Netflix stakes big on original content strategy, letting Epix deal lapse and heading for Hollywood

Netflix (NASDAQ: NFLX) is about to go almost all-in on original content: The top SVOD provider's five-year licensing deal with Epix has lapsed, meaning that major movies like The Hunger Games: Catching Fire and Transformers: Age of Extinction are off subscribers' plates. But Netflix's executives haven't been all that fussed about the loss of such popular content, even as analysts have fretted. The company is betting even higher on the ability of its original content slate, along with a good-sized Disney deal, to sustain its popularity with OTT viewers.

Hulu, which is pursuing an aggressive content acquisition strategy, snapped up the opportunity, signing a deal with Epix that will see much of the premium cable network's content shift over to that SVOD service in the next few weeks, Re/code reports.

The loss of Epix is neither a surprise nor a disappointment to Netflix executives. The network did not have an exclusivity pact with the provider.

"While many of these movies are popular, they are also widely available on cable and other subscription platforms at the same time as they are on Netflix and subject to the same drawn out licensing periods," said Ted Sarandos, chief content officer, in a blog post on the company's website. "Through our original films and some innovative licensing arrangements with the movie studios, we are aiming to build a better movie experience for you."

The move will further align with Netflix's stated goal of driving global licensing for content. "Studio licensing practices means it often takes more than a year before consumers can watch a theatrically released movie when and how they want," Hastings said. "Just like we've changed the game for TV watchers by releasing entire seasons around the world at the same time, we have begun making movies that will premiere on Netflix globally and in some cases, simultaneously in theaters."

Perhaps more telling, Netflix signed a lease on Aug. 27 to occupy over 200,000 square feet of office space at the ICON office development in Hollywood, which will place it square in the middle of California's entertainment industry when the high-rise opens in late 2016.

CEO Reed Hastings and CFO David Wells, when questioned about the possibility on a second-quarter conference call with analysts in July, said that they were investing more in original content, whose costs were "front end loaded," with a commensurate impact on the company's free cash flow.

Hastings at the time also credited the quarter's higher-than-anticipated acquisitions to "the growing strength of our original programming slate" including the premieres of Marvel's Daredevil, Sense 8, season three of Orange Is The New Black and other series.

Netflix also has a juicy deal in place with Disney that includes movies from Pixar and Marvel as well as the upcoming Star Wars films, Fortune pointed out, all of which will bolster its increasing original programming slate.

The company's first completed in-house movie, Beasts of No Nation, will debut at the Venice Film Festival on Sept. 3 and will be released worldwide on Netflix and in theaters simultaneously on Oct. 6.

Netflix shares were down slightly in midday trading Tuesday on the Nasdaq at $106.49.

For more:
- see this Netflix blog post
- see this WSJ article (sub. req.)
- and this Fortune article
- see this Business Finance News article

Related articles:
Premium cable channel Epix gets booted from Netflix, signs deal with Hulu
Netflix targets teen audience by licensing YouTube stars' movies; Europe invests in OTT, multichannel networks
Netflix, Hulu subscriber churn should be a concern for OTT providers, research firm says
'Star Wars' movies finally available online... but not on Netflix

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