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Why Does Netflix Prefer Original Content?

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Aug. 11 2015, Updated 10:05 a.m. ET

Netflix prefers original content over content licensing

Netflix (NFLX) differs from linear networks in terms of flexibility. Netflix subscribers can watch any show on demand for hours at a time. They can stream content on any screen, including a laptop or tablet. This kind of hyper-consumption works for Netflix and has encouraged the company to produce original content. The company expects to spend ~$5 billion on content acquisition in 2016.

Content licensing is usually for a fixed number of years, and Netflix pays for an exclusive SVOD (subscription video-on-demand) license for a given title. But content providers may prefer other cable and broadcast networks and other OTT (over-the-top) players over Netflix. In order to avoid a particular player’s monopoly over content, numerous licenses can be issued for the same content.

This is one of the reasons Netflix prefers original content produced exclusively for the company over content licensing. Original content also gives Netflix global distribution rights, which could add to its revenues in the long term.

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Netflix, a leader in the OTT market

According to a report from Sandvine, Netflix accounted for 36.5% of downstream Internet traffic on computers and networks in North America in March 2015, up from 34.9% six months before. As you can see in the above graph, Google’s (GOOG) YouTube was a distant second in this segment. It accounted for 15.6% of all downstream Internet traffic in North America. Apple (AAPL) iTunes, Facebook (FB), and Amazon (AMZN) Prime Instant Video are some of the smaller players in this segment. You can get a diversified exposure to Apple by investing in the Technology Select Sector SPDR ETF (XLK), which has invested 18.03% in the stock.

According to Netflix, there’s a large-scale movement of users moving from linear networks like Dish Network (DISH) to online streaming services like Hulu. It has led to other OTT players maintaining their share in terms of viewing hours.

Considering the increasing popularity of Netflix content, it seems that Netflix is on the right track to retain its leadership.

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