Netflix's potential $6B original content drive could have ripple effect on licensing costs

As Netflix (NASDAQ: NFLX) moves forward with its focus on more original series, a new study by Ampere Analysis predicts that the SVOD provider will up its spending to $6 billion before 2018 as it tracks toward a library offering 50 percent original content. Considering Netflix's potential to swell to more than 130 million subscribers by 2020, that original content bet could swing today's pricey licensing deals in its favor.

"It's potentially a winning strategy if they get it right," said Ampere's Richard Broughton. "They can reduce expenditure and improve margins by shifting to original content." That will have longer term benefits including improved cash flow and reduced debt -- two areas that analysts and investors have eyed nervously for several quarters so far.

Netflix currently opts for licensing higher-profile movies and TV series earlier in the release cycle: Ampere said that the provider has more than twice as many series produced in 2015 in its library than Amazon (NASDAQ: AMZN) Prime Instant Video does, and that about 9.5 percent of Netflix's movies were released in 2014.

And as Netflix shifts its budget from such licensed existing content to creating its own content, it is also planning to rely less upon third-party production companies to make those original films and series.

The provider recently leased office space in the heart of Hollywood and will reportedly film comedian Chelsea Handler's upcoming series there.

"The move exposes Netflix to new financial risks -- hiring the talent, renting equipment and overseeing budgets -- but could also speed up its drive to offer a uniform service around the world," a Bloomberg article said.

Where are the savings, then? For one, the original content it has now, like Orange Is The New Black, is owned by companies like Lions Gate and Walt Disney Co. (whose Marvel unit produces the new Daredevil series) and licensed to Netflix. In time, those series will be available to competitors, including Hulu and Amazon, as well as other distributors and pay-TV operators, Bloomberg said.

Producing its own content will give Netflix greater control; it can also license that content globally across the countries in which it operates.

"They're spending now for future benefits," Broughton said.

If Netflix's original content plans pan out, it could have an interesting ripple effect across the media and entertainment industry. Content owners that currently are enjoying the leverage they have in licensing deals with almost every distributor out there -- not just SVOD providers but pay-TV operators, broadcasters and more -- may see that cash cow dry up somewhat by 2020.

Production groups may have to consider content partnerships with Netflix and others, Broughton said, and create even more original content rather than relying on licensing their existing libraries.

Ampere costs of Netflix content

Original series costs can run as high as $9 million per episode for Marco Polo, for example. (Source: Ampere Analysis)

For more:
- see the press release
- see this Bloomberg article

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