Amazon, for example, is touting its pilot testing program as a unique content development model, broadcasters were doing the same almost from the start of television programming.

"Broadcast networks have been testing pilot episodes with audiences for decades," Dotan wrote. "Traditionally, they'd choose a sample audience, broadcast the show to them at a specific time and follow up the next day with a telephone questionnaire."

Ditto with Netflix's development process. While the provider used subscribers' viewing and behavior data as part of its decision to greenlight House of Cards, the process is "actually pretty old school." Traditional TV networks also use data--mostly gleaned from Nielsen and focus groups--to figure out what shows to spend their money on. A show's development process for both broadcasters and Netflix is similar, bringing in outside studios, writers and others to create a series.

Regardless of their "old-school" show development methods, both providers are racking up results from their original series. Netflix, of course, reaped 31 Emmy nominations this year for House of Cards, Orange Is The New Black, Derek and The Square (although it was robbed of any significant wins amid the cable-heavy competition).

Amazon, meantime, is seeing a steady increase in viewing traffic and is chipping away at Netflix's bandwidth lead. According to Motley Fool contributor Tim Beyers, the increase in original content--not to mention its multimillion-dollar, landmark deal with HBO for the premium channel's older series--is playing a role in that growth.

At its second-quarter earnings conference call, Amazon CFO Tom Szkutak let drop that the provider would spend $100 million on original content in the third quarter of 2014. Netflix, meantime, allocates about 10 percent of its total content budget each year to original content; that will likely come to $400 million spent in 2014.

By comparison, consider that CBS Corp. laid out $3.05 billion in programming expenses for 2013 (including sports programming), according to its annual report.  Similarly, media giant Viacom laid out nearly $2 billion in 2013 for original programming alone, according to its 10K filing.

The series creation process is laying bare a stark truth: that Amazon and Netflix will have to continue to lay out millions of dollars--perhaps far more than they're already budgeting--to keep generating original content at TV network quality. "Shows continue to be expensive and risky bets; pilots continue to be financed and flop for reasons that are art as well as science," wrote Dotan.

For more:
- The Information has this story (sub. req.)
- Daily Finance has this op-ed

Related articles:
Amazon to spend $100M on original online video content in Q3
Orange Is The New Black, House of Cards lead Netflix's 31 Emmy nominations
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