Netflix Is Shifting Focus toward Original Content



Deal with Disney for original content

Netflix (NFLX) had ~65 million members at the end of the second quarter of 2015, with 42 million members in the US. The company gained 0.9 million members in the US in 2Q15, exceeding Netflix’s internal forecast for an increase of 0.3 million subscribers. Netflix’s strong original programming content is the reason for the higher-than-expected membership gains.

Netflix struck an original content deal with the Walt Disney Company’s (DIS) ABC Studios in the fall of 2013. As part of this deal, Disney’s ABC Studios is producing four live-action series for Netflix, leveraging characters from the Marvel Universe. The first of this series was Daredevil, which had good audience engagement. There are three more serialized programs in the pipeline from the Disney stable that will include characters from the Marvel Universe.

As the above chart indicates, Disney has a strong IP (intellectual property) cache. Netflix’s deal with Disney is an attempt to leverage this strong intellectual property to grow Netflix memberships in the OTT (over-the-top) market.

Amazon (AMZN) is becoming a major threat to Netflix. Users get to watch videos and movies for free with the $99 per year Amazon Prime program. Amazon is also looking to produce and acquire 12 original movies per year.

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Reason for the move toward original content

Netflix believes that original content is the way forward for the company. Netflix’s original content is becoming increasingly popular among its viewers, and this could translate into more viewing hours and potential subscriber events. It could also lead the company to offer ad-supported original content in the future. Global distribution rights to its own content could mean long-term revenues for Netflix.

Netflix’s original content will help it compete effectively against other OTT services including Hulu. Hulu is an OTT, ad-supported streaming service jointly owned by Fox Entertainment Group, Disney, and NBCUniversal (CMCSA).

You can get diversified exposure to Netflix by investing in the SPDR S&P 500 ETF Trust (SPY), which invests 0.26% of its portfolio in the stock.


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